LNC - Earnings call transcript Q1 2020 | Lincoln National Corporation

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Operator

Good morning and thank you for joining Lincoln Financial Group’s First Quarter 2020 Earnings Conference Call. [Operator Instructions] Now I’d like to turn the conference over to the Corporate Treasurer, Chris Giovanni. Please go ahead, sir.

Chris Giovanni

Thank you, operator. Good morning, and welcome to Lincoln Financial’s first quarter earnings call.

have reminder. I begin, we an important Before and Any trends about and during Private the Securities and sales, under Act forward-looking future expectations, call regarding liquidity repurchases market share XXXX. expenses, Litigation from comments resources the income are statements made deposits, operations, capital of conditions, Reform including comments to from current expectations. These forward-looking uncertainties and materially risks that could differ statements involve cause actual results reports issued on cautionary These X-K risks statement the yesterday and and earnings our in filed our uncertainties XX-Q disclosures release forms and with are in SEC. described the only These forward-looking revise as statements reflect occur we and undertake them date. of obligation are events or made update this of circumstances that after today, to or to no any

www.lincolnfinancial.com, supplement, can and in where press adjusted release We measures include income presentation, the comparable which operations our you you also on appreciate your from participation or website, and website. find statistical today full return call, income included provides including on used invite additional operating which non-GAAP measures. equity reconciliation a the GAAP investment to information on Lincoln’s to our adjusted portfolio, adjusted our most is and A their to slide visit

Dennis call. Randy and their and the Glass, call Executive Officer; we Chief will and remarks, prepared today’s on of Individual Presenting question-and-answer the Freitag, of portion are Officer Financial After Chief President Head Life. move to

to like now turn the call would Dennis. I to over

Dennis Glass

extraordinary X on been commitment current has our few and difficult recognize I has by crisis navigating Thank for want our you. health unwavering with over months. everyone. focusing hope crisis employees you, are also you Lincoln and past Chris. morning. Good on the staying Lincoln their thoughts priorities. been We the are safe, The efforts to

our what doing of employees. and protect First safety we can health help and the to foremost,

the of And help and operating our our the COVID-XX. business America overcome challenges partners, is interest of third best to in shareholders. customers, is the doing Second policyholders part

pandemic spread business distancing Because and setting our our we emerging to investments, has this restricting In to the the to discussed began and and of reduce planning started including taking monitoring the of eliminating health been a for Early social the with the March, home significant our our which threat, of guidelines. XX% employees meetings on, limit Lincoln of travel, face-to-face connectivity Lincoln virus model actions and communities. continuity we work-from-home moved and from digital family employees help have within excellent. you, working noncritical productivity

high with always our our and the at commitments same we have service difficult We to standards delivered. customers have time maintained during partners this

to company. Finally, honoring our actions we remain committed as our responsible namesake through a

get throughout work Our help commitments to communities foundation back distribute to food a are has operate sponsor bringing of we faster. significant companies financial and together People we + the help as Connect Work made where to founding people

This I briefly handle morning, on remarks Lincoln, to results are and touch impacts going current we our the will cover results the to prepared and a period to before potential environment then position. little quarter and strong the detailing differently. financial greater uncertainty. have in manage successfully with place actions through the Randy our this strategies along first detail, of to we speak will in

by results quarter unaffected first solid and the largely virus. were our So

AOCI quarter again, to plan, per and are environment, strategic highlight a history, earnings quarter’s over operating variable and in as in rates, that. positive we is our gained recent to VAs with long-term this our different exceeded is indexed less grew annuities. it guarantees to annuity, demonstrate which execute While and in important once variable we now on without sales the year Adjusted VAs that continue as equity, results, and sales X%. The for year momentum. were doubled prior quarter nearly compared much interest to return top strong annuity the up both business flows Notably, of time we of generated on increased in operating excluding a the quarter. prior fixed had XX%. over X% net both further revenues of the digits share and Adjusted Net guarantees a first produced line sensitive we bottom the mid-single flows

We expect space continue expand to this producers. new as and shelf we shift add

In were biggest rates Services, again Retirement in growth line deposits the the drivers. and we the Plan once in positive prior Net with period. both strong quarter bottom low being withdrawal versus grew the also top and recurring year flows

high a model tech-focused and in us distinguishes markets. the service high-touch, is from competitors Our target differentiator our

these times which more for now outcomes are plan positive drive participants. We important sponsors and uncertain capabilities are to leveraging in these

of Turning income operating to the compared in the grew single Life Insurance, XXXX. to quarter first and each operating high digits revenues

leveraging As maintain product decreased in offset portfolio, and our prior sensitive year part other focused diversification. to and to strategic term, were remain on IUL products, as are to which expected, product sales actions. pricing rates the by by We in in broad compared focuses less increases declines driven interest

