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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.
After their prepared comments, we will move to the question-and-answer portion of the call.
Third quarter operating earnings were reduced by pandemic claims and other charges and helped by strong alternative investment results.
Adjusting out these various items, our underlying earnings and earnings growth potential remains strong.
Our expectation remains to be at the high end or above our 8% to 10% earnings per share growth target in the intermediate and longer term.
Intermediate term expectations are primarily based on recovering sales momentum, strong fees on assets under management, incremental expense management initiatives and the combination of $900 million of buybacks related to our recent block sale and ongoing share repurchases.
Taking each of these in turn.
Sales year-to-date are consistent with our expectations of building off the levels achieved as we exited 2020.
We are also achieving returns in the low- to mid-teens on capital backing sales across all business lines.
Overall, sales growth is reemerging due to our distribution strength, added shelf space, digital capabilities and product innovation.
After introducing 10 new products since the beginning of the year, including the industry's first combined life plus long-term care policy built on a variable chassis, we have more updates planned and additional products in development.
Expense efficiency has long been a key focus for Lincoln.
This quarter, we once again reported a lower expense ratio across most of our businesses.
We also have a track record of delivering on past cost savings initiatives.
We expect Spark, our new cost savings initiative to drive savings well in excess of the impact of spread compression through 2024 and to improve both our operational effectiveness and the customer experience.
Finally, our buyback strategy, as just mentioned, is comprised of two components: first, our ongoing repurchases, which returned to pre-COVID levels this year, driven by the capital efficiency of our products, including the impact of the recently announced VA living benefit flow reinsurance deal, low levels of credit losses and net ratings upgrades in our high-quality investment portfolio and our well-managed hedge strategy.
Second, the buybacks funded by the block deal.
Before turning to the business segments, I want to congratulate Ellen Cooper.
In August, the Board announced that Ellen will succeed me as CEO after our Annual Shareholders Meeting next May.
Since joining Lincoln in 2012, Ellen has worked with me and the rest of our executive team to shape and execute on Lincoln's strategy.
She joined us as Chief Investment Officer, and her responsibilities have grown to include leading our enterprise risk efforts and our annuities business.
Ellen is a gifted leader with a proven track record of empowering high-performing teams and executing effectively in challenging environments.
I know that Lincoln will be in great hands with Ellen at the helm as she moves forward and fully capitalizing on the exciting opportunities ahead for Lincoln.
Ellen will be joining Randy and me on the first quarter's earnings call.
Now turning to the business segments.
In Annuities, we reported sales growth of 7% and over the prior year quarter, driven by our industry-leading product breadth and distribution force plus shelf space added over the last two years.
Sales were down sequentially as we led the industry with weight reductions on indexed variable annuities in response to market conditions as well as typical third quarter seasonality.
We remain pleased with our sales mix of guaranteed and nonguaranteed products, providing us diversification and attractive new business returns.
Looking forward, we are expanding customer choice by adding new investment options and index strategies and have improved the attractiveness of our indexed variable annuity product setting us up for sales growth in the fourth quarter.
Finally, we expect our earnings to continue to benefit from the high-quality and diversified in-force book we have built over the years.
In Retirement Plan Services, we reported another quarter of excellent results and remain well positioned with award-winning digital technology, a competitive cost structure an expanding set of product solutions and scale in our target markets.
Total deposits were up 2% despite being negatively impacted by some sales shifting into the fourth quarter.
While we reported slightly negative flows this quarter, trailing 12-month net flows remained strong at positive $1.2 billion, and we expect full year 2021 net flows to be positive.
Sales of YourPath or alternative to target date funds remain strong.
We have continued to innovate, enhancing our in-plan income solution called PathBuilder Income and integrating the solution inside our YourPath investment option.
As a result of the SECURE Act, we also see significant long-term opportunities around in-plan guarantees, pooled employer plan solutions and advisor managed accounts.
Finally, the macro environment continues to provide a tailwind to Retirement Plan Services.
In addition to healthy equity markets, the economic recovery is contributing to better wage growth, higher employee contribution rates and a greater employer deposits.
The retirement business is having an outstanding year as we continue to execute on our strategy.
