Lincoln National Corporation (NYSE:LNC) Q4 2023 Earnings Call Transcript

Lincoln National Corporation (NYSE:LNC) Q4 2023 Earnings Call Transcript February 8, 2024

Lincoln National Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning and thank you for joining Lincoln Financial Group’s Fourth Quarter 2023 Earnings Conference Call. At this time, all lines are in listen-only mode. Later, we will announce the opportunity to questions and instructions will be given at that time. [Operator Instructions] Now, I would like to turn the conference over to the Senior Vice President, Head of Investor Relations, Tina Madon. Please go ahead.

Tina Madon: Thank you. Good morning and welcome to Lincoln Financial’s fourth quarter and full year 2023 earnings conference call. We appreciate your participation today and invite you to visit Lincoln’s website, www.lincolnfinancial.com, where you can find our press release, statistical supplement, and supplemental investor outlook presentation. These documents include reconciliations of the non-GAAP measures used on our 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. Before we begin, I have an important reminder. Any comments made during the call regarding future expectations, actions or trends in our businesses, prospective services or products, and future performance or financial results, including those regarding expenses, income from operations, share repurchases, and liquidity and capital resources, as well as any statements relating to our 2024, 2026, and longer term outlook, and the expected timing and impact of our strategic initiatives are forward-looking statements under the Private Securities Litigation Reform Act of 1995.

These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from current expectations. These risks and uncertainties include those described in the cautionary statement disclosures in our earnings release issued this morning as well as those detailed in our 2022 annual report on Form 10-K most recent quarterly reports on Form 10-Q and from time-to-time in our other filings with the SEC. These forward-looking statements are made only as of today, and we undertake no obligation to correct, update, or revise any of them to reflect events or circumstances that could occur after this date. Presenting on today’s call are Ellen Cooper, Chairman, President, and CEO; and Chris Neczypor, Chief Financial Officer.

After their prepared remarks, we will move to the question-and-answer portion of the call. Let me now turn the call over to Ellen.

Ellen Cooper: Thank you, Tina and good morning everyone. I want to start my remarks today by looking back on 2023 and reflecting on the significant progress we’ve made in repositioning Lincoln for long-term value creation. We’re entering 2024 in a much stronger position compared to 12 months ago as we advanced on our key initiatives, which were to; one, repair and rebuild our balance sheet; two, deliver organic growth while shifting new business to more capital efficient and higher risk-adjusted return products. Three, position our group business to become a larger part of our overall business mix; and four, continue to build our leadership team, putting the right people in the right roles to produce results-driven outcomes and lead the organization forward.

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Q&A Session

We have a powerful franchise, a trusted brand, distribution prowess and a broad product portfolio that meets customer needs across our four businesses. These attributes will continue to serve as a solid foundation for our future growth. Our primary focus last year was to strengthen our balance sheet. And as you’ll hear from Chris in more detail, this will remain a top priority. We closed a major reinsurance transaction with Fortitude Re, which marked a big step forward in our efforts to derisk our balance sheet and improve our capital position and ongoing free cash flow. We also announced an agreement to sell our wealth management business to Osac. This transaction is expected to provide a capital benefit of at least $700 million upon closing, which we anticipate in the first half of this year with no expected material impact on ongoing free cash flow or earnings.

We ended 2023 with an estimated RBC ratio above our target of 400%, which includes the impact of the Fortitude Re transaction and represents a substantial increase from the 375% to 385% range at the end of the third quarter. And when the sale of our wealth management business is finalized, we expect this will further improve our RBC ratio and provide us with additional financial flexibility. We also made good progress last year in shifting our new business to a more capital-efficient mix with higher risk-adjusted returns and we are doing this across all of our businesses. While a ship like this takes time, both our product and distribution teams are executing on this transformation. Our group protection business delivered substantial year-over-year margin expansion, while also generating solid premium growth.

A larger and more profitable group business is a core tenet of our long-term strategy to achieve a balanced mix of earnings from businesses and products with higher stable cash flows. Lastly, I’d like to acknowledge our leadership team. Not only did the team execute at a high level to achieve our 2023 results, they are also refining our strategy and processes, creating the framework for further transformation. We are continuing to invest in our technology and infrastructure to support future profitable growth, including digital platforms to enhance the customer experience and innovative tools to drive more production for our distribution force. Next, I’ll briefly touch on our results for the fourth quarter and full year. I am pleased with our overall performance and the progress we are making to transform our company.

In the quarter, we delivered improved operating performance led by our Group Protection business, record sales and annuities, and more stable life earnings. In Retirement Plan Services, we delivered our ninth consecutive year of positive flows. Elevated expenses remained a company-wide headwind and as I mentioned last quarter, we are actively addressing this along with exploring a range of additional strategic initiatives to continue growing the franchise, which you’ll hear more about later on. Turning to our Retail Solutions businesses, Annuities and Life Insurance. In Annuities, we had a record sales quarter, driven by strength in fixed annuities, which surpassed the $2 billion mark in the quarter for the first time. While variable sales, including our RILA product, were flat sequentially, we have several product enhancements launching in 2024, focused on increasing our addressable market and expected to grow sales.

