Lincoln National Corporation (LNC) Earnings Call Transcript & Summary

And we're live. Again, how is like saying it, and we're live. Okay. Welcome back to the Annual Bank of America U.S. Insurance Conference. The current session is Lincoln Financial. Just as a preview, we've -- the next on tap is MetLife. With regards to this presentation or the next, you're welcome to queue some questions up in the Veracast/Oddcast. I will ask the questions. It's pretty self-explanatory how to do it. And we welcome you to send them in. I'll ask all the questions. But we're very pleased to have Dennis Glass here right now, CEO of Lincoln Financial. I mean, I think if I've done the math right, between Jefferson-Pilot and Lincoln, Dennis has been CEO for 20 years. Maybe they didn't tell me that's wrong. I don't know. We're going to find out.

But I just want to say to start off things. Welcome, Dennis. Thanks for giving us your time today. And just an easy sort of -- thanks out to all your employees who have done a great job during this time. Can you talk a little bit about how Lincoln has adapted to the current moment and the resiliency and success that you've had during the pandemic?

Josh, yes, I'll do that. But first, let me thank you for having me and Lincoln. We're very appreciative and look forward to the session. I think it's more like 14 years, although I've been attending this conference for probably 25, not always as a speaker. So let me just touch on a couple of categories and let me speak to operational effectiveness first in terms of the environment. We had initiated about 3 or 4 years ago a significant acceleration in our digital investments, getting ready to be able to compete on a service level with the born-digital companies, knowing it wasn't our direct competitors that we're setting the stage for customer service expectations with born-digital companies; Amazon and Airbnb and Uber and so forth. So that investment put us in an excellent position to deal with the health aspects, which the primary response was to move some 9,000 employees from the office home. Just very quickly on that issue. The productivity levels have improved slightly in our customer service areas. As one example of how effective we've been, when I turn to distribution, the ability to visit, meet, have meetings virtually with our distribution partners, it's been excellent. We've shifted quite a bit from the way we interact with financial advisers because of virtual. So created a lot more content, a lot more group meetings, but that's been extremely effective as well. So from an operating perspective, we are very pleased. And actually, we're using this past 8 months to take the experience that we're having from an operational standpoint both manufacturing in the home offices as well as our customers' place of activity to get better. And so we've just completed a couple of initiatives there, and I'm very excited about us maintaining our -- particularly our distribution advantage as we go in. So that's one issue. Let me speak to the balance sheet and some of the actions that we took in early 2020 to protect the balance sheet, one of which was to cut sales a little bit so that we preserve capital. We talked about a number of about $400 million, not knowing at the beginning of the year how severe credit losses and credit downgrades might be and how it might affect RBC. And so we generated that amount of capital. We issued some contingent debt -- contingent capital notes to further bolster the balance sheet in the event of severe stress. But sort of like the digital investment, we had started de-risking the portfolio 3 or 4 years ago just in anticipation of not a pandemic-type recession, but the expectation that this cycle of growth might slow, and we might see additional credit losses and downgrades. So we had started that. And just the end to 2020, as we talked about on the earnings call, we never did see the kind of investment downgrades or credit losses that we thought we might see. And so we ended the position -- the balance sheet ended in a very strong position at the end of the year. So those are the 2 large things that come to mind. And -- well, just one more with respect to the pandemic, which is, of course, quite a substantial dollar amount of COVID claims, predominantly in the 2 life businesses, Group Life and Individual Life. We saw some short-term disability increases from a -- most of that is administrative services. So we saw a little bit of that. So Josh, those would be the 3 areas that come to mind. Be happy to talk about others if you had other things in mind.

No. I mean, it's kind of freeform. I would always start with the employees in my mind, obviously, working very hard in a very unusual circumstance. I'd rather switch focus to the market in general. Obviously, we see a major decline in your appetite and your sales on the fixed annuity marketplace at this point in time right now. I guess I'm not asking questions so much about Lincoln, but the question is, how does this all end? Interest rates are down. Obviously, there are some companies that are offering very nice returns in for a FIA or maybe a multiyear guarantee type product. Lincoln is not going to offer those kind of returns. Does this end well for the life insurance market? Does it end badly? Do we know the future? Have we seen -- obviously, these are in historic times. How does the fixed income market play out from here with the generous returns that are being offered that you are not willing to follow?