In life insurance, our focus on expanding both consumer value propositions and distribution shelf space resulted in sequential sales growth of 32% this quarter with sales totaling $166 million and all product categories reporting double-digit increases.
The focus on expanded customer choice aligns with our ongoing efforts to diversify our product risk profile.
As examples, in the life business, our variable MoneyGuard and our principal VUL products offer the customer the choice of lower guarantees and higher upside potential.
Sales of these types of products have been growing faster than segmentwide sales.
The products have less potential tail risk and better capital efficiency.
In addition to the property and casualty distribution partnership we added in the second quarter -- We recently launched our variable MoneyGuard product at two of our largest strategic partners, providing 25,000 more advisors with access to this first-of-its-kind solution.
Complementing our distribution and product expansion efforts, our digital-first focus continues to drive a lower cost per policy and an improved customer experience.
Looking ahead, we are enthusiastic about the future of the life business, we are introducing new solutions that will further expand our customer and distribution reach with more introductions planned for the first half of 2022.
Lastly, our Group Protection business continues to be impacted by the pandemic particularly as the Delta variant affected more individuals under age 65 driving increased claims.
While the pandemic continues to be a headwind, the underlying fundamentals of the business are strong, and we are pleased with the progress we are making.
We achieved 5% premium growth over the prior year which is a result of a stronger persistency rate of nearly 90% and renewal rate increases implemented earlier this year.
Year-over-year sales are flat as we stick to our pricing discipline.
We're seeing more sales from our higher-margin employee-paid products year-to-date.
59% of Group Protection sales have come from these products as more individuals see the value of them.
Within this category, we have begun to quote our new hospital indemnity product rounding out our suite of supplemental health products.
Underlying margins after adjusting primarily for pandemic-related claims or again, in the middle of our target range this quarter.
We will continue to build on our progress and expect margins to grow toward the top end of our 5% to 7% target range.
As we remain disciplined on pricing, new business, reducing costs and managing claims.
Briefly on investment results.
Credit quality remains excellent.
Our general account portfolio is predominantly comprised of fixed income investments, of which 97% are investment-grade equivalent.
We continue to expect a benign credit outlook and have seen favorable credit trends within our portfolio with minimal credit losses and positive net credit migrations.
During the quarter, we invested new money at an average yield of 2.6% with 1/2 in shorter-duration assets versus 1/3 for the full year 2020.
And reflecting the increase in shorter-duration product sales and our disciplined asset liability matching.
Approximately 60% of our purchases were in investments other than public corporates, providing diversification and good relative value and yielding approximately 100 basis points over comparability rated public corporates.
Lastly, our alternative investment performance was once again strong with an 8% return in the quarter, exceeding our long-term targeted quarterly return of 2.5%.
In summary, reported results this quarter continue to reflect ongoing impacts from the pandemic in life insurance and Group Protection.
Our product strategy, distribution strength and ongoing innovation are helping to build sales momentum at attractive returns.
Our new expense savings initiative is expected to more than offset spread compression, improve overall operational effectiveness and drive earnings growth.
And ongoing share buybacks driven by our strong balance sheet and free cash flow generation, combined with the incremental buybacks enabled by our recent block deal will further boost EPS.
In sum, our underlying earnings power is improving, and we remain confident in our ability to grow earnings per share at or above our 8% to 10% target range.
Last night, we reported third quarter adjusted operating income of $307 million or $1.62 per share.
Also, this quarter's results were impacted by pandemic-related claims, which reduced earnings by $180 million or $0.95 per share.
While results benefited from strong performance in the alternative investment portfolio, boosting earnings by $89 million or $0.47 per share above target.
Additionally, we experienced some unfavorable nonpandemic mortality in the Life Insurance segment that I will discuss further in the life commentary.
From a reported adjusted operating income standpoint, it was a bit of a noisy quarter, but we have strong underlying earnings power as we exit the quarter.
Net income totaled $318 million or $1.68 per share, boosted by gains in the investment portfolio and strong performance from the variable annuity hedge program.
Moving to the performance of key financial metrics.
Consolidated adjusted operating revenue grew 9% from the prior year, which included growth in each of the four businesses.
