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Text: Before we begin, I have an important reminder.
We appreciate your participation today and invite you to visit Lincoln's website, www.
During 2020, Lincoln responded well to the immediate health, economic and capital market challenges.
We also took steps to add new products and build distribution, improve cost effectiveness and strengthen the balance sheet.
Fourth quarter earnings were affected by elevated pandemic-related claims in our life and group businesses, which was partially offset by another quarter of strong returns from our alternative investment portfolio.
Given this year's circumstances, we saw quite a bit of variability in earnings when normalizing for several items in 2020, the largest of which were charges from our third quarter annual review and pandemic-related claims.
We view our earnings per share for the year at approximately $9.30 and ROE excluding AOCI at 13%.
Based on our current views, we are poised to deliver 8% to 10% earnings per share growth of this level over the long term.
Focus items during the year included three initiatives.
One, executing our reprice shift and add new product strategy, two, achieving expense savings, while improving the customer experience and three, maintaining a strong balance sheet and maximizing our financial flexibility.
Let me touch on each of these.
First with our reprice shift and add new product strategy.
Our aggressive and disciplined repricing actions targeted achieving appropriate returns on capital.
As we exited the fourth quarter, we generated at least a 12% return on new business in our current portfolio based on the forward curve across all our businesses.
As expected, sales decrease in most businesses with growth expected to reemerge over the course of the year based on the shift and to add new components of our strategy.
Also, several competitors followed our repricing actions making our repriced products more competitive as we enter 2021.
We are introducing eight new products during the first half of this year that will increase consumer choice and expand our customer value propositions.
These actions will further strengthen our product portfolio, enable us to participate in more market segments and increase sales opportunities, combining our product breadth and distribution capabilities as part of our historic playbook that we will continue to execute on to drive top line growth.
Second, on our efforts to increase efficiency while improving the customer experience.
Expense management is a key priority.
We are focused on actions that will further increase productivity across our manufacturing and distribution organizations and also enhance the customer and partner experience.
Accelerated implementation and acceptance of digital tools is part of the reason we see the potential for further expense savings opportunities.
As an example, during the fourth quarter, 99% of life policies were delivered electronically, nearly triple the prior year quarter.
Successes like this combined with our overall expense management capability, are enabling us to start another meaningful expense savings program.
We will update you later this year as the project plan is finalized and we size the opportunities.
Third, on the balance sheet.
We have successfully focused on protecting and further improving the balance sheet.
Our RBC ratio and cash at the holding company have increased and remain above our targets.
We also increased our financial flexibility through capital actions, including adding contingent capital and extending debt maturities out until September 2023.
Investment portfolio has benefited from de-risking actions and various government support programs.
As a result, credit losses and downgrades have been less than expectations at the onset of the pandemic.
Looking forward, capital generation will face some near term headwinds from elevated COVID-related claims.
However, given our strong balance sheet and overall free cash flow generation, we remain in the market repurchasing our shares during the first quarter.
Additionally, we have put more energy and resources in the potential risk transfer deals with a goal of enhancing capital deployment.
Lastly, before shifting to segment results, it is important to note that since our last conference call in early November, we have seen a number of favorable developments, including the rollout of COVID-19 vaccinations, further gains in the equity markets and an increase in interest rates, and continuing economic stimulus.
All of these bode well for Lincoln over time.
As I just noted, our underlying earnings are firmly intact and we are positioned for growth as COVID impacts diminish.
And the medical experts forecast that COVID-19 thus will peak in the first quarter and receed over the course of the year.
When mortality claims ultimately return to normal levels, we see earnings momentum building in the second half of this year and into 2022.
Now, turning to the business segments.
Starting with annuities, where we successfully leveraged our unique manufacturing and distribution capabilities.
We expanded our shelf space and the number of producers selling Lincoln's indexed variable annuity products doubled in 2020, which helped cement our leadership position in the IVA marketplace, which is the fastest growing segment of the annuity market.
In total, IVA sales were $5 billion for the year.