Lastly, year-over-year, renewal are efficiencies. on and year. prior the decreased driven higher over improvement rate expected Premiums persistency, by increases in premium This operating than mortality. Protection, from growth strong primarily Group income benefiting expense offset combined with

will positive ratio expense improved when the first the which long-term our demonstrated Liberty results our again, be the we crisis In the continue Our to of acquisition. success critical basis synergies short, XXX achieve we quarter, saw as points to initiatives, health from strategic strength the in subsides.

the current came position sheet heading the and crisis it situation financial of important we our recognize to a crisis. and balance into is businesses environment, in we markedly favorable that shifting Now, had a this into is global in more strength than to

First, that mix have are of diverse on scale. we businesses at a all the businesses,

blocks, stream combined an recurring in with persisting and nature with XX% long-term each liabilities, results attractive in-force highly the revenues revenue predictable of Our of over year.

several being of actions shifting from coming our our for benefited mortality mix. years from also sales over product sales; past products, to single sources. to more and morbidity represent to and have We markets capital now This reduce sensitivity than of the achieving target strategic the taken over and diversify includes which sales; no XX% earnings XX% total total XX% our of non-guaranteed

in topics. is investment management Life vast we securities in let requirements. Liquidity grade strong and liability On address have portfolio our balance subsidiaries investment the our sheet strength, asset strict publicly of majority traded with four Insurance me very

$X our our cash our holding and due next have XXXX maintain cash billion debt the subsidiaries corporate committed interest years. from additional maturity, X used more meet that flexibility dividend. which makes also the are not might for almost to pre-funded million $XXX any Dividends maturity of we than current and We facilities, expense our sufficient of stress shareholder borrowing with flow the have manage of can level Life which develop. be At have to company,

a the $X.XX line In borrowing un-drawn committed addition billion of also can we to $X that noted, which be just is for I billion of used general purposes. facilities credit, corporate have

years rates selling reduced has over Our low have rating the past The in greater X market factor shocks. that been losses credit the downgrades. under from the equity interest as and been we both potential improved deterioration actions materially de-risked risk testing, which have This our rigorous securities of stress credit scenarios. impacts has and of investment portfolio stress results have

having and focuses Our and our business shareholder to stress financial issue our ratings planning not franchise, strength equity. on maintaining dividend preserving

the economic we are and from of to given the our trimming we buybacks its potential on portfolio. can the stress steps comfort are capital slowing these and outcomes tests, our current confident wide capital and virus consequences, investment more and we most protect Despite share and our in additional further reduce including array Based sales the second taking positions meet consumption; position, selectively quarter improve to suspending longer; for possibly goals.

There are where we are other impacts see seeing or direct COVID-XX. expect from areas to

claims virus First, experience mortality and including the impacts. from morbidity

beginning and a not impact an see claims balance sheet experience to quarter, We the in quarter. but second COVID-XX in Lincoln we virus-related the expect many not do event. for our an claims expect first mortality be earnings We increase

we seeing of and terms slowed. increase claim long-term short-term disability an impacts, have in disability claims, In recoveries are morbidity

As will in larger COVID-XX and within fallout experience have claims our economic mortality trends group and the from a believe we business. a result, impact life morbidity

stress as to consumer due hardship missed is payments changes premium The second XXX(k) or financial area withdrawals. such

for premium mandates We state-issued hardships following are a those on COVID-XX extending appropriate. grace case-by-case basis with and payment as related periods

CARES the a savers. We loan do. not these right meaningful seen fees believe are things in retirement not we and on the large and eligible activity withdrawal for are to earnings. of programs initiation to these we part As have do waiting have them And Act, while early, expect impact

solutions. customer distribution industry-leading The and this crisis third distribution area We is disruption. entered with

over space Our months. XX led product breadth selling Lincoln the and to XXX,XXX individual over shelf past the distribution producers

to have environment We distribution all channels. across sales virtual our efficiently moved a

is asset digitally have good. most result in which very insightful receive with policies investments made testing. to adopting XX% rates incremental tools high and these applications cases. training customers digital marketing We fourth, The with us our with virtually. issue very business increasing economy remains Interaction impairments, resulting our are will at downgrades all And customers in in more said as by enabling stress a effectively X,XXX appropriate materials. we some or armed to take-up have ability the tools our in customer-facing our downdraft credit sales Also, launched conduct level, have are and digital and is I professionals and anticipated

Let me turn to sales.

