Good morning and thank you for joining Lincoln Financial Group's Fourth Quarter 2018 Earnings Conference Call. At this time, all lines are in a listen-only mode. Later we will announce the opportunity for questions and instructions will be given at that time. [Operator Instructions] Now I would like to turn the conference over to the Senior Vice President of Investor Relations, Chris Giovanni. Please go ahead, sir.

Thank you, Crystal. Good morning and welcome to Lincoln Financial's fourth quarter earnings call. Before we begin, I have an important reminder. Any comments made during the call regarding future expectations, trends and conditions, including comments about sales and deposits, expenses, income from operations, share repurchases and liquidity and capital resources are forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from current expectations. These risks and uncertainties are described in the cautionary statement disclosures in our earnings release issued yesterday and our reports on Forms 8-K and 10-Q filed with the SEC. We appreciate your participation today and invite you to visit Lincoln's Web site, www.lincolnfinancial.com, where you can find our press release and statistical supplement, which include a full reconciliation of the non-GAAP measures used in the call, including adjusted income from operations and adjusted return on equity to their most capable GAAP measures. Before beginning, I would also like to remind you that we will be hosting our Investor Day on June 12 in New York City and we hope that many of you will join us in person. Presenting on today's call are Dennis Glass, President and Chief Executive Officer; and Randy Freitag, Chief Financial Officer and Head of Individual Life. After their prepared remarks, we will move to the question-and-answer portion of the call. I would now turn things over to Dennis.

Thank you, Chris, and good morning everyone. Continued execution on strategic priorities produced strong fourth quarter and full year results with adjusted operating EPS of 9% compared to the prior year quarter and 13% excluding notable items for the full year. Adjusted ROE expanded another 40 basis points in 2018 to 13.5%. As you know, we have a multi-year track record of equally strong financial results and are confident we can sustain this performance over time given the strength of our franchise and effective execution of key management initiatives including maximizing our diverse product portfolio and distribution advantages to sustain profitable top-line growth driving expense savings from both our digital programs and synergies from the Liberty acquisition. With the Liberty transaction, we also successfully increased the scale of our group business and the percentage of earnings from traditional insurance risks. Maintain superior risk management and leveraging the strength of our balance sheet and solid capital generation. Let me touch on each of these. First on profitable top-line growth. Our powerful retail franchise benefited from management actions targeted towards expanding the product portfolio in attractive fast growing segments of the market and increasing the breadth and effectiveness of our distribution force. These tactics drove solid growth within all four businesses including the annuity business returning to positive net flows in the fourth quarter for the first time since 2015. Strong growth in life sales in the quarter contributing to the sixth consecutive year of individual life sales gains, three straight years of sales growth and group protection and record RPS deposits and net flows in 2018. The near-term sales outlook is encouraging and we expect further momentum in 2019. Moving to expense savings. We have initiated two significant programs. A few years ago, we made a strategic decision to accelerate our…

Thank you, Dennis. Last night, we reported adjusted income from operations of $475 million or $2.15 per share for the fourth quarter a 9% increase from the prior year. There were no notable items within the current or prior year quarter. However, there were a few items that drove some variability within the Life Insurance segment, which I will speak to later. Now let me touch on the performance of key financial metrics for 2018. Adjusted operating EPS of $8.48 was a record up 9% or 13% excluding notable items. As we combine growth in pre-tax earnings and benefits from tax reform with active capital management. Adjusted operating ROE increased 40 basis points to 13.5%. Book value per share excluding AOCI increased 5% to $67.73 an all time high. Consolidated net flow is more than doubled to over $7 billion primarily driven by the significant improvement in annuities and record flows for RPS. Operating revenues grew in every business segment. Expense management continued to be a good story as the G&A expense ratio improved to 20 basis points. And finally, our balance sheet remains an important source of strength highlighted by a high quality investment portfolio. Solid capital ratios and liquidity and strong capital generation which enabled us to deploy $2.5 billion of capital well above our expectations going into the year. Net income of $1.80 for the quarter was impacted by $37 million loss from general account investments with the largest impact coming from the mark-to-market on equity investments and a $20 million acquisition and integration expense. Now turning to segment results, starting with annuities, reported earnings for the quarter were $258 million compared to $265 million in the prior year quarter. The most significant item impacting fourth quarter results was the reinsurance transaction completed with the Athene, which…

Thank you, Dennis and Randy. 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 only one follow-up and then re-queue if you have additional questions. With that, Crystal, could we begin Q&A

Thank you. [Operator Instructions] And our first question comes from Ryan Krueger from KBW. Your line is open.