Asset protection products like IVA are resonating with consumers and producers.
This was contributing to our sales shifts toward variable annuities without living benefits.
These sales represented more than two-thirds of total VA sales in 2020.
Based on our in-force VAs without living benefits and other non-guaranteed products represent 47% of total annuity account values.
Growth and asset protection sales combined with continued market demand for guaranteed living benefits led to positive annual variable annuity net flows for the first time since 2015.
As expected, total annuity sales were down as we de-emphasized fixed annuity sales due to return challenges in the current environment.
In 2021, we expect to continue to benefit from our high quality in-force book of business that generates consistent capital and strong returns.
We project sales begin the year consistent with the $2.5 billion run rate we have produced in recent quarters and build over the course of the year as we benefit from our 2020 product introductions as well as products we plan to add this year.
Our new products create additional consumer value propositions and expand on our already broad product portfolio.
In retirement plan services, our digitally focused model where high tech enables high touch continues to differentiate us in a virtual environment.
While economic and pandemic-related uncertainty weighed on most businesses this year, strong performance from our sales and retention teams drove a 6% increase in total deposits, including growth in both first year sales and recurring deposits along with our sixth consecutive year of positive net flows.
Notably, some of the headwinds we have seen from employers reducing or eliminating matching contributions and workforce reductions have receded with recurring deposits up slightly year-over-year in the fourth quarter compared to a decline in the third quarter.
Overall, it was a strong quarter and year for the retirement business and we expect momentum to continue as we are well positioned to compete in our target markets.
Near term, we see further opportunities with YourPath, our alternative to target date funds, and longer term we see significant potential from key positions in The SECURE Act that facilitate providing protected income solutions to working Americans and multiple employer programs that address access to work site retirement plans.
Within the life insurance business, our focus in 2020 was on repricing and product innovation with an eye on introducing new solutions during the first half of 2021.
Given repricing actions combined with record sales in the prior year quarter, sales declined year-over-year and we expect sales to remain at similar levels until our new products are introduced.
These new products offer consumers more choice and alternative value propositions, positioning us for long-term sales growth at attractive returns.
While we continue offering guaranteed solutions, our product portfolio expansion leverages separate accounts as the investment engine providing non-guaranteed upside benefit potential for our consumers.
Examples of these new products include our MoneyGuard and VUL solutions.
As always, we will couple this expanded product portfolio with the strongest distribution platform in the industry, positioning us well in 2021 and beyond.
Lastly, on group protection.
Sales in our seasonally strongest quarter increased over the prior year period due to timing of when cases closed.
While for the full year, sales declined 6% as gains in disability were more than offset by decreases in life and dental.
Strong persistency of 87%, up 350 basis points in 2020 more than offset the lower sales, which led to a 4% increase in premiums for the full year.
Importantly, the contraction in premiums we experienced at the onset of the pandemic is stabilizing and quote activity has resumed, both of which are positive for premium growth.
Even adjusting for the pandemic, margins were below target.
We are taking action and based on focused pricing enhancements we began in 2020 along with expense initiatives, we expect continuous margin improvement over time building toward our 7% target.
Briefly on investment results.
As I mentioned earlier, our investment portfolio has performed well through this volatile period for capital markets, highlighting solid portfolio construction and the high quality nature of our portfolio.
We managed credit risk defensively with proactive de-risking as well as adjusting our new money allocation to higher rated assets that match our liabilities at attractive yields.
As a result of these actions, the credit quality of the portfolio is in line with pre-pandemic levels.
Additionally, the alternative investment portfolio performed well in the quarter and for the full year generated an 11% annual return slightly above our long-term target.
In closing, I am very pleased with how Lincoln responded to this year's unique challenges, including product outcomes that further differentiate us in the marketplace.
Importantly, I want to recognize our employees for their extraordinary efforts and unwavering commitment last year.
We enter 2021 well-positioned and a stronger franchise.
Sales momentum should build over the course of the year at attractive returns as we benefit from new product introductions.
