Good morning and thank you for joining Lincoln Financial Group's Second Quarter 2020 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'd like to turn the conference over to the Corporate Treasurer, Chris Giovanni. Please go ahead sir.

Thank you, operator. Good morning and welcome to Lincoln Financial's second quarter earnings call. Before we begin, I have an important reminder. Any comments made during the call regarding future expectations, trends and market 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 include those described in the cautionary statement disclosures in our earnings release issued yesterday, as well as those detailed in our 2019 annual report on Form 10-K, most recent quarterly reports on Form 10-Q, and from time-to-time in our other filings with the SEC. These forward-looking statements are made only as of today and we undertake no obligation to update or revise any of them to reflect events or circumstances that occur after this date. We appreciate your participation today and invite you to visit Lincoln's website www.lincolnfinancial.com where you can find our press release and statistical supplement which include full reconciliations of the non-GAAP measures used on the call included adjusted return on equity and adjusted income from operations or adjusted operating income to their most comparable GAAP measures. A slide presentation containing supplemental second quarter 2020 earnings and investment portfolio information is also posted on our website in the Investor Relations section. 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 like to turn the call over to Dennis.

Thank you, Chris. Good morning everyone. As we all know the pandemic's course and economic consequences including lower interest rates are both challenging and difficult to predict. However, Lincoln is very effectively dealing with the immediate COVID-19 operating issues such as working-from-home and virtual-selling. We're also aggressively responding to the overall health, economic, and capital market environment. Our near-term focus continues to be on maintaining our already strong balance sheet, actively repricing products to achieve appropriate returns and delivering on expense savings targets. Additionally, over the medium to long-term, our emphasis is on improving the way we operate by capitalizing on the benefits of the accelerated shift in digital and virtual selling to increase wholesaler and employee productivity, adding new well-priced products to complement our refreshed product portfolio, and drive growth and targeting additional expense-saving programs. We expect all these actions will create long-term competitive advantages. I will cover each of these items later, but first I will touch on second quarter results. Second quarter adjusted operating income was affected by elevated claims experienced from COVID-19 and negative returns within our alternative investment portfolio, both consistent with our expectations. Excluding these items, adjusted operatings per share would have been more consistent with the very strong prior year quarter. Based on the current level of equity markets, we see a lift in third quarter earnings related to higher fees on assets under management and a recovery and returns on the alternative investment portfolio. We also expect lower COVID-related claims. In aggregate, prior to any impacts from our annual assumption review, we expect adjusted EPS more in line with results from the first quarter of 2020. As I just mentioned, we are responding aggressively to the current environment. In the Individual Life and Annuity businesses this includes active product repricing related to…

Thank you, Dennis. Last night we reported second quarter adjusted operating income of $187 million or $0.97 per share, a difficult quarter but consistent with our expectations. There were no notable items within the current or prior year quarters. However, as expected, this quarter was negatively impacted by COVID-19-related claims and performance in the alternative investment portfolio. First on COVID. We estimate that COVID-related claims reduced earnings by approximately $125 million to $145 million or $0.65 to $0.75 per share. We provide an estimated range for COVID impacts because there is undoubtedly a level of imprecision in estimating claims due to timing and recording of deaths. This is slightly above the mortality sensitivity we provided previously. Looking forward, we now estimate every 10,000 COVID-19 deaths in the United States to impact our earnings by approximately $10 million with $8 million still hitting the Life business and $2 million in Group. In addition, we anticipate morbidity headwinds in Group related to the economic environment. Next on Alternatives. Returns were negative, which reduced earnings by $0.62 per share relative to our targeted annual return of 10%. This represented a negative 7% pre-tax return in the second quarter. We reported a net loss of $94 million. Importantly, the majority of the difference between our adjusted operating income and our net loss was the result of $150 million in items we consider to be non-economic. Related to accounting associated with our 2018 sale of Annuity business to Athene and variable annuity GLB non-performance risk. Specific to the Athene transaction, as we have noted in the past, changes in fair value for many of the assets run through the balance sheet while the offsetting change runs through the income statement. This non-economic impact will fluctuate but over time will subside and reverse. Additionally, this year's…

Thank you, Dennis and Randy. We will now begin the question-and-answer portion of the call. [Operator Instructions] With that let me turn the call back to the operator.