Hi, good morning. I had a first question on expenses. The $200 million total cost saves that you expect, is it -- that would be comparable to prior combined guidance I believe of 190 to 250, so the high-end of that I guess is that correct. And is 2021 still the year you expect to achieve it?

Ryan let me walk through and break that down into the two component parts. One half is the digital program and that program is running spot-on with what we originally guided you to. So what was that original guidance? We have an expectation that as we enter 2019, expenses will be in the $70 million to $80 million range and the benefits will equal that amount. So we'll be about net neutral in 2019 after the expenses will continue to trend down. The benefits will continue to grow and we'll grow ultimately to that $90 million to $150 million range. On the other side, you have the integration savings associated with the Liberty acquisition. We experienced about $50 million of those savings in 2018 and as we move into 2019, we currently expect to exit the year at $100 million run rate. That's one year ahead of our original expectations. Additionally, as we've examined and tightened up the integration plan, we now believe that we can grow that original guidance of $100 million to $125 million in the out years. Those are the numbers that get you to the total run.

Great. Thank you. And then, now that you've completed the fixed annuity reinsurance transaction, your stock still trades at a pretty low multiple. Would you consider a similar type of transaction for a piece of the individual life block if your valuation remains at these levels.

Ryan, we're always open to transactions that have the long-term improvement in shareholder value. So the answer is, yes, that we'll continue to look at them.

Thank you.

Thank you. Our next question comes from Humphrey Lee from Dowling & Partners. Your line is open.

Good morning and thank you for taking my questions. Just a question related to the ROA annuities and I think in Randy's prepared remarks, you've talked about expenses were down and you have a good book of business that [indiscernible] to the 83 basis point of ROA, which I find is still pretty strong given the adverse market and probably you have set a little bit of higher fixed unit cost after the transaction. I was just wondering, if you can go a little bit more detail in terms of the strong performance and do you think if the current level is sustainable in the current market environment?

Humphrey, thanks for the question. Yes, I mean we continue to expect and it's very consistent ROAs story over the years. It has been in that 75 to 85 basis point ROA range for as long as I can remember. As we look forward, we continue to see consistency in our ROA expectations going forward.

Okay. And then shifting to retirement plan services same thing you talked about expense initiatives helping the G&A expense ratio and balance benefiting the ROA. But I think the 26 basis point is probably one of the highest with all the benefits of VII. Do you think that 26 basis points for RPS is a sustainable number going forward?

I think it's in the range. I think it was a good quarter for their RPS business as I said, $5 million variance was a good strong quarter and it led to the 26 basis point ROA. I don't think that the ROA as we look forward, there's a range of ROA expectations, I think 26 is probably at the top-end of that range. But it's not outside of the norm that we would expect from that business.

Okay. Thank you.

Thank you. Our next question comes from Randy Binner from B Riley FBR. Your line is open.

Hey, thanks. Good morning. So I have a question in group protection and I think that's got addressed a little bit in the opening comments. I don't want to dig in because the -- I guess the timing of -- how the margin comes in the group protection business? And then, kind of what -- now that the Liberty deal is kind of in fully, how to think about the benefit ratio there? The benefit is a little higher than I thought it would be this quarter. I'm just wondering, if there is a seasonality, or any other kind of timing elements to how that margin and benefit ratio develops going forward.