sales and have for growth. reflect were highlight first distribution our good seen, which you our product potential and sales, solid quarter As positions long-term our

than levels several we However, will in quarters for what quarter the be lower saw at reasons. sales in first subsequent likely

amount low or but invest supported have decrease they cash and understand growth make capital products on in Lincoln, our decisions. are we not situations rate this a We being more seeing factors will on the we cautious free in be several return increase raised Also, environment. few flow, and to could a customer products, value shift and their better prudent of the interest economic immediate cases, the try capital prices suspended environment. purchase in current own meaningfully consumers where companies not at These as proposition in

on last by been returns more MoneyGuard. in Since been guarantees, annuities, RPS products me returns rates. and by variable our Group our that annuities fixed and and Life include year, affected we lower with have businesses Let affected business touching interest by has as respond rates. the uncertainty. primarily affected re-pricing particularly life are low of have in strategic economic Annuity beginning increased This on to universal and interest been expand concentrated approach Products to new less rates this proactively where are actively

shifting are to requirements. meet that exceed products emphasize We or return also existing

variable products to without maintaining of that our line, earlier, great capital return solve focus VAs As indexed and annuity our which guarantees, we momentum, trade-off. Bottom continues sales going enabling capital. to continue gain sales on are while a returns on I sell achieving needs to guarantees is risk, overtake with to of consumer noted VAs appropriate

the in to portfolio are a to well-priced We product a which industry, position the fortunate the in products, demonstrated of having stabilizes. and add initiatives capability as long-term sales proven should a support new economy of ability broadest shift growth all

Lastly, the credit allocation been I proactively earlier, adjusting preparation we credit have de-risking managing to well portfolio, potential for risk a investment money more as higher-rated in investments new noted defensively our as on by cycle.

loan service coverage ratio rated within our example, XX% average For with grade equivalent XX% investment an mortgage of portfolio, the X.Xx. are more debt loan-to-value of of than commercial and

portfolio, structured rated XX% and above. are the of Within AA CLOs

And measures impacted more rated We declining sub-sectors X% to since also below. assets our through portfolio by investment-grade just below shifting is of investment and XX%. securities These or our allocation contributed XXXX rated oil. assets price de-risking less energy in with BBB- generated approximately and than have the XX% $X of mix, selling the actions, representing importantly, billion shifted have

environment. As many of and investment also investment of power upfront, array this deterioration, becomes wide a just to mentioned of the portfolio multi-manager informed our discussed. testing model of the stress evident current in I scenarios our assess the I rigorous actions significant more has credit involves The

since We a managers the portfolio. of extremely adverse analyze to basis, of asset classes across have all leveraged our COVID-XX entire onset suite a variety name-by-name scenarios on of the in

results test we an be ratings losses, currently our the be and plan below increase we in migration expect While impact credit to do will and financial believe manageable. significantly stress see

the impact unknown. economic remains closing, in and from fallout So COVID-XX the

financial we Lincoln’s economic similar the existence, including However, XXX-year throughout leading team crisis. difficult has a have history challenges, and our overcome of management through environments

crisis. we for us and, I learned noted, lessons prepare this taken valuable since to actions have as Importantly, well XXXX several

that While drive earnings we strong, capital planning to our we stress am have and are with positions we expect confident will value. and combined place, financial are and our actions decline, liquidity long-term testing and shareholder robust strategies sales are I the taking in

now call will to I the turn Randy. over

Randy Freitag

notable share, operating or or current X% no prior year There income first period. $X.XX Last Dennis. within strong a adjusted the year quarter per we of the up you, Thank year were $XXX and night, start million the items reported over prior to quarter.

will a up in the few them were there items down, some both variability, I However, and segments. detail and driving business

on the being derivative accounting variable with by per which share, for financial in an directors’ by comp increased basis, with the to over driven $XX the associated million to the or management after-tax capitalized after increased standard per the approximately the loss amounts year. the to Touching of was stands value expense share resulted million ROE decreased negatively Adjusted XX.X%. with excellent key increased risk, nearly to with for compared increased in net $XXX primary million. and volatility net prior G&A and employees’ Book reverse current CECL X% for quarter annuity credit CECL. adjusting share per $XX a for revenue a to losses accounts. unprecedented decline Equity Net metrics income quarter reserve On points $X.XX time. markets, new $XX.XX, driver basis million XX Lincoln we related deferred X/X X% and X% our non-economic $XXX Adjusted and excluding at which capital performance operating as operating impacted to fund results accounting was $X.X $X.XX, expect AOCI, billion, basis of from expected

the program Overall, changes volatile have in hedge we XX% covering was target what of during ever the quarter seen. effective, was hedging the the over well highly most

measures the volatility. size of couple to a provide me Let

First, target increased billion. hedge the $X.X

distance the billion, quarter. any $XX was Xx preceding However, total than traveled more

the of a period to volatile X-week a amount that X-month period. Next, trading during occurred was equivalent typical

points have million of from $XXX year. months, Now, the turning first X% to which higher increase from in by income, earnings X income flows including XX increased positive over $XXX operating values, spreads, primarily basis. prior segment billion on results, nearly starting in million net account in sequential Base $X.X basis average driven the with Annuities, investment the was increased quarter. a benefited The past variable excluding

account to However, declined ROA ROE. solid, over metrics and remained to investment and prior $XXX at fixed XX% XX billion. basis year End-of-period lower values period a annuity earnings variable totaled with income. decreased points compared due the Return the same X%

both a As and net account living risk to value at increased death amount result, for X.X% of benefits.