[Operator Instructions] And our first question comes from Erik Bass with Autonomous Research. Your line is open.

Good morning. Thank you. First, can you just help us think about the sensitivity to any changes that if you were to make any to your long-term interest rate assumption or the grading period? And should we look at what happened last year and expect that the impact would be similar?

Erik, its Randy. Thanks for the question. So as I said in my script, if you go back to last year the interest rate component was a negative in the overall unlocking it was in total $291 million and it was impacted by three different areas. First, the starting point and changes to the ultimate rate in the grading period. The starting component of that was $139 million of negative last year. And when you think about our assumption think about the starting point as a mark-to-market, right? So our starting point where are we investing money today? What is the market? Then you have the ultimate rate which is more of a subjective view of where could rates go to over time and then what connects them is the grading period. Last year that $139 million impact from that objective view of our rates were -- was driven by the fact that that rates were lower. And again, this year rates are lower. So it wouldn't be surprised if that one component was negative again this year. In terms of the more subjective view of where rates could go over time, I think that's part of the process for reaching out for the managers collectively coming up with a reasonably -- reasonable view of what that future could be. And that will be part of what we're doing right now and what we'll do over the remainder of the quarter. So I think that and hopefully that gives you some insight. I also said in my script and I just want to remind everybody, at the end of the day interest rates are one piece of what is a broad set of assumptions and so we'll review all of those assumptions. And while the interest rate piece of that may have a negative bend to it right now. At the end of the day it's going to be about what all the assumption impacts add up to.

Okay. Got it. That's helpful. And then a bigger picture question for the Life business. Does the pandemic experience change your view at all on risk retention limits and the amount of reinsurance you may look to utilize especially since you don't have any material exposure to longevity businesses that act as an offset to mortality?

Erik. No, I don't think so. The pandemic itself, I think, the use of reinsurance and the amount of reinsurance we use is more aligned with things like is the cost of reinsurance at that moment in time attractive what is our risk appetite as a company? And as we talked about mortality and morbidity-based earnings are something we we're very comfortable with. We are very comfortable with our ability to underwrite Life Insurance. And so our current retention program and just as a reminder we keep up to the first $2.5 million. After that we reinsure the majority of the risk we keep a small percentage of it. So we're very comfortable with that. And I don't think the pandemic changes our view of appropriate risk retention.

Got it. Thank you.

Thank you. Our next question comes from Ryan Krueger with KBW. Your line is open.

Hi. Thanks. Good morning. On the capital position in the $400 million of expected free cash flow benefits this year from lower sales activity, I guess, has that come through in the first half of the year at around half of that pace? I guess, the reason I'm asking is RBC ratio is kind of just steady in the quarter I thought it may have increased some more given the lower sales actually to be strategic review some of the moving parts of the RBC ratio in the quarter, and if you'd expect to build in the second half of the year?

Thanks, Ryan. Thanks for the question. Yes, I think, a little more than half came through in the first quarter and it's really driven by -- in that first year what our expectations are around fixed annuity sales. The fixed annuity sales have a pretty big first year drag on their own and for a lot of valid reasons, we have termed back our sales of pure fixed annuities. In terms of what you saw in the second quarter why didn't the RBC ratio grow I'd just remind you that the two big items we talked about in GAAP, COVID-19 claims and alternative performance those also occur in statutory. So -- and actually they're a little bigger in statutory because you don't have a DAC offset. So if you think about those two items providing roughly $300 million of headwinds to statutory results in the quarter. When you think about some other items we had some other small negatives that we put up. So you're talking about $350 million to $400 million of headwinds that we saw on a statutory basis. So I'm very happy actually that overall capital state level for the quarter. It just means that underlying all that there were some good strong statutory means. So I'm very happy with the results in the quarter and have actually seen a fair amount of the benefit driven by lower fixed annuity sales on the denominator.

Thanks. And then on buybacks, I know, it's still pause for the third quarter. But as you've seen credit experience coming quite a bit better so far I guess is it -- would it be potentially contemplated to bring the buyback back before the end of the year at this point?