Hi, Randy. First I mentioned that there was a little bit of seasonality in our loss ratio. Let me dig into that a little bit. If you go back to the third quarter, we reported a loss ratio of 73.6%. But, as we also mentioned, we had a benefit from our reserve review. So if you adjusted for that the loss ratio in the third quarter was 74.5%. We experienced 75.8% in the fourth quarter. One, I mean those numbers at the end the day for a big business that's not a big difference, so it's not like there was a real fundamental change in the loss ratio, I would say. We do typically experience a little bit of seasonality in our disability business in the fourth quarter, negative seasonality. If I had to pinpoint why exactly that is, I think as you think about claims and management especially around the holidays whether it's staffing levels here at Lincoln or whether it's staffing levels at the doctors either from our client standpoint or even our own doctors as he work with those. I think there's a little bit of a slowdown in claims management process around the holidays. If I had to highlight one thing, I think that's why we typically have a little bit of seasonality. So I think 75.8% as we said, it's a good solid result and it's well within our, once again, our range of expectations for that business. And as a reminder, we came into the year saying we were going to have an overall margin in the group business of 3.5% for the year. We did 5.5%. So it was a really good year for the group business. And as I said looking forward, we continue to think we can operate in that 5% to 7% range ultimately growing into the upper half of that range.

And expenses seem like they're trending better, right? So is that a lever you continue to pull there as we look for?

Back to the answer on Ryan's question, we experienced about $50 million of the integration savings in 2018. We expect to exit 2019 at $100 million run rate and ultimately move to $125 million. So absolutely expenses are going to be one of the items that benefit earnings as you we look forward.

Okay. Perfect. Thank you.

Thank you. Our next question comes from Thomas Gallagher from Evercore ISI. Your line is open.

Good morning. Randy, the adverse mortality in individual life insurance this quarter, I guess that's the first time Lincoln has had that in about two to three years. The rest of the industry saw the same thing more or less. Any thoughts on what happened here? Any concerns for you? Do you think it's just normal volatility? Have you dug in there a little bit?

Well, Tom let me accelerate to the [NSA] [ph]. Yes, I think it was just normal volatility. I like you and many others when I saw the result for the quarter was disappointed and so dug into the quarterly results and what we found was nothing really extraordinary outside of just bad results. So frequency was a little bit elevated, severity was a little bit elevated. There wasn't anything inside from a type of cause of death standpoint. So there wasn't anything that stood out in terms of the quarter other than just one of those quarters where experience came in a little worse than expected. Now if I expanded that view out and thought about it on a broader standpoint, I'd point out in the third quarter, we were about $20 million better than our expectations versus the $28 million negative that we experienced in the fourth quarter. So combined those two quarters we're pretty close to our expectations. One of the other phenomena we saw in the fourth quarter and this is really the first time we've experienced this in my memory was that about a third of the experience in the fourth -- negative experience in the fourth quarter came from third quarter claims lag. So we establish an IBNR at the end of every quarter. And once we test that thing over time, typically we come within a few million dollars, but this quarter as I mentioned about a third of that $28 million came from an IBNR that was a little lower in retrospect than it should have been at the end of the third quarter. So you know viewed from the last half the year, I think you came much more in line with our expectations. And then, when I viewed over a longer period of time, so as I got out of the quarter and I started to look into much longer period of time whether it's the full year as I mentioned severity and frequency both at 100% as I viewed over an eight year period and as I mentioned seven of the last eight years within 1 percentage point of 100%. So when viewed over that longer period of time and viewed in a reflection of what mortality is, I find that quarter to be unremarkable other than it was one of those quarters when experienced just with a little worse than our expectations. But, once again, we don't expect quarterly performance to always fall exactly within a particular range, but when viewed over a longer period of time we do and that's what we experienced.

That's helpful especially the IBNR comment that would make sense why when you -- if you smooth that piece of it out between 3Q and 4Q wouldn't have been as exaggerated between the quarters. The other -- my follow-up is on variable annuity earnings and hedging. Can you comment on your variable annuity fees? How much is based on AUM versus guaranteed amount? And then, also has the recent market volatility altered hedging costs at all as we think about go forward earnings and margins there?

