Release Date: August 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Lincoln National Corp (LNC, Financial) achieved an estimated RBC ratio of over 420%, surpassing their target and providing greater capital flexibility.
- The annuities business grew earnings by 10% year-over-year, marking its highest earnings quarter in two years.
- Group protection maintained strong sales growth across all products and segments, with earnings in line with the record prior year quarter.
- The company successfully launched a second-generation RILA product, which has shown positive market reception.
- Lincoln National Corp (LNC) made significant progress in optimizing its operating model, resulting in expense reductions and improved operational efficiency.
Negative Points
- The life insurance segment reported an operating loss of $35 million, impacted by the Fortitude Re transaction and below-target alternative investment income.
- The retirement plan services segment saw a year-over-year decline in operating income due to lower spread income and elevated participant-driven stable value outflows.
- Alternative investments generated a quarterly return of 1%, below the expected 2.5%, primarily due to lower merger and acquisition activity and higher interest rates.
- The group life loss ratio increased by 4 percentage points year-over-year, driven by severity volatility and higher benefit amounts in younger age populations.
- Despite strong overall performance, the company anticipates seasonal moderation in disability results and a potential impact from the timing of annual experience refunds in the second half of the year.
Q & A Highlights
Q: Can you give us a rough sense of what your first half of the year free cash flow was?
A: We are on track relative to the longer-term outlook we put out earlier this year. We targeted a 35% free cash flow conversion in 2023, growing to 45% to 55% in 2026. We are making the necessary investments and seeing progress towards these targets.
Q: How much capital did you originally contribute to the Bermuda entity, and what was the impact of the class you initially seeded?
A: We ceded about $7 billion in fixed annuities and a bit less in disability reserves. The entity was overcapitalized relative to its long-term target to prepare for executing internal flow deals. The next step is to execute a new business flow reinsurance agreement.
Q: How comfortable are you with the pricing adequacy in new group protection sales given the competitive environment?
A: The environment remains competitive but rational. We prioritize margin over growth and have refreshed our products. We maintain discipline in pricing, reflected in our 3% overall premium growth, combining new business and renewal pricing.
Q: What drove the strong annuity sales, especially in fixed annuities?
A: We built operational capabilities last year, including an attractive flow agreement and leveraging distribution relationships. We also refined our strategic asset allocation. Our Bermuda affiliated reinsurer will further support growth in the fixed market.
Q: How should we measure expense improvements given your investments in the business?
A: Look at the business unit level for specific metrics. For example, life insurance net G&A expenses were down year-over-year. We see significant opportunities for optimization while continuing necessary investments.
Q: What are your thoughts on the sustainability of the record annuity sales in the industry?
A: There is significant customer demand driven by demographic trends and higher interest rates. The annuity landscape is competitive but rational. We ensure target returns and capital efficiency across our products.
Q: Do you think there's room to run above your 5% to 7% margin target in the group business?
A: We are tracking at the high end of our 50 to 100 basis points improvement range for 2024. There is seasonality in our group results, but we remain confident in our margin expansion strategy.
Q: Can you unpack the higher mortality amongst younger age groups in the group business?
A: There is volatility in any given quarter. Higher mortality in younger age cohorts can have a higher impact due to expected earnings. However, this is not indicative of a long-term trend.
Q: How do you think about capital return now that your RBC ratio is above the buffer, and are there M&A opportunities?
A: Our focus remains on using free cash flow to improve operating efficiency and make long-term investments. We are not changing our capital return strategy and are prioritizing investments to achieve our strategic objectives.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