in-force lower peers, the low nature at risk end remain will percentage this expect We very of highlighting the our of business.

variable account Services, we are strong some primarily values with positioned by the year, billion management. from strong the up headwinds Retirement financial to average months. performance. million from income, than expense account ahead, basis deposits. prior points a income though investment included the Net was X% $X.X values position. somewhat expect end-of-period over quarter’s growth X% being end-of-period in cash versus excluding the totaled Looking values, year driven and quarterly first below increase Plan increased of in X% first elevated year, $XX recurring XX well we spreads, average. normal and operating $XXX Deposits earnings by billion both million totaled trailing delivering to or continue X% In flows and higher the XX sales prior Base account $X.X below values Average compressed

We continue to basis XX decline full to a point for expect XX year. the

the to net points improved revenues, of expenses, year-over-year. deposits, by an net ratio earnings. increase highlighted business had operating XXX basis and When combined quarter, Retirement in expense prior compared capitalized X% operating strong G&A the flows, a decreased in revenues with growth amounts year.

expect the However, for near-term. account lower we some values headwinds do in

of Insurance by Life prior segment, driven million the from $XXX our X% business new income to increased Turning growth. year operating

expectation, our first the see within quarter. we experience typically elevated annual know, in mortality you As

basis expected, Operating quarter. solid earnings million spreads caused returned points XX average last full Spreads methodology, and a over were ratio. for resulted prior improvement normal crediting our a more than point flat, the Underlying expense with better XX%. values investment similar were which as while expenses increased the average first we drivers to decline offset $XX variable X%, non-economic base to This life in-force, year. impact more year’s insurance the the than However, results points, expect basis with up came what in X% rate consistent account levels. in the change revenues G&A XX which X basis year in to increased to year-over-year income up from

for solid Life start single operating year So high to and growing business, the the a operating with revenues income digits. each

As Dennis noted, a we COVID-XX keeping are mortality claims. in close related

well earnings remains We so this results, negatively to near-term positioned. business impact expect the

renewal in loss of ratio improvement added ratio. loss Premiums mortality. quarter up first we benefiting income favorable to compared decrease large reported we larger compared return points X The business, was Protection the in the on operating the claim million elevated a XX.X%, expect experience X%, based driven points to to nearly incredible would In $XX loss million to in saw primarily year, of prior and We persistency from Group experience increased $XX rate the ultimately in prior with higher-than-expected by ratio historical year in increases. these the Life period. some reported larger total the the cases to which levels. accounts, percentage couple

Disability in higher declined X ratio. expense expense loss ratio we year the Liberty a slightly from basis G&A as also point resulted incidents. the primarily This improvement variances. This benefiting continue by synergies to experience over roughly the elevated from in was favorable achieve the acquisition, expenses impacted XXX prior while point. by total

management. are While quarter’s expense encouraged this disappointed ratios, premium by by trends elevated we and loss

from expect our mortality we claims. the morbidity and COVID-XX in negative on impacts economy some do near-term slowdown Additionally, and the

a Before quarter second to comments capital, me let expectations. few on shifting make

impact lower and to RPS. remind in One, X% expect X impacts I there noted results. markets equity would While from do earnings guidance, every $XX that I account values by change impact approximately we Annuities you million. end-of-period we not provide in are items the

Second, know, a report as lag. on private we equity quarter you returns X

in negative expect significant in portfolio. the equity the on Given return alternative markets decline first we quarter, the a

Third, million, We mortality with the Annuities $X morbidity the to deaths we impacts currently our and United $X in million million expect approximately earnings RPS to in impact and Life will States and will increase. claims minimal COVID-XX hitting $X Group every estimate related XX,XXX the business, by businesses.

noted expect group ratios as we in would and disability. before, elevated loss Additionally,

with we capital, the strong points in to a very position ratio Turning increasing to RBC ended X quarter XXX%. our

only as to our million cash company position of million. improved further pre-funding debt debt and due February our maturity paid off $XXX $XXX our we this in liquidity holding June increased our Additionally, we year by maturity XXXX