Hey, Tom. The base fee, so the [M&E] [ph] that's driven by account values. The fee is for the living benefit guarantees on the vast majority of our products are linked to the guaranteed benefit base. So that's your differentiation between those two fees. I think the primary driver to the second part of your question, the primary driver of the cost of hedging is going to be the level of interest rates. And so the interest rates have come down a little bit and that has pushed the cost of hedging up a little bit still within our range. If you expanded that out to what do we see across the industry, we continue to see -- I think a reasonably priced industry with most competitors behaving what we would call as rationally.

Okay. Thanks.

You bet.

Thank you. Our next question comes from Jimmy Bhullar from JPMorgan. Your line is open.

Hi. Good morning. So just a question for Randy on RBC ratios obviously the tax reform they've come down a lot for most companies and your RBC is considerably higher than the peer levels. But I guess to some extent your business makes warrants that as well, but what do you view as a reasonable RBC threshold going forward versus where you stand right now?

Jimmy, thanks for the question. First I want to reiterate, this was in my comments, but I want to make sure everybody understands that the 455% RBC ratio that we reported included a 35 point benefit from goodwill associated with the acquisition of the Liberty Group business. In that acquisition we bought a legal entity and when you do a legal entity for statutory purposes, the excess of the purchase price over the book value of that entity gets recorded as goodwill, which then gets amortized off over the next 10 years. Additionally, if you merge that entity out of existence which we intend to do over the next few years that goodwill will go away. So that's a -- what I would describe as a non-economic component of our 455% RBC ratio, adjust for that in your 420%. So let's talk about that number. Everything about that number is consistent to a little better than our expectations when we went through a fairly rigorous review process with the rating agencies around the Liberty acquisition. And ultimately it's the rating agencies who really drive capital -- required capital needs and expectations as we continue to operate as a AA company. So I find that 420%, which as I said is a little better than the productivity formas we put together at the time of the integration when our ratings were reaffirmed. And as we sit here on this table, outlook pretty much across the board with our agency partners. So the upshot of that is that I would expect over time that about 400% is the right number for us during periods what I would call the good times and of course that ratio then drifts down a bit during times of stress and that gets built back up during the good times. Well, I think the numbers probably about 400% ultimately driven by the rating agency models.

Okay. And then just on the sort of portfolio yields, I guess the new money yields gone up over the past year might have come down a little bit recently, but what's the difference between your portfolio yield and the bonds that are getting pulling off. And when do you get to a point where you think sort of spread compression will cease to exist in your business?

Jimmy, so I've mentioned in my remarks that we're putting new money on at about 4.5% in the fourth quarter and that the fixed income book -- portfolio book yields about 466. As we've mentioned in 2019 and into 2020, we're seeing a little higher yield on those assets that are running off. But we still expect spread compression to abate completely as we exit 2020. And I'd also like to mention that the amount of spread compression in terms of basis points was dramatically lower today than it was three years ago.

Okay. Thank you.

Thank you. Our next question comes from John Nadel from UBS. Your line is open.

Hey, good morning. Thanks for taking my question. I guess if we set aside variable investment income which was elevated in the quarter. Randy how would you characterize the impact of a pretty severe market decline in the fourth quarter overall on your earnings. And it's kind of hard to discern it especially given some of the moving parts in the annuity segment with the Athene deal et cetera. Was there any real notable impact on your earnings this quarter?

Well, John, obviously the average S&P came down in the quarter and that had a negative impact. I'd estimate that impact on the annuity business for instance was $12 million, $13 million just on the quarter.

Okay.

As you exited the year, if you are sitting there on January 1, you would have had further negative impact at the end of quarter account value were below the average for the quarter. Now subsequent to January 1, we've had a recovery in the equity market. So as you sit here today, I think if you looked at the average S&P and you took really S&P as today and projected it out to the end of the quarter held at level to the end of quarter. you'd have a relatively modest decrease in the average level of the S&P. So there would be some additional headwind, but it's a lot lower than it was back at the beginning of the year. There would have been less of an impact on the retirement business, but there would have been a small negative impact on the retirement business in the fourth quarter also from the level of the equity markets [indiscernible] the same comments as you move into 2019. So that's what I would say about both the equity markets and I think as Dennis pointed out, as you move into the first quarter, it's tough to say exactly what the variable investment income portfolio will do. But one of the leading indicators for that portfolio is the level of the equity markets and so you would expect a bit of a headwind in the first quarter from that particular component.

