The operator welcomes participants to the Lincoln Financial Group Third Quarter 2023 Earnings Webcast. The call will begin with a listen only mode and instructions for questions will be given later. The Chief Accounting Officer and Interim Chief Head of Investor Relations, Adam Cohen, reminds listeners that any comments made during the call regarding future expectations are forward-looking statements and may be subject to risks and uncertainties. The company will not update or revise these statements after the call. The website, www.lincolnfinancial.com, contains additional information and reconciliations of non-GAAP measures used on the call.

On today's call, Ellen Cooper, Chairman, President and CEO, and Chris Neczypor, Chief Financial Officer, will be discussing the company's third quarter results and providing an update on the reinsurance transaction with Fortitude Re. The transaction has been approved by regulators and is expected to close this month. The company is focused on rebuilding its capital position and delivering profitable growth, with a strong foundation in its brand, distribution, and diversified product solutions. While third quarter results were below expectations, the company is making progress in improving the business and evaluating additional actions to accelerate its recovery.

The company acknowledges that their efforts to rebuild and evolve may not be immediately reflected in financial results. They have taken targeted actions in three key areas: capital efficiency, expense and technology modernization, and improving profitability. They are also focused on product enhancements, distribution initiatives, and evaluating solutions to unlock the value of their in-force. Additionally, they have assembled a strong leadership team to drive results and lead the organization forward.

In the fourth paragraph, the company discusses how they are benefiting from fresh perspectives and are reevaluating all aspects of their business strategy. They also mention a $144 million charge related to updated assumptions in the Life business, and the underperformance of the Group business in the third quarter. The company is taking deliberate actions to support long-term margin expansion, including repricing strategies and focusing on higher-margin supplemental health products. They also address the issue of elevated expenses and are currently examining their expense base.

In the third quarter, the company saw sales growth in both their retail solutions businesses, annuities and life insurance, with sequential growth expected to continue into the fourth quarter. Annuities saw a decline in year-over-year sales but a 6% increase sequentially due to product enhancements and partnerships. Life insurance also saw a decline in year-over-year sales but a 17% increase sequentially, driven by strong performance in certain products. The company is focused on capital efficiency and meeting new business return targets. They also have a strong position in the market with their Workplace Solutions business, serving over 50,000 employers and 14 million employees with differentiated product offerings and service capabilities.

The Group Protection segment saw a 4% increase in premiums due to strong relationships and positive customer experience. Sales were down 19% year-over-year but employee-paid sales and supplemental health sales showed strong momentum. Retirement Plan Services had a decrease in first year sales but a healthy pipeline for 2024. Recurring deposits also increased by 6% and client retention remains high. The Workplace Solutions businesses are meeting or exceeding targets for capital efficiency and new business return. The company is focused on profitable growth in all segments.

The company saw sequential sales growth in their retail businesses in the third quarter and has a strong pipeline for all 4 businesses in 2024. They have a clear plan in place and are committed to achieving financial objectives by strengthening their balance sheet, evaluating solutions to unlock value, and being transparent with stakeholders. The company is making progress in repositioning for long-term value creation and will provide more specifics on their outlook early next year. The CEO expresses confidence in the team's ability to deliver and the call is now turned over to the CFO to discuss financials in more detail.

In this paragraph, the speaker outlines the three main topics they will be discussing in their presentation: a recap of the quarter, segment level financials, and an update on the investment portfolio. They also mention the adjusted operating income and net income for the quarter, as well as the impact of the assumption review and nonrecurring items. The speaker notes that the quarterly results fell short of expectations and that steps are being taken to address the issues. They also mention the difference between net and adjusted operating income, driven by positive market risk benefits and the impairment of securities due to the upcoming transaction with Fortitude.

The quarterly impairment only included assets in an unrealized loss position and will have no impact on statutory capital. Three general themes impacting the business are short-term pressures, higher expenses, and progress being made for longer-term value creation. The Group segment has seen substantial improvement in margins through the first three quarters, due to strategic actions and a favorable macro environment. However, there has been a normalization in favorable incidents experienced in the third quarter.

In the third quarter, the Group reported a decline in operating income compared to the previous quarter, mainly due to increased incidents in Disability and higher mortality in Group Life. However, excluding the impacts of the annual assumption review, the loss ratio improved compared to the previous year. The company remains focused on achieving a long-term margin of 7% and is confident that ongoing efforts will lead to sustained improvement.

The article discusses the financial performance of the company's annuities and retirement plan services in the current quarter compared to the prior year quarter. Annuities reported a decrease in operating income due to higher expenses and outflows, but this is expected to improve in the future. Retirement Plan Services also saw a decline in operating income, but base spreads increased and there is a positive outlook for net flows in the future.

The spread expansion for 2023 is expected to be mid-single-digits, with the rate environment playing a role in the outlook for 2024. Expenses are a challenge, but efforts are being made to address them. Long-term earnings growth and steady cash flow are expected from the retirement business. The Life Insurance segment had a negative impact due to assumption updates, but excluding this, it reported an operating loss of $17 million, an improvement from the previous year. The improvement was driven by alternative investment income and underlying mortality, but was partially offset by other factors. Spreads are expected to bottom out in the fourth quarter and begin expanding in 2024. Progress is being made in strengthening the life business, and efforts are being made to reposition the in-force block of business and shift to a more capital-efficient mix. Company-wide expenses are also being addressed.