Average account values increased 17%, and book value per share, excluding AOCI, grew 8% and stands at $76.96, an all-time high.
Now turning to segment results, starting with Annuities.
Operating income for the quarter was $338 million, which included a $5 million net unfavorable impact from our annual review.
Compared to $196 million in the prior year quarter, which included a $101 million net unfavorable impact from the annual review.
Adjusting for notable items in both periods, operating income increased 15% from the prior year quarter, driven by record average account values of $170 billion, up 17% over the past year.
The current quarter included $10 million of favorable alternative investment income.
The expense ratio improved 80 basis points compared to the prior year period as our focus on expenses continues to benefit the bottom line.
Return metrics remained solid with return on assets coming in at 80 basis points and return on equity at 26%.
Risk metrics on our VA book once again demonstrate the quality of our in-force with a net amount at risk at 63 basis points of account values for living benefits and at 43 basis points for death benefits.
So a great result for the Annuities business with another quarter of high-quality earnings, strong returns and solid risk metrics, leaving us well positioned to finish the year with another excellent quarter.
Retirement Plan Services reported operating income of $60 million compared to $50 million in the prior year quarter, with the increase driven by higher fees and account values, continued expense efficiency and higher alternative investment income, which was $6 million favorable to our expectation in the current quarter.
Our annual review had no impact in the current quarter, but did have a net unfavorable impact of $3 million in the prior year quarter.
Favorable equity markets drove average account values up 21% to $97 billion.
The expense ratio improved 80 basis points over the prior year quarter as revenue growth combined with continued diligent expense management contributed to improved results.
Base spreads, excluding variable investment income, compressed 10 basis points versus the prior year quarter, in line with our stated 10 to 15 basis point range as crediting rate actions continue to take hold.
Overall, the retirement business had an excellent quarter, and continues to be well positioned to drive strong results.
Turning to life Insurance.
Operating income for the quarter was $93 million which included a $26 million net unfavorable impact from our annual review compared to an operating loss of $311 million in the prior year quarter, which included a $440 million net unfavorable impact from the annual review.
Additionally, the current quarter included an unfavorable notable item of $19 million related to a legal expense associated with the reinsurance arbitration award.
Adjusting for notable items in both periods, operating income increased 7% from the prior year quarter, driven by higher alternative investment income, as the current quarter included $65 million compared to $37 million in the prior year quarter.
Elevated mortality related to the pandemic was $60 million in the quarter compared to $70 million in the prior year quarter.
This quarter's impact for 10,000 COVID deaths of $6 million was down year-over-year as expected, but was up sequentially and as the severity of our average COVID claim was elevated.
We believe this elevation is normal volatility as we had a few larger COVID claims in the quarter.
In addition to the impacts of the pandemic, underlying mortality was negatively impacted by $34 million.
We believe this was driven by two factors.
First, over the course of the pandemic, when COVID cases have been increasing, which they did in the third quarter, we have seen elevated non-COVID mortality as well.
And second, normal quarterly volatility.
I'd point out that we experienced favorable underlying mortality in the prior two quarters, and when viewed on a year-to-date basis, our actual to expected mortality ratio remains under 100%, better than expected.
Earnings drivers continue to grow, with average account values up 9% and average life insurance in-force up 7% over the prior year.
Base spreads, excluding variable investment income, declined 13 basis points compared to the prior year quarter, above our five to 10 basis point expectation.
Our expense ratio improved 30 basis points over the prior year quarter as our efficiency efforts continue to benefit margins.
This was a noisy quarter for life earnings, but growth in earnings drivers, long-term mortality results in line with expectations and continued expense discipline keep us confident in our underlying business.
Group Protection reported an operating loss of $32 million which included a $16 million net favorable impact from our annual review of reserve assumptions compared to operating income of $6 million in the prior year quarter, which included a $3 million net unfavorable impact from the annual review.
Adjusting for notable items in both periods, operating income decreased from $9 million to an operating loss of $48 million, driven by higher mortality impact from the pandemic.
The current quarter also included $6 million of favorable alternative investment income.
On a sequential basis, pandemic-related claims in the quarter negatively impacted earnings by $120 million compared to $28 million in the second quarter and included $107 million in life claims and $13 million in disability claims.