Yes. That's helpful. And then if I think about that $12 million or $13 million, I know it's an inexact science Randy, but if I think about that is there. How much of that was on the fee revenue side versus direct amortization. I'm thinking about the cushion that you guys have in the corridor on the annuity deck and how much of that might have gotten eaten up.

I would say during the quarter about 100% of it was on the fee income. So our quarter operated as it was supposed to do in the quarter. We came into the quarter with a couple of hundred million dollars of cushion. Most of that got taken away by the 15% downdraft in the equity markets. It's probably growing back up again as the markets have recovered here in the first quarter. But, all of the impact I would say is on the fee income side.

Got you. That's really helpful. And I just want to say I thought the prepared remarks and the commentary on the call were just terrific and I think some others should maybe pay attention to you guys. Thanks.

Thank you.

Thank you. Our next question comes from Alex Scott from Goldman Sachs. Your line is open.

Hey, good morning. I was just hoping you could provide an update on some of the things you're doing in the distribution channels in the annuity segment. Could you talk about how much -- how far down the path of building out the wholesalers and sort of expanding into IMOs, I mean is there continued momentum here. Have you gotten a lot of that work behind you? Any color would be helpful.

Yes. That's a pretty Alex broad question, but let me say that there is very significant distribution additions that we've made. One being example -- one example of that being Allstate and we have already built the Allstate wholesaler team. And I think that was 15 people about. So that's in place. Other areas where we have expanded distribution include IMOs. And we've built our wholesaler teams for that. The bank channel, we've increased our wholesalers for that. So if I just look in aggregate, we've taken our wholesaler headcount in the annuity business from 236 in the fourth quarter of '17 up to 285 in the fourth quarter of '18, which is about a 21% increase. So that increase is consistent with incremental additions of distribution opportunities.

Okay. That's helpful. Follow up question I had was, just on the RBC. I know you already made some comments on it, which were quite helpful. I guess as I look at a couple of the peers they have -- that are in variable annuities anyway, they're much higher RBC ratios and they're kind of telling us, don't look at that. There's a lot of noise in there and as we adopt the framework changes that will come down. Can you just talk about sort of how that will impact yours kind of think about that 420 or anything related to VA changes that will move that down or is that all sort of insulated from your offshore entity. Anyway to think about RBC as we think about the next couple of years that would be great.

The short answer, Alex, is no we don't expect any impact from the implementation of what has been called the Oliver Wyman approach. I want to reiterate that I think the whole process that we've gone through with the regulators and industry has been a textbook case in regulators and industry working together to create a better solution both for the regulatory side and for the company side. So I applaud the states for the approach they took with that process. We don't expect an impact at Lincoln. Other than that we believe that statutory reserving and capitalization will be improved by this new approach.

Perfect. I just want to make sure. Thank you.

Thank you. Our next question comes from Eric Bass from Autonomous Research. Your line is open.

Hi. Thank you. Can you just comment on group persistency trends around the year-end renewals and as we think about 1Q earnings, is there anything we should consider in terms of modeling the level of amortization?

Persistency generally is better than expectation and that has contributed to higher premiums than we have expected at this time from the combination of the companies. There is this amortization event that occurs in the first quarter. I think it is burning off a little bit, but I'll ask Randy to speak to that. This was separate from the ongoing operations.

Yes. Alex, if you go back two to three years, we used to have amortization seasonality that would lead to an additional $15 million to $20 million of amortization in the first quarter. We changed our approach a few years ago and so it's been grading down I would expect a modest increase in the amortization in the first quarter due to that process. But I would describe it as modest.

Got it. Thank you. And then, can you remind this on the composition of your alternatives portfolio. And should we anticipate some headwinds in the first quarter from private equity holdings?