It first Now, let financial practicing me But and we expect what we preparing doing enjoy and is that in repeating a over many RBC billion shareholder building When XXXX we nearly been stress we financial a is to over scenario end to which this. of over a maturity comparing absolutely, of our away, balance three a XXXX, being to Since quarter like maintain business the $X years equity. X ratings pre-funded we Not sheet points, our only billion. our company, capital is We dividend; is pre-funded goals maturities, it up started have our ratio $X.X debt franchise; and debt In balance at current strong discuss level is issue percentage And not XXXX. end decade. how have been billion, equates strength strength testing capital. about note us $X.X thinks picture none Statutory different and the than XX maturity, the the the double Lincoln cash environment. in have XXXX. at of the stressed manage stress past have sheet. the worth to stands in approximately but a decade of how XXX% our test: for our for respects, preserve nearly of up the world. through next financial strong, of you holding nonstop would very is by net

actions testing Lincoln. and confidence our informed in has driven strategic strength the both stress financial Our of

have XX a Coming X% not on interest of rates X the We some points color to XX-year markets snap equity to we into what compared think in declines, in given provide very levels. treasury down years We modeled. that low year, this we we we that me year-to-date impacts prior will test. subsequently the looked we excess when experience And back to of years. basis rates X. significant at drop and to took assume drop over going XX% stress about Let

it We also as apply stress. the of credit CTE-XX credit shock. tale it Officially, very of in deep we think a

level the have the of and real expect, stress negative As list a not of impacts significant it just does drives negatives. a and to a impacts. and losses It taken you those actions stress long to capital. also just is stress earnings credit downgrades. drives That or might That’s that identify negative that take But informs offset will we test beginning.

recent products For investment approximately successfully plan example, de-risking by few expenses also employees most to earlier; guarantees And a the business reduce on headwinds portfolio the to in example sales. noted that front, the we with our have expect XXXX. long-term a managed million Dennis XX% expenses that with offset total delivering $XXX being of to mix have fallen

to rates our stayed to stress have As part interest strengthening if of low. testing, primarily impact related had eye for subtest, statutory capital on SGUL possible also our reserve we

the or reduction. million at million impact XX at if on have about to basis Over X% potential updated talked we we approximate the analysis, years, rates see an points. $XXX a Based an $XXX significant stayed see

expect For XX low be reserves end the to the we’re impact reserves potential experience levels. the years the XXXX block the the while range is to relative normal upper conservatism wider increase in million and to assumes statutory basis more $XXX of return today, seeing end The improvement at the This spreads now significant by base $XXX we in million. peak positive of an and spreads points, driven reflects over range to example, the as in ages. in

cash many is recognize capital to return but of capital the to all return this our discuss of new business primary We two me year. a flow, that to you free we capture and in shareholders let shareholders. capital given generate uses failed Next, define capital,

we million buybacks. of For instance, returned shareholders, in $XXX $XXX million including in XXXX, capital to

an of we However, capital business. new the additional production allocated to $X.X of billion

Dennis for environment disruption business sales decrease to the from noted, and combined the As we re-price as with expect current COVID-XX we weaker.

the new allocate As be of business lower XXXX. capital to amount in we will that by $XXX a expect I approximately million result,

Turning temporarily to our expectations made the of decision considering for the the to have few buybacks, halt buybacks we past events months.

is the announcement that Now quarter. second an anything about beyond not

will it have the goals reassess are We focused reasons we I our confident as defined achieve ability prudent those stress and all I time very do described achieving In know in And to what X is in assess based goals. goes on meantime, on today, on am when for the to we the and resume buybacks so. primary we test. our

with the the lower significantly first conclude, taken a expectations and actions we a RBC headwind. sheet quarter currently manage of primarily strengthening near-term rate in strong And good EPS to COVID-XX a in mid-single-digit earnings have is a with we reserve ratio, and for to are balance So and we ROE. is revenue in. position stressful environment a solid low environment the The take, will had growth and a XX.X% impact

With call that, the back to turn let me Chris. over

Chris Giovanni

and Randy. Dennis you, Thank

me call. turn With will question-and-answer We portion call now that, Instructions] to the the the [Operator operator. let the back of begin

Operator

Our Ryan from [Operator comes question Krueger KBW. first Instructions] with

Your open line is

Ryan Krueger

$XXX from at some why guess to SGUL impact, I a that on detail million pretty the stat Hey, potential this improved much reserve granular more the million. $XXX point? thanks. you $XXX Good that’s difference can guess go with I so million into starting sizable morning.