Total annuity sales for the year increased by 8% with a well-balanced mix across product categories and strong growth driven by our strategic positioning across fixed product categories and with select distribution partners. We also continue to achieve our objectives for capital efficiency and product returns while providing customers with a broad range of product solutions to meet their evolving needs. We expect further momentum in our annuity business as we head into 2024. In Life Insurance, sales declined in the fourth quarter and full year, driven by our intentional strategic realignment to products with more stable cash flow profile and risk-adjusted returns, such as accumulation life products. We anticipate that this sales shift will continue to take time and entails optimizing the product portfolio by deemphasizing long-term guarantees such as Guaranteed Variable Universal Life or GBUL, and commoditized lower-margin products such as term.

We expect to further support this shift with go-to-market strategies, including product actions and expanded distribution channels. Next, turning to Workplace Solutions, which comprises our group protection and retirement plan services businesses. In Group, we had a compelling 2023 as we delivered record full year earnings and strong topline growth. This reflects our progress executing on our new segment strategies and our actions to drive margin expansion. Premiums grew more than 5% for the full year and 3% versus the prior year quarter. Our deep relationships and positive customer experience enabled us to achieve strong persistency while executing on the pricing actions that are core to our margin expansion. In what is typically our highest sales volume quarter of the year, sales were up 12% versus the prior year quarter and up 3% for the full year as we achieved significant momentum across all market segments and products.

We saw continued strength in supplemental health, where sales more than doubled in 2023, helping to build a more balanced and diversified book of business. Strong claims to execution and a favorable external environment helped improve risk results in 2023 and when combined with pricing actions were drivers of the substantial progress we made toward our goal of sustainable 7% margins. We are also taking the necessary strategic actions to position this business for future growth with investments to build out our infrastructure, including technology and digital platforms, enhancements to our customer experience delivery, and segment-specific offerings that we believe will provide differentiation. We’re confident that our strategy will deliver further profitable growth and margin expansion.

Lastly, retirement plan services. While 2023 results were below our expectations, we are taking actions to regain momentum and drive long-term sustainable growth. First year sales were down for the quarter and full year, driven in part by a lower volume of stable value sales as higher interest rates drove lower demand for this product category and also contributed to participant driven stable value outflows. Our employer retention remained excellent, which we attribute to our differentiated service model. Total deposits in the quarter were in line with the prior year quarter and recurring deposits were up year-over-year, driven in part by higher participant contribution rates. We are focused on the actions and initiatives necessary to move this business forward.

We are already seeing some positive results as we have a larger pipeline of known sales wins than we had a year ago, although this growth will take time to emerge in our financial results. Looking ahead, we’re optimistic about our strategy to grow and improve the profitability of the retirement business. Before I turn the call over to Chris, I want to set the stage for our outlook discussion. As we progress on our multiyear journey to reposition Lincoln and restore value, we remain focused on three strategic priorities; one, to further strengthen our balance sheet; two, to improve free cash flow; and three, to grow our franchise profitably, which includes advancing the optimization of our business model. As a market leader in our at-scale businesses, we have the opportunity to expand our footprint by utilizing three key foundational competitive advantages, which include leveraging our distribution strength to grow our addressable market, target specific segments and deepen existing partnerships; emphasizing products in our core markets that have higher risk-adjusted returns and more stable cash flows, while expanding into adjacent product categories; and offering a differentiated customer-centric service model with enhanced digital delivery.

Over time, we expect to grow and diversify our group business across products and size segments, our annuity business to evolve with a well-balanced product mix that includes expansion of spread-based product lines, our life business to emphasize more accumulation products and deemphasize products away from long-term guarantees, and our retirement business to grow its core recordkeeping segment. This longer term mix is expected to provide more balanced, stable cash flows and higher risk-adjusted returns that over time will support our financial objectives that Chris will cover during his remarks. Our businesses are in different stages of their strategic realignments and as I mentioned previously, it will take some time for these changes to manifest in our financial results.

While we are taking the necessary steps within each business, we are also continuing to actively evaluate a series of strategic initiatives expected to further contribute to building a stronger capital foundation and optimizing our operating model. Chris will provide further details on these initiatives in his remarks. To sum up, I believe we’re at an important inflection point for our company. Today’s outlook provides the first lens into our future as we proceed on our journey to create increasing shareholder value. I am confident in the path ahead and look forward to updating you on our progress. With that, I’ll turn it over to Chris.

Chris Neczypor: Thank you, Ellen and good morning everyone. Overall, we reported solid results for the fourth quarter, capping a year of consistent progress across our business. We are executing well against our strategic priorities, strengthening our balance sheet, improving free cash flow, and focusing on profitable growth. I’m going to focus on three areas this morning. First, I’ll recap our full year and fourth quarter results, including a review of our segment level financials. Second, I’ll briefly touch on our investment portfolio. And then third, I’ll discuss our financial outlook, touching on capital, free cash flow conversion, and expected growth. We’ve also posted an investor outlook presentation on our website that provides you with these details.

So, let’s start with a recap of the quarter and the full year. This morning, we reported fourth quarter adjusted operating income available to common stockholders of $246 million or $1.45 per share. There are two items to call out as it relates to our results. First, while alternative investments delivered a 7% annualized return in the quarter or $58 million. After tax, this was $20 million below our target or $0.12 per share. Second, our Annuities business had a one-time favorable item of $14 million or $0.08 per share associated with a model refinement. Excluding the impacts of our annual assumption review in each year, full year 2023 adjusted income from operations was $1.1 billion, a slight improvement compared to 2022 as growth in our group business more than offset expense pressures faced across the enterprise.