Broadly speaking 85% of our private portfolio is in private equities and 15% in hedge. Inside the 85% were well diversified in the types of investments that are in the 85%. As Randy has already mentioned, I will elaborate just one point. We record earnings on our portfolio on a one quarter lag. So that the effect in the fourth quarter equity markets will show up in the first quarter results. But again, we don't know exactly how much that is. And then, I will also say that given the fact that the equity markets have come back some of what we might see in the first quarter is already going to turn around in the second quarter. So it'll be weaker in the first quarter than it was in the fourth quarter also in total But again, for the full year, we still think we'll get to our target of 10% just more of it'll come in the last three quarters and the first quarter.

Got it makes sense.

Eric, this is Randy. Let me apologize. I think I might have referred to you by the wrong name and I apologize for that.

No worries.

Thank you. Our next question comes from John Barnidge from Sandler O'Neill. Your line is open.

Thank you. There was a pretty meaningful drop in first year sales for RPS. Is there any commentary you have on that?

Just the variability of sales in general probably driven by the large case market where sales are lumpy or just because they're large sales.

Okay. Then, how is conversations with producers changed over the last quarter from market volatility and the government shutdown?

I think across Lincoln, we haven't gotten too many specific comments about the impact of the government shutdown on our business.

Okay. Thanks for your answers.

Thank you. Our next question comes from Josh Shanker from Duetsche bank. Your line is open.

Yes. Thank you. Just a follow up on Alex's question and talking about distribution a little bit, but of course your sales and annuities especially the variable kind are much better than your peers. If there are any product cycle issue, you have been changing your appetite, you to write stuff or is the marketplace is changing towards what you're selling, is their product design issues going on here or what do you think?

Yes. This is a very important question because it goes to sort of the theme in my and Randy's comments about us taking specific actions to improve top-line growth and the annuity business sort of was the textbook example of that for Lincoln. So if you go back three years, we defined our strategy in the annuity business as essentially being a manufacturer of guaranteed lifetime income. And I think in my remarks in 2013, 85% of what we sold at least in the guaranteed lifetime income space had guaranteed lifetime income, excuse me the variable annuity space 15% difference. Will and his team and the company at large say that very specifically that we were going to broaden our strategic view of what products we'd manufacturer and sell in the broader annuity industry and we would first attack established market where there was significant volume of sales taking place. And so, as an example, we talked about this tremendous launch that we had this year with our index variable annuity. Well, the sales that we're getting in that total market aren't even at the market share that we would expect, once we get to our full market share. So that's one of the drivers. In the bank market for fixed annuities, so is the same process. Yes, we did fix the annuities, but it wasn't a strategic focus. So we decided to focus more strategically there helped with a quick start because of the Athene transaction. But now we're established in that marketplace. So consistently you've seen us pivot from product to product. But this is more broadening our view on where we're going to participate and getting what I would refer to as the normal share in existing established markets, products, value propositions.

And do you think that -- over the coming year, do you think that your relative share of the pie is going to grow or the pie will stay relatively stationary while you grow or will both grow.

I think the pie is going to get bigger I mentioned across all annuities mentioned LIMRA has an industry expectation of growth. So that's only the second time I think in the last five or seven years where they had a growth expectation for the broader annuity market. I think, we'll continue to take share. And in general, I think annuities are going to continue to become more popular with savers just because of the demographics of where we sell that demographic bucket is growing quite a bit. So we're pretty optimistic about the top-line for the industry and very optimistic about our ability to take share. And these comments are specific to the annuity as an example. But we're doing the same thing in the life insurance business. We're revisiting segments of the life insurance business where we don't have the market share as the number three provider of seller life insurance in the United States that we should have. And so that's going to help fuel our growth.

Well, good luck in the New Year. And thank you very much.

Thank you.

Thank you. And that does conclude our question-and-answer session for today's conference. If there was anyone left in the queue, the company will be able to follow-up with you later in the afternoon. I would now like to turn the conference back over to Mr. Giovanni for any closing remarks.

Thank you all for joining us this morning as always we will take your questions on our Investor Relations line at 1800-237-2920 or via email at investorrelations@lfg.com. Thank you all and have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a wonderful day. Speakers, please stand by.