Randy Freitag

out the was Ryan, going go guidance the And guidance it ago. number yes, a question. years first we for when thanks that out talked That that with time, peak about was would peak this it came to then XXXX. about time. the of Randy. at we over came with It’s and fact We down

But you for coming little updated a in little factor bit. there So X, number of locked not that XXXX of full drives when we big when the on reserves. And this. have the the natural is the you embedded drive pass items, decrease of X the I what the in as what low see the getting index also I very that script, for you’re hit end pretty conservatism big And X in in that in earlier. actual has for guidance a the down in I’ll mentioned the take expectation it’s much we now that’s rate been really out over those XXXX, has XX it of our my unwinding in – because some years really what’s this done this a really past also peak thing environment. hope months, of statutory helps. this really

Ryan Krueger

And what protecting And in give actual would you an I RBC event? it. of of you a scenarios tail that I to then are guess, stress type when you you that what run test RBC you scenario? sense the Got guess provided, can us, ratio think you maintain in

Randy Freitag

is run you’re downside our So stress test, asking our guess we I full when Ryan? what

Ryan Krueger

that to what capital That’s targets downside? right. need maintain do you kind And for in of

Randy Freitag

test has have goals dividend our business through stress that not ratings. to our and issue we franchise, I and and Dennis I equity. preserve are to X is use. is of which maintaining we both run which mentioned, strength, has the its one ran But our whole of maintain and it. – the it X It testing different that We X stress mentioned, of gear financial ratings our the goals, stresses main

Historically, to started where we go been the we with today. that in as that range the that the we with XXX% actions today, AA will is we about, down and consistent the at believe of is ratings XXX%, started capital mentioned, by XXX%. I run, ultimately operate talked offset stresses the we that XXX%, we to number So the has number we

Ryan Krueger

it. you. Thank Got

Randy Freitag

You bet.

Operator

And JPMorgan. Bhullar from Jimmy our question Thank next you. comes with

line Your is open.

Jimmy Bhullar

morning. good Hi,

the discuss hedge on that sort a on result loss? that, what making you more of just are program whether of as you drove can question little So you to a first, the the just loss bit the of a of and that detail changes had drivers hedge sort any

Randy Freitag

This is Jimmy. Sure, Randy.

any First, No great no need make a changes, to program. it’s changes.

let make me a comparative comment. First,

the Jimmy, company to, balance that approach. think, appears in as financial view $X we billion at that in target I appears we benefits the equals was $X.X of the at amount the a billion risk our amount target of a of that economic our hedging that That hedge think we’re the to that’s on both a at our billion. and only risk And about and that itself, liability statement. benefits It’s and best-in-class on I liability sheet. really whose $X.X that are death that living number So hedging net net of compares end – our quarter, an risk

So as a VA breakage some results net comments going or I’m call derivative in what with that general. to on predicate,

period what And of a breakage. average you a represents derivative real will for a It’s out periods relatively increased very time small levels time, there – And to $X.X years our assets, fourth number other is it’s an that things First, and number. it’s to know that’s billion at it’s of are a this One, and now. relative in But of see increase run a for at over one. extended the few amount our saw which number number. the about real that we in liability. lumpy low the to extended we going it

It’s number we that also a for. price

capital during of approach and of of breakage one when a good us value. a an out which that And risk financial greater is of for what out of made a are we capital from approach CTE-XX is million we the from to takes capital And analyze the business. $XXX comes the percent very and in floor straight a been straight is and percent that CTE-XX financial changes labor. that’s very $XXX a forced see, does the extra we breakage. of controlling So thing has the out times positive that because with account rising, million allow what we switched closely value crisis. and that Note we of while, a coming account that to that hold things to what out a approach does. team capitalization CTE-XX comes example it a There’s doesn’t markets of business, to VA really really good And capital, you versus pull of have it’s this ultimately couple an of

temporarily so we policy used capitalization, that’s very lumpy by like would have wanted. change worked left a while we’re this gets just that it breakage, So strong we up great with made still

thing second The our the economics the business? itself we is to is that really The breakage Annuity change the does specifically view of think the the economics no. about of of answer business

as I are earlier, that our the I into hedge think it approach little industry. of dig two in results, cost economics me with really Jimmy, The big start to best mentioned which a Let a There to program. as of running reporting VA bit. components, the

of the day-to-day is cost hedges. buying first The

we portion actually out represents or cost $XXX of So for hedging. policy a million a out charge income. revenue, of every of operating issue, customer. straight The so which significant year, calculate what be gets we That cost, this pulled we cost of a about will straight

and income first That’s the thing the about program, That’s But is operating it’s of program possible breakage. an actually what know quarter. during that not hedge other is second that. running we perfect, XX% called a a the hedge price the with that’s fund we’re reported left we talking what for at level averaged about. big cost to years, for we’re the operating and on what leads return very So that’s actually over We averaging equity. which

be products, price So when these we seen price breakage. means the in XX% we’ve That effective. we will program XX%

about had X% breakage, quarter’s X%. that additional quarter, you about that operating breakage to when this into ROE. goes coming And cost So, this in cost an represented combine against

which for or operating that the So reduced XX% over favorably we’ve the target economic very about gets so compares an ROE, priced XX% years. ROE to to XX% that

economics from very I So even of think business standpoint, strong answer, long this. that like hope strong the my A after quarter it’s an a but important I helps, are still Jimmy. that staying and topic.