Ryan, its Dennis. And I think we'll just stay with the -- a couple of comments. One it's very unpredictable these days. I mean as we all know there's so many drivers of what might happen over the next several quarters, which could affect earnings, which could affect our investments. So I think right now the focus is on maintaining our high-quality strength in the balance sheet. And at this point, we'll just comment that the -- we're pausing for the third quarter.

Got it. Understood. Thank you.

Thank you. Our next question comes from Elyse Greenspan with Wells Fargo. Your line is open.

Hi. Thanks. Good morning. I guess, my question follows up on the capital question to a certain degree. You guys obviously no little while ago did that philosophy insurance deal with the fee and that was not helpful to free up capital for buybacks. Obviously, given where interest rates are from what we're hearing right there is a greater bigger spread on some deals in the market right now. But do you guys have a view on whether you'd be more or less willing to transact in other deals? And then would you consider transactions similar to that to not free up capital potentially return to buying back your shares sooner than you might otherwise?

Elyse, its Dennis. I think your first point, which is that low interest rates have an effect on what you get for selling blocks of business. And so I think right now it's probably -- there may be some deals done, but it's hard to clear the table for buyer and seller on blocks of business. We've seen some very strategic activity in the marketplace, which go beyond sort of just pure return from the sale of the block. But absent the strategic deals I think it's been pretty quiet. We continue to be in the flow of opportunities and we'll continue to see what makes sense. And so we're open-minded focused, and if something comes along that makes sense for both buyer and seller we would do it. But again I think it's -- we'd be sort of, again I'm going to keep coming back to the unpredictable circumstances that we're in I think that shows that marketplace a little bit.

Okay. That's helpful. And then you guys provided an updated sensitivity on COVID, right? That's a little bit higher within Group than what you guys expected before. I guess when thinking about the mortality impact in the third quarter, is it just as simple as we should just kind of like pay attention to the death rate number of lives and kind of use of sensitivity there, or what would – given the mix of your book in the third quarter, what could cause that to vary within Group where things could potentially trend in a little bit better than expected?

Elyse, its Randy. Thanks for the question. We think about COVID-19, we spent a fair amount of time last quarter coming up with our estimates. We included our doctors, we included our data experts in terms of analyzing the different studies that were out there. We included our actuaries in terms of understanding our own mix of business. So we spend a lot of time. I think that shows in the overall fact that our estimate came very close to our actual experience. I've actually been a little surprised by some of the companies I've seen out there who missed by upwards of 75%. I'm not really sure why we've seen those sorts of gaps. But we spend a lot of time and so we're very – nobody's happy with claims but we think we did a really good job of estimating the potential impact. As we mentioned, in the Life business we had $8 million. When the final number came in we're right in line with that. So that number sticks. But in the Group business we did see a little pick up from $1 million, which was the estimate we provided last quarter to what we're now updating the $2 million. I don't think there's anything truly impactful in there. I think it just reflects a growing understanding of exactly how the pandemic is going to hit different areas of the economy. So we felt good about the nine. It came in pretty close. We'll update it to 10 and we feel that provides a good estimate as we move into the third quarter.

Okay. Thanks for the color.

[Operator Instructions] Our next question comes from John Barnidge with Piper Sandler. Your line is open.

Thank you. As we look forward in the Group Protection segment, can you talk about how you square favorable claim trends in dental in the likelihood that a segment of the population is just not going to use their benefits this year and square that with renewal pricing and the prospect of catch-up claims or emergence of more severe claims in 2021?

John, thank you for the question. So I think it's a very broad question about Group results. Dental itself is a relatively small component of our Group business. We had what a little – almost a little short of $1.1 billion in premiums in the quarter. And Group premiums represent only about 6% to 7% of that about $65 million. So on a relative basis we're less impacted by what's going on in the dental world than some of our peer companies. Now in terms of what we expect as we move into the third quarter, we are expecting and we started to experience that people are going back to the dentist. So we're expecting that the group loss ratio will move back more in line with its longer-term trend, which is right around 70%. We had roughly 40% this quarter. In terms of the other businesses, Disability and Life, starting with Life, we saw our loss ratio on a year-over-year basis tick up about 11 points. We think the majority of that or the primary driver of that was COVID. If you unwound that 11% increase in loss ratio, it translates into about $35 million of after-tax claims. The reality is we have about two-thirds of those actually reported on the death cert as COVID but there are a couple of factors: one, we don't have all of the death certifications yet. So that number will probably go up more. And then we believe based upon our analysis that there's a fair amount of under reporting especially in April in terms of cause of death associated with COVID. So we believe that COVID was the primary driver in the quarter. And as we move into the third quarter while we have increased our sensitivity from $1 million to $2…

Thank you very much.