Our digital tools and capabilities have never been stronger, which will enable us to further enhance the customer experience and improve productivity.
We have a durable balance sheet with a high quality investment portfolio and strong free cash flow generation and capital ratios.
The underlying earnings power of our businesses are intact.
And as I said earlier, we are poised to deliver 8% to 10% growth over the long term even in the current low interest rate environment.
As a result, I am optimistic about our ability to drive shareholder value.
Last night, we reported fourth quarter adjusted operating income of $346 million or $1.78 per share.
There were no notable items within the current or prior year quarter although, this quarter's result was impacted by a number of items.
First, pandemic-related claims reduced earnings by approximately $187 million or $0.96 per share.
This included a $174 million mortality impact and $13 million from disability claims.
Second, results benefited from strong performance in the alternative investment portfolio relative to our targeted annual return of 10% boosting earnings by $73 million or $0.38 per share.
Third, there was unfavorable expense variability of $28 million or $0.13 per share in the other operations segment related mostly to elevated deferred compensation costs, resulting from the increase in Lincoln share price last quarter.
Finally, there was $20 million or $0.10 per share of favorable amortization levels in life insurance, which was largely offset by seasonal unfavorability in group protection.
Net income totaled $143 million or $0.74 per share as improvements in credit spreads drove a $240 million loss in the variable annuity non-performance risk.
Outside of this non-economic item, credit experience was excellent and the variable annuity hedge program performed exceptionally well with 100% effectiveness in the quarter.
Moving to the performance of key financial metrics compared to the prior year quarter.
Adjusted operating revenue increased 3% with operating revenue growth in each of our four business segments.
Average account values increased 9%.
Total G&A expenses net of amounts capitalized decreased 1% or 7% when excluding unfavorable expense variability in other operations.
The 1% decline, combined with operating revenue growth led to a 60 basis point improvement in the expense ratio.
And book value per share, excluding AOCI, stands at $71.59, an all-time high.
Now, turning to segment results, starting with annuities.
Operating income for the quarter was $289 million compared to $269 million in the prior year quarter.
The increase was primarily due to higher account values, driven by growth in the equity markets.
Average account values of $151 billion increased 9% year-over-year and 5% on a sequential basis.
Additionally, end of period account values exceeded average values by 4%, providing a tailwind into the first quarter.
Base spreads excluding variable investment income were up 8 basis points from the year ago quarter, driven by active management of crediting rates and some quarterly noise.
G&A expenses net of amounts capitalized decreased 5% for the full year and quarter leading to a 60 basis point improvement in the expense ratio for the quarter.
G&A expenses rose sequentially due to the typical fourth quarter seasonality.
Return metrics remained healthy in the quarter with return on assets coming in at 77 basis points and return on equity at 21.4%.
Risk metrics and the VA both continue to demonstrate the quality of the business.
As the net amount at risk sources 70 basis points of account value for living benefits and the 34 basis points for death benefits.
Continuing a theme that has been in place for well over a decade, 2020 was another excellent year for the annuities business.
Earnings grew in line with account values and excluding the unlocking, return on equity was very strong coming in at 21%.
Looking into 2021, we expect more of the same.
Retirement plan services reported operating income of $49 million compared to $47 million in the prior year quarter.
As favorable alternative investment performance, expense management and higher average account values more than offset spread compression.
Positive flows combined with favorable equity markets drove average account values up 10% over the prior year quarter.
G&A expenses net of amounts capitalized were flat compared to the prior year quarter and down 5% for the full year, driving a 140 basis point improvement in the expense ratio in 2020.
Base spreads excluding variable investment income compressed 28 basis points versus the prior year quarter.
Spread compression was above normal primarily due to lower yields on floating rate securities with a crediting rate on the matched liability adjust less quickly.
We expect this to moderate and return to our more typical 10 to 15 basis point range in 2021.
The retirement business ended the year with strong results, including a 23 basis point ROA in the quarter with momentum in sales and expense management serving as positive drivers going forward.