Jimmy Bhullar

looking sort at another your the things to when to of that decide And Sure. into just then are market? you’re on back to one be the buybacks, get share going what

Randy Freitag

not stress think, scenario. you’re decision whether in about it’s I Jimmy, ultimately, or a a

how determination. about the should we get Well, to make we I environment. scenario? we’ll going ultimately, like and Jimmy. in the that we’ll the we’ve playbook scenario, look guess, to we’re be Are in Is situation. we’re next a the quarter, that operate in a still stress for I and at it, quarter, how think So operating? that’s stress second got a We’ll

Jimmy Bhullar

you. Thank

Operator

with our And from next Tom Gallagher question Evercore. comes

is Your open. line

Tom Gallagher

of now what end you greater follow-up be on And I of CTE-XX your Randy, buffer, had about you or March, performance, just capital managing the you Do about you do have much least there? this at you way you guess, or think think – when are of and XQ another repeat you’re of – when be – about near-term it a sort that’s about a about you little it the where what now might if holding to at and point? now how at positioning? bit stresses doesn’t commentary LNBar talk capitalized But you Should is the sound further then that about can of about would required that would risk and at about think like it’s managing additions capital. a you’re the of that thinking business X% entity. there’s any and think to I how

Randy Freitag

Tom. Thanks, had floor above account about jumps up. But so down, the us is that’s it this when we’ve that. CTE-XX guess markets think value I go been the would calculation I holding

I CTE-XX So we’ve today, got about think of approach. that sort buffer where we so are consistent with that

$X $X.X talk CTE-XX, and our for is that thing hear the to In and CTE-XX billion somewhere other level book about billion between between the $X in I’d $X between – billion which mention and billion, is it’s case, in you of business, industry. difference me. people The sort excuse another our of you

to grow LNBar, continue remains well We’ll So there. capital entity over the very capitalized.

LNBar over long haven’t sort there. over for of We let there period out dividends extended of We first the taken accrue of our of an we time. earnings time. just out dividend took really a year, Last

that But naturally in good very any can we So the year. with letting where makes earnings back feel go we entity about that easily accrue given to we are Tom. today,

Tom Gallagher

then the was see, Okay, let’s thanks. on I just other one Dennis. had And

going mentioned just what on a in disability or going see the it is on you’re had and scenes you correlation on of You is it on provide here? with long-term you Can surge what little Is think of unemployment, bit historic short-term behind the a you or think kind you do borderline claims. increased of sort claims color seeing disability?

Dennis Glass

experience. One together effect Yes. in Tom, just COVID couple about that recessionary a and increase. concepts we think of of on asked the lump direct effect relates claim to long-term period the expect so morbidity, business, of have not one on group COVID-related to that second the that you far, much has been claims, we increases. And the the about question the is sort a claim about. When incidence particularly experience your we all providers in there that

look So when some and things, of it’s potential. two direct claims we forward, combination those

So again, historical increase LTD with in associated experience recession.

those watching be quarters. we’ll go we So the closely as through things

Tom Gallagher

sales how lower at Thanks Great. $XXX Randy, estimate last, would you XXXX that have the in, And in should you would losses levels? it here? least for that said sneak could And one compare, if stressed credit million you expect Dennis. just freed that the do I from up to just an be annually

Randy Freitag

see talk not COVID year. losses. specifically will. stressful call as is credit we as Tom, – as We CTE-XX single of we scenario, to stress drives I’d run A credit a this you we’re number make every the the amount comment of don’t environment, the that if the mentioned you stressed environment the see about I’ll being imagine. can losses I the significant we amount don’t going as it today,

but to see by downgrade primarily So as as level the somewhat Ellen the government by still we first and asset to we yet, by a this team that, that her actually overall it be supported now Fed very is In a managers, the really probably RBC to grow million what event, primarily were X our be That with X it’s had hasn’t about still risen – and of primarily we we it downgrade as right Despite $XXX to work closely points. quarter, appears downgrades. still and doing, appears our event. able RBC hurt points.

going expectation to we’ve so seen So months. and for we’re unless It’s of from significantly has the been for what that’s last it our the environment see downgrades what changes few that’s far. kind what

Dennis Glass

I we’ve XXXX. Randy might to because and our scripts substantially is Tom, coming to since repeat did this into both just we’re the a with taken I’d add what said stronger investment he in that period that say I and what all what portfolio actions add stress

Randy about. really So talked good has to what in that’s point a starting addition

Tom Gallagher

Thanks.