Our next question comes from Tom Gallagher with Evercore. Your line is open.

Good morning. And as you guys look to pivot to a derisking approach into 2021, I think it makes sense that it's going to free up more capital and improve cash flow. But it will likely put more pressure on GAAP earnings growth I'm assuming, whether that's on the yield side, as you think about risk or the weaker sales this year translating into lower revenue growth next year. Is that a fair way to think about it, Randy? And if so, how much -- how many points of GAAP EPS pressure do you think that strategy you'll have assuming that lasts for the next several quarters?

Yeah Tom, let me take a quick -- let me take the first response to that. We're not pivoting to a de-risked approach in 2021 so much as, we're watching the developments. And right now we're being a little bit more cautious about deploying capital. If things improve which I hope they do for America for all the right reasons that could change our view on how we deploy capital. So that's one point. The second point is. And we've been emphasizing this a lot is, the expense management activities that are underway can improve earnings and to some extent offset the -- to your point, the growth in earnings in 2021 that's lost a little bit to the lower level of sales that we're seeing in 2020. So we're continuing to pull all the levers to focus on earnings growth, at the same time that we're watching on protecting our capital base. Because again, we just said, this a couple of times, it's very -- we're in very unpredictable times. And so I think being cautious on capital deployment, is the right answer. But not stopping there and taking other actions, such as expense management to offset some of the GAAP earnings issues associated with that.

Got you, and would you guys be able to offer up any way you could think about the impact, if we isolate put the expense initiatives on the side is this maybe a couple of points of growth being sacrificed, or is it potentially more meaningful than that?

Tom, it's kind of difficult to answer that question. I mean, if you look at some of the components of our 8% to 10% growth targets over time, I think you get about 4% from new business. That will come down a little bit I don't know how much. We get 1% from expense efficiencies that will come up a little bit. Whether or not they completely offset each other would be hard to predict right now. Then you got the impact of capital markets and spread compression then you have share buybacks. So all of those things contribute to, the long-term outcome and a little bit unpredictable in the short-term.

Got you. And then my follow-up is, the 55% free cash flow conversion ratio that you've given out. How should we be thinking about that now? I presume it may actually get better, just given the level of capital that gets freed up from lower sales. Is that a fair way to think about it? And can you shed any light into, how you're thinking about the 55% ratio? And is it -- are we going to have -- I guess my question is, are we -- is there enough potential adverse impacts from credit and low rates that it's still not going to trend above 55%, or do you think, it might actually move above that?

Hey, Tom, it's Randy. Thanks for the question. I think you highlighted most of the relevant points. So I'll add one to what you mentioned. On its, own lower sales is supportive of statutory earnings. So that's a positive in that regard. What's the other side of statutory earnings is what is your required capital right? So what at the end of the day are your distributable earnings? That's statutory earnings less your change in required capital. And that's driven by a lot of factors, including the level of sales and the sales come down that's supportive. But addition to that is really the big driver of the change in required credit capital will be what goes on in the credit markets? And that's really where a lot of the uncertainty in the current environment lies. And that's as Dennis mentioned, if we look into the third quarter we still think it's uncertain enough where the best action is to not do buybacks. We'll reassess that in the fourth quarter. And as we get around the planning for next year and looking at the results we'll make our best estimates what we think as we look into 2021 and beyond. But ultimately, what happens to free cash flow I think is going to be determined to buy what we believe will be the impact on the credit markets of everything that's going on whether that's the pandemic or the resulting impact on the overall economy.

That makes sense. Thanks, Randy.

Yep.

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

Good morning, and thank you for taking my question. Just a couple of clarification questions. So, you mentioned about full alternative returns you expect better results in the third quarter. Do you anticipate the return to be better than kind of your normal run rate so providing a decent tailwind in the third quarter?