Yes. The distinction that you're making is that some companies have the capability to take excess credit risk. And when I say they have the capability, I mean that's a core skill set for them. They spend a lot of time and energy on it. And a lot of that skill set is with companies that sort of focus on fixed annuities. And therefore, that business model, and I'll come to our business model in a second, creates higher crediting rates, and again, predominantly, driven by a belief that they understand credit risk and can take some amount more than others do. And they may very well be right. I'm not going to criticize at all that model. We'll just have to see as cycles occur how it plays out. Coming to Lincoln, our overall retail model, which tethers together broad product portfolio across our businesses, deep distribution, both in the capabilities of our customer-facing people such as our wholesalers as well as some of the best overall shelf space in the country or in the industry. So we focus on tethering product breadth with distribution strength. We concentrate quite a bit on the optionality and the risks in the liabilities themselves. And we marry that with a investment portfolio where we don't think we have to take excess credit risk to make the numbers work for our shareholders and our customers. Again, the one product line where we do get squeezed out because of other companies that are willing to take more credit risk is the fixed annuity marketplace. So we're seeing less sales in fixed annuities, and I don't see a rebound based on our investment strategy and model. We're in the lower -- way lower double digits return on capital, behind that product. It has a fairly -- the fixed annuity product has a fairly significant capital strain. So we think there's better opportunities for Lincoln given our model and some other product lines, IVA, as you're probably going to talk about a little bit as an example.

All right. So let's start with the IVA. One question, if I go back in time, let's say, 10 years ago or that's 10 years of little stress. I mean, let's say, 15 years ago before the global financial crisis, I think about the prospective buyer of a variable annuity. And now today, obviously, the sales of those products -- the offers are much less generous. The market isn't really lending itself to be off -- offer generous products, but the buffer annuity is out there. Is the same customer who 15 years ago would have been buying a variable annuity with benefits who is buying the buffer annuities today or does it reach out to a different type of customer as the product has evolved?

Yes. A couple of things, Josh. So let me touch on a couple of important points that you've made. In terms of the value proposition of protected lifetime income for the customer, because it's a long-term liability, a lot of optionality in it for the customer, lower interest rates have caused us to do 2 things, us being Lincoln as well as the industry. Number one is we've increased the rider fees a bit. And number two, we've reduced the benefits a bit. So as compared to, say, 2 or 3 years ago, it doesn't work for the consumer quite as well as it did then. So we're still selling a lot of guaranteed lifetime variable annuities -- guaranteed lifetime income variable annuities, and we're going to stay in that market because after our pricing we've ended up being very well positioned from a return on capital and the risk associated with that. So yes, there's been a little bit of downdraft in the value of the protected guaranteed income to the consumer. At the same time, what's happened is, we all know over the last decade is there's been a huge increase in the equity markets. We're at all-time highs. And so consumers are seeing that their 401(k)s and their equity portfolios have gained quite a bit. And so they sort of shifted their -- in some instances, they shifted their objectives from protected lifetime income to protected -- protecting that buildup in the assets that they've achieved. And so with the IVA, which is a sharing of risk between the manufacturer, between Lincoln and other manufacturers, and the customer, on the downside, gives the customer more upside potential in the participation rate in the index. So for example, the customer may, in one of our flavors, IVA, Lincoln might take the first 10% risk on a decline in the value of the customer's account, and then the customer will take all the rest. And so that gives us -- because it's a sharing of that downside risk from a market perspective, gives us an opportunity to provide a higher participation rate in the indexed annuities. So we've gone from protected lifetime income, lower interest rates, lower overall value to the consumer to, in this case, IVA, which still allows the customer to participate in the market upside rather than just a fixed bond return in exchange for taking a little bit more risk. So I think it's just a combination of things that occurred to make the IVA the best-selling annuity product in the market right now, all around value proposition.