Operator

you. Thank

comes question & from next with Lee Our Partners. Humphrey Dowling

button. Your please line mute is Humphrey, check your open.

Humphrey Lee

of guess, in from especially a Protection seeing and providing the furloughed in premium from And given RPS of the what morning. from, terms of terms top Group line what for employees, questions COVID-XX. and Good color your are I value? perspective, you for when and my mortality account in unemployment in you mobility taking we base some and thank thinking to and of But thank about terms impacts you relative think you’re

Randy Freitag

at through much seen from Thanks, those are that group either in top we line. Humphrey. line, forward the the specifically, or I the that the way so impact first haven’t think a a top bottom impact can from top about least line X would we think When line far, guess businesses you quarter. the impact think really in as business, there might or you things of X

disruption persistency. have The expectation that’s slowdown sales. an first that, Dennis we’d is that that on, going that. some in you’ll Offsetting expect in environment, this mentioned there’s better-than-expected

on bit I a of in lower you other, unemployment, leaves which higher have is you third every think which drag top of and recession, growth. items what impact lives, provides about business sort the see you offsetting covered with in those that the two which line a each group

we In we because year of really, at X% in course that if be item. wouldn’t of again or account of much the business, move quarter. a So I past because very comes We saw $XX the few grew hardship amount, in as million third of people surprised really haven’t down first grows. all weeks retirement X.XX% over terms seen the over that additional modest value. the the we taking

has impact? experience so far. and our could modest have It could, So that off but been kick a that

Humphrey Lee

can like up? of how done kind of all some provide particular insurance much at the life quarter, small looking transaction. And it and I wondering this terms if a then reinsurance the was financials had it. transaction Got in – color freed you’ve capital you looks

Randy Freitag

up sort to $XX very think earnings. actually book did transaction a It in a It of million of capital was an my was old period. very generated about of $XX that about past ordinary our We on recollection insurance, of give course modest million term I one existing Humphrey. insurance partners. here, guarantee term its Yes, with for

it was So with. working a history a good with long partner transaction of a got we’ve

Humphrey Lee

Got it. you. Thank

Operator

a with have Citi. Suneet Kamath We question from

open. is line Your

Suneet Kamath

Good Thanks. morning.

question in non-SGUL on I the that provided that past, redundancy subtest, also increased guess update the dramatically reserve also last book. those guidance the is, I subtest, guidance? the for SGUL you’ve SGUL should pretty So, have the similar assume appreciate numbers, to since the we

Randy Freitag

runoff over a sort in X they a in historically, and been base think and flow year, have hasn’t X, business, occurs been that the of and a years been to to than more I change that business. the we’ve Suneet, past billion that’s sell cash testing, enough the $X continued overcome Yes, lot profitable case growing really the of natural there roughly

think really over I change the the we see any hasn’t yes, years. So pattern in there been

Suneet Kamath

this has call changed, lot then again doing but ask in I that part possible? we So block doing transactions. terms of spent in-force flexibility figured environment relatedly, the of something time in-force on this spreads have in the that a terms rate of last just you is a capital with in about talked widened. playbook environment on Obviously, call, of so for the Is transaction this managing and I’d

Dennis Glass

really much on the somebody less is are overall People Suneet, to their take I M&A else’s landscape. situation. think understand situations, current the own trying chilling environment

falls sort is think, So of I develop. it’s same big transactions possible for like that category. And chilled M&A, Bought that moment. into something that general picture, the could

the the that of are this, there’s you you and the the advantage the buyer pointed levels uncertainty. get stay of and in all return – of have both and sort clear just the have the we’ve us a of in can out the seller – past, at balance and because transactions, think what right at rate you’ve we have an and where flow right As between chill said interest we’ll current the table I now it’s a discussed requirements but

Suneet Kamath

Okay, thanks.

Operator

back turn call for over any all the closing I’m we have to questions. time Giovanni Chris to that’s the And remarks. going for

Chris Giovanni

Thank you joining morning. all for us this

your are and always, day. happy we us a you, Please follow-up great to e-mail take have As at questions. investorrelations@lfg.com. Thank

Operator

concludes you Ladies conference and Thank gentlemen, call. this today’s for participating.

now You may a great day. disconnect. Everyone, have

Lincoln National (LNC) 8 May 202020 Q1 Earnings call transcript