Turning to life insurance.
We reported operating income of $144 million compared to $179 million in the prior year quarter.
This quarter's result included $113 million of pandemic-related mortality partly offset by $53 million of favorable alternative investment experience and the favorable amortization, I noted upfront.
Underlying earnings drivers continue to show growth with average account values up 6% and average life insurance in-force up 9% over the prior year.
For the full year, outside of the pandemic, mortality was in line with our annual expectations.
G&A expenses net of amounts capitalized decreased 13% from the prior year quarter, leading to 140 basis point improvement in the expense ratio.
Base spreads declined 25 basis points compared to the prior year quarter due to a previously noted non-economic change in our crediting rate methodology.
We expect base spreads to return to our more typical 5 to 10 basis point rate of decline in 2021.
Looking forward to the first quarter, we continue to expect headwinds from the pandemic.
Over in the coming months, the worst should be behind us and key life insurance earnings growth drivers remain strong.
Group protection reported a loss from operations of $42 million compared to operating earnings of $54 million in the prior year quarter with the decrease driven mainly by pandemic-related claims.
Group earnings were impacted by a number of items during the quarter, including $74 million of claims related to the pandemic, $15 million to $20 million of seasonally higher fourth quarter disability claims and expenses and a slowdown in social security approval that negatively impacted results by $8 million, partly offset by $5 million of favorable alternative investment experience.
The reported total loss ratio was 87.8% in the quarter up 4.6 points sequentially.
This was driven in part by an increase in pandemic-related mortality and hospitalizations, which resulted in elevated claims, including $39 million of direct COVID-19 mortality, $13 million of direct COVID-19 disability and $22 million of excess mortality.
Excluding pandemic-related claims from both periods, the total loss ratio was 78.9%, up 3 percentage points sequentially as improvement in group life and dental were more than offset by an increase in the disability loss ratio.
The sequential increase in the disability loss ratio was driven by typical fourth quarter seasonality as well as the previously mentioned slowdown in social security approvals.
G&A expenses net of amounts capitalized decreased 6% from the prior year quarter and 5% for the full year.
Excluding the pandemic and other items I mentioned, the earnings of the business were below our expectations.
Or as Dennis mentioned, we are confident that the actions we have been taking will over time get us to our targeted margin.
Turning to capital and capital management.
We ended the year with $10.3 billion of statutory surplus and an RBC ratio of 452%, which includes 23 percentage points from our non-economic goodwill associated with the Liberty acquisition that we expect will go away at the end of 2021.
Cash at the holding company stands at $754 million, above our $450 million target as we have pre-funded our $300 million 2022 debt maturity.
Additionally, we had a $500 million contingent capital facility earlier this year.
This combination of strong life company capitalization, cash at the holding company, pre-funding of debt maturities until 2023 and new sources of contingent capital puts us in a stronger, more diversified position than we were a year ago.
We resumed buybacks in the fourth quarter and deployed $50 million toward share repurchases.
As a result of our confidence in our capital position, we plan to increase our buyback to $100 million in the first quarter and we'll provide additional updates on our next earnings conference call.
To conclude, this year's result included a large impact from COVID-19 and we continue to expect headwinds from the pandemic in the near term.
Looking past that, we see strong underlying earnings and solid drivers of earnings per share growth, including record end of period account values, a strong record of expense discipline across the company, the ability to grow sales looking forward, pandemic-related headwinds that we believe will decline over 2021 and a robust capital position, providing us an ability to increase the pace of capital deployment.
And as a result, we reiterate our plan to grow earnings per share at an 8% to 10% rate over the long term.
We will now begin the question-and-answer portion of the call.
As a reminder, we ask that you please limit yourself to one question and one follow-up and then requeue if you have additional questions.

user
compname reports q4 earnings per share $0.74.
q4 adjusted operating earnings per share $1.78.
q4 earnings per share $0.74.
resumed share repurchases with $50 million completed in quarter.

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