In the quarter, U.S. COVID deaths significantly shifted to the working age population, and in our group business, the average claim size for active employees across all ages is consistently three to four times the size of those for retirees.
This significant increase in working age deaths, coupled with the higher average claim size, drove the sequential increase in mortality.
While I've been humbled by trying to predict the impacts of the pandemic, I do believe that this quarter's increased impact reflects the current state of the pandemic, with a higher percentage of deaths occurring in the working-age population.
Excluding the annual review of reserve assumptions, pandemic claims and favorable alternative investment income, the group margin of 5.9% was consistent with the prior quarter and in the middle of our 5% to 7% targeted range.
The loss ratio was 87.8% in the quarter, an 8.5 percentage point sequential increase.
Excluding pandemic-related claims and the impact of the assumption review, the loss ratio improved 20 basis points to 75.9%.
Group's expense ratio remained flat despite ongoing investments in our claims organization to address elevated claim volume from the pandemic.
Despite the tough quarter for group, we are confident that the underlying business fundamentals are solid and the strength of this business will reemerge as the pandemic subsides.
Turning to capital and capital management.
We ended the quarter with $10.9 billion of statutory capital and estimate our RBC ratio at 63%.
As a reminder, our RBC ratio includes 25 percentage points from noneconomic goodwill associated with the Liberty acquisition that we expect will go away by year-end.
Cash at the holding company stands at $754 million, above our $450 million target as we have prefunded our $300 million 2022 debt maturity.
We deployed $200 million toward buybacks in the third quarter.
In line with our goal communicated last quarter to have full year buybacks in line with pre-pandemic levels of approximately $600 million, excluding any incremental buybacks from transactions.
Our block sale with Resolution Life, which we announced in September and closed on October 1, generated approximately $1.2 billion of capital, $900 million of which we plan to use for incremental share repurchases.
We expect these repurchases to be completed by the end of the first quarter of 2022 and began the incremental buybacks in October, via a $500 million accelerated share repurchase program.
Outside of the deployment of proceeds from the block sale, we expect to continue our ongoing buyback program.
Although I'd point out that the timing of ongoing buybacks may be influenced by the accelerated share repurchase program.
We were pleased to have executed both a life block deal and a VA flow deal last quarter, and we continue to be open to additional block and flow reinsurance deals.
Additionally, we announced a 7% increase in our quarterly dividend this quarter.
Now to provide some details on the Spark initiative.
As we have been communicating for the past few quarters, we are excited to be embarking on another meaningful expense savings program.
Teams from across the organization have been hard at work identifying and prioritizing opportunities for us to invest and improve efficiencies through this initiative.
And they have been working with them and across departments to identify the best project to maximize effectiveness as part of Spark.
Because the strategic digital program is nearing its end, we have decided to integrate the balance of that program into this new cost savings initiatives for ease of tracking and communication.
As of the end of 2020, the total net recurring benefit from our strategic digital program is $80 million, on track with our target.
In addition to these savings, we expect to achieve $260 million to $300 million in run rate savings through Spark as we exit 2024, with benefits growing steadily starting this year, and ramping up in the out years.
The total expected onetime investment to achieve the savings is $350 million to $410 million including the $57 million in investments we've made already this year.
We expect investment spend to peak in 2022 and decline in subsequent years.
All numbers that I've just discussed are pre-tax and pre-DAC.
Spark will be focused on driving efficiencies throughout all aspects of our business, from leveraging automation to simplifying and improving process efficiency.
And we will continue to focus on enhancing the customer and employee experiences while modernizing our technology footprint.
We are also targeting benefits beyond cost savings, including improving the way we work by focusing on reskilling and upskilling our valuable employee base.
We will update you on our progress going forward, tying back to this disclosure.
To conclude, the pandemic environment continues to challenge our life Insurance and Group Protection segments.
However, underlying earnings in these businesses remains strong.
Our Annuities and Retirement businesses both delivered excellent results.
In sum, our underlying results and earnings power are both strong and growing.
We will now begin the question-and-answer portion of the call.

user
compname reports q3 earnings per share of $1.68.
q3 adjusted operating earnings per share $1.62.
q3 earnings per share $1.68.

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