The company's expenses have remained high in the quarter, which is a key challenge for their earnings and free cash flow. The management team is actively reviewing and mitigating expenses, including one-time and short-term costs, inflationary headwinds, and deferred maintenance expenses. They aim to find savings in other areas of the organization to offset these costs and right-size the expense base. In terms of investments, the company has maintained a high-quality portfolio through disciplined construction and risk management.

The commercial mortgage loan portfolio of the company is performing well with no major issues or modifications. The focus is on near-term maturities in the office sector, with 100% of loans paying off and minimal maturities in the next few years. Alternative investments had a lower return this quarter, but are expected to perform well in the long term. The company's private equity returns may be impacted by the current market conditions. The company is working towards sustainable value creation, with progress made through a reinsurance deal in the first half of the year.

The company is pleased with the performance of their new VA hedge program, which has exceeded expectations and allowed for a modest dividend to be taken out this quarter. Despite headwinds and unexpected earnings or credit issues, the company has been able to improve RBC and plans to discuss further steps in rebuilding capital next year. The annual assumption review was a major undertaking and included assembling a new team of leaders. The company feels good about their comprehensive review and believes it will benefit the franchise in the long term. They plan to provide more specifics to help the investment community understand their business outlook.

The company has invested significant time and effort into reviewing their business lines, financials, and operations, with a focus on optimizing expenses and capital allocation. They anticipate being able to share more details next year. The call then moves into a question-and-answer session, where the first question is about free cash flow and the Fortitude deal. The company confirms that there are no changes to the previously communicated economics of the deal and that they will provide more information in the future.

The speaker discusses the expected impact of a recent transaction on risk-based capital and free cash flow, stating that they are tracking similarly to last quarter. They also mention the Fortitude transaction adding $100 million to the run rate and hint at potential expense changes. The speaker clarifies that the majority of the SGUL reserves affected by last year's cash flow testing are part of a different transaction and there should not be any additional impact.

Ellen Cooper, speaking on a conference call, answered a question from Tom Gallagher about the terms and timing of a recent deal. She stated that there have been no changes to the economics or structure of the deal, and that it took longer than expected due to the complexity of the transaction and thorough review by regulators. Cooper also mentioned that the deal is a major milestone for the company and will help improve their capital position and free cash flow. She then briefly mentioned potential future actions such as internal and external reinsurance.

Ellen Cooper, speaking on behalf of the company, addresses questions about the company's external reinsurance and potential strategic partnerships with investment managers. She mentions that the company is focused on the close of the Fortitude transaction and evaluating internal and external solutions for the in-force. The company has also been focused on profitable growth through flow agreements. Cooper promises to update investors in the beginning of next year and emphasizes the company's commitment to transparency. The next question is from Ryan Krueger of KBW.

Ryan Krueger asked about the company's expenses and if they were looking at taking any actions beyond the Spark initiative. Ellen Cooper confirmed that they were still on track with the Spark initiative and expected to see a benefit of $260 million to $300 million by late 2024. However, they also see a bigger opportunity beyond Spark and are examining it currently, with plans to update investors early next year. Ryan also asked about the $50 million impact from Linbar, to which Ellen did not provide a specific timeline, but mentioned that the company used to take $100 million to $125 million a year.

Chris Neczypor discusses the recent assumption review and changes in assumptions for the company. This review is a comprehensive process that is undertaken every year and covers over $100 billion of reserves. The review includes key assumptions related to mortality, policyholder behavior, and capital markets for all four of the company's major business lines. In the current quarter, there were both positive and negative changes across the segments.

The Life segment had $156 million of unfavorable adjustments, mostly due to policyholder behavior and mortality. The Group segment had a positive unlocking driven by a more favorable view on LTD claim termination rate. The company had new leadership during this process and feels good about where they landed. There will be a $5 million per quarter negative impact for Life going forward, but the run rate will be less onerous due to the Fortitude deal.

The speaker is responding to a question about the impact of unlocking for Life, stating that it will have a $5 million run rate impact but will be offset by better expectations from a GAAP perspective. They decline to comment on legal accruals and state that they are evaluating expense reductions, with a focus on improving ongoing earnings, free cash flow, and talent expansion.

Chris Neczypor, the speaker, responds to a question about the expense program and its potential impact on cash flows and dilution. He states that it is too early to discuss details and that they will be thoughtful in their approach. When asked about their target RBC level, he mentions a near-term goal of 400% and a longer-term goal of holding a buffer above that. He believes they can reach this through organic growth and potential strategic actions. The next question is about holding company liquidity, specifically regarding the debt maturity of $450 million. The speaker does not provide a specific comfort level but mentions potential levers they have to address any near-term statutory earnings headwinds.

Chris Neczypor and Wes Carmichael discuss the target level of operation for Lincoln and the possibility of holding excess capital at the holding company or insurance company. They also mention paying down a $500 million debt maturity and their goal of deleveraging. They comment on the statutory earnings generation in the quarter and mention that the same math applies to both earnings and RBC. They decline to comment on future programs for buying back GUL policies.

The speaker discusses the success of their recent quarter and how it relates to their RBC (Risk-Based Capital) program. They mention a one-time item that had a minimal impact, but also mention that capital was freed up. They state that the RBC program is a relatively small portion of their overall program and they will continue to look at it going forward. They also mention that they have 40% of their GUL (Guaranteed Universal Life) to reinsure and will continue to execute the program as needed. The call concludes with the speaker thanking participants and offering to answer any follow-up questions.

This summary was generated with AI and may contain some inaccuracies.