And as we -- Prudential made news this year that they're getting out of the living benefits business entirely or -- basically selling new living benefits. And if you talk to them, I'm not trying to put words in their mouth, they would say we still like the business, we've decided that investors don't like the business. And so there's -- we want to get out of it in order to make our stock price go up. And I think that's -- maybe I'm putting it too simply, but that's kind of how I read their analysis. A, is there application from the market to be a huge opportunity for Lincoln? And b, given that MetLife, Prudential, I mean, even equitable, and they really -- they all sounded buffer annuities. Brighthouse being MetLife now, but no one wants to sell this living benefits. Is there a lesson to be learned? Or is it just everyone is sort of walking away at the bottom?

Josh, our program -- and we have demonstrated by and large that we have the lowest risk in-force variable annuity with living benefits block in the industry, and there's a couple of reasons for that. And just going back in history a little bit. This goes way back. One, when we built the products, every rider was hedged from day 1. When we built the products, we were focused on account value growth counts first and most important. And so we focus them on the underlying sub-counts and investment strategies. And we never participated in the, what they call it, the feature wars. And so as an example, we've never had a roll-up on our debt benefit. So a lot of decisions that we made early on contributes to why we have a low-risk in-force business. Another one of the decisions we've made over the years is to stay in the market at all times. And so sometimes the markets provide a little more upside opportunity on return, sometimes not as much, but we've decided to be in the market consistently. Some of the companies that you've spoken to have been in and out. They've gone out. They've come back. And so it's sort of a function of how they see their business model at the time. When that happens, in other words, when big players move out of the market, we don't aggressively try to take their share. Sometimes we -- there's been 1 or 2 instances over the last decade where someone pulled out, we did get a lot of extra share. We were happy to get it at the time. But right now, I think it's more about -- the amount that you can sell is more about what we were talking about a minute ago, which is the value proposition to the customer and what alternatives they have and what's their objective; asset protection, guaranteed income. Those are the things that are going to make the difference in the long run. I would say that a large majority of the big players in the guaranteed lifetime income space remain in the business. I've spoken a couple of times to an organization that Lincoln helped get off the ground, which is called the Alliance for Lifetime Income, which is predominantly a grouping of companies to focus on giving lifetime income and annuities, in general, a much better understanding for the consumers. It just doesn't do anything for any other company. It's just a consumer-directed educational activity. We've raised $100 million over the last 4 years to advance in the consumers' mind the quality of the annuity business, predominantly ALI, stands for Alliance for Lifetime Income. And so it's an evidence that there's quite a few companies that continue to support that segment of the market and annuities in general. So staying in a market consistently, pricing the capital well, not being too concerned about competitors that come in and out, and then through ALI advocating for the everyday consumer to better understand annuities.

And look, given the current market climate in virtual sales and the way that -- it's always been said that life insurance products are sold, not bought. Obviously, the decline of what can be offered and the decline in the sales relationship have been very difficult in the past 18 months to get the product in the hands of consumers. Two -- one, I guess, do we expect there will be a sales surge as we enter the period of the new normal and people begin to interact? Again, they have been annuity products that haven't been bought that need to be bought, that people just held off on? And two, has anything good come out of COVID in terms of the knowledge about how to interact with potential customers that we didn't know we could do beforehand?

Yes. Let me speak to Lincoln's broadly about the impact of COVID on sales. I would characterize sort of in the first half of the year people sitting back and not making decisions as quickly about what product they want to sell -- excuse me, what product they want to buy. And best example of that would be in the group business, where employers were not rebidding their business. They took a wait and see attitude. So there wasn't as much opportunity for all of us to bid on new business because people just weren't putting it in the market -- putting their plans up for bid. In the -- sort of in the individual markets, there may have been some of that at the individual level where people paused for a month or 2 to see what was going to happen in the markets -- in the capital markets before they made decisions. But I would say for the industry, in general, as we exited 2020, the pandemic-related effect on sales, hard to quantify, but I would say, pretty modest. Certainly, at Lincoln, it was pretty modest. Again, for Lincoln, the critical issues in the sales results for 2020 versus 2019 were the 2 that I mentioned, intentionally putting a little more focus on building up capital. So we slowed sales intentionally, and we did that mostly through pricing. And so lower interest rates create a little different value proposition, but interest rate reductions is what affected Lincoln's sales the most, not the pandemic. And Josh, what was the second part of the question?