Humphrey, its Dennis. The – again, I don't think we're going to predict exactly what's going to happen in the alternative portfolio in the third quarter. Let me just say, this as we seen the effects of capital markets and energy prices on our returns in the second quarter both of those are trending up. And so we therefore think that our alternative returns will be trending up. We – for the last six or seven years, we have about a 10% return on our alts portfolio. Our alts portfolio today consists about 88% private equity and the balance in hedge funds private equity returns generally have a higher long-term outcome and return. So we're comfortable in the long-term with our 10% and our experience supports that. And again, quarter-to-quarter it's sort of difficult to predict. But I will say that, what we saw in the second quarter had to do with equity markets in large part a little bit energy prices. And again, those indicators have trended up in the third quarter, or in the second quarter affecting the third quarter alts business returns.

That's helpful. And then Dennis in your prepared remarks you talked about the sales outlook for different channels and for Life Insurance you expect to be declining – to be down substantially for 2020 but what about for annuities? Do you expect some of the pressure to continue in the balance of the year? And if so, do you still anticipate the segments to see net inflows for a full year basis?

Yeah. We'll have to see how net flows develop. Humphrey, though I would come back to the aggregate sales as we look forward are shifting more toward our index variable annuities and our – which is getting a good return. We continue to get additional shelf space. We continue to provide additional sort of value propositions within that product. So we see that continuing to grow. As Randy and I both pointed out fixed annuities are just simply not an emphasis of ours today in our business model. We would be investing at sort of in the new money range of 2% there's just not enough juice in a 2% investment return to provide both a good value proposition for the consumer and a good return on capital for Lincoln. So in aggregate, we would expect total annuity sales to be down driven mostly by a pretty significant decline in fixed annuities.

That's helpful. Thank you.

[Operator Instructions] Our next question comes from Suneet Kamath with Citi. Your line is open.

Thanks. Quick just another question on capital. One of the things we've been talking about on second quarter calls has been the NAIC's review of the reversion to the mean assumption for interest rates in VA capital. A couple of companies have come out and said, if the NAIC were to change that wouldn't have a big impact on their positions. And I think one company even came out and said they're very much in support of it. I'm just wondering how -- what your view of that is? If there was a change would it have a significant impact on either your hedging strategy or your VA capital position?

Hey, Suneet, its Randy. Yes, we're very supportive of the NAIC's efforts. I think if you think about the NAIC and the work they did and what's just referred to is the Oliver Wyman where -- they were very prudent in hiring an outside expert. They were very prudent in working with industry. And I think they ended up at a very good spot, a spot that's good from the regulator. It's good for industry. And I think it will be the same with this. So we're supporting the effort. We will support it. I don't think it will likely come into effect until probably 2022, but we do not see it having a big impact. And just as a reminder our hedge program is refocused on the economics. And essentially, they're talking about making the interest rate generator a little more reflective of the economics. And I don't think that's a bad thing.

Got it. And then my follow-up is just on the Life sales again. So MoneyGuard has historically been a really big differentiator for you guys. And I know that you talked about repricing your Life products. But in this interest rate environment with credit spreads as tight as they are, can you make that product work in terms of repricing, or is it just sort of a difficult one for you guys to sell to achieve your returns, but also provide value to the customer?

Suneet, its Randy. You can just look at the results, right? Sales are down 36% over the prior year. I think they'll fall even further as we look into the back half of the year. I mean, the short answer to your question is MoneyGuard really any general account type product is a tough sell. It's tough to create a compelling value proposition for the consumer and a return for the company when you're investing money in the low 2s. So I think that we would expect that in the current environment that MoneyGuard sales will continue to fall. I think there is a significant opportunity because MoneyGuard is an example of a product that speaks directly to a huge need for the American consumer. And I think there's an opportunity to create a compelling value proposition in MoneyGuard something we're working on right now. You know we created that's Lincoln's innovation MoneyGuard. And we're actively working on creating what we believe is the next version of MoneyGuard, which thematically is going to be very similar to things we've talked about for instance with IVA right, lower guarantees, a different way to generate investment returns, shifting risk to the consumers probably moving to more of a variable-type chassis. So I think there's a huge opportunity for a product like MoneyGuard, but yes when you're investing at rates we're investing at today the existing version of that product is a tough sell and I'd expect sales to be down in the remainder of the year.

Yes. Suneet, if I could jump in, in a period where we're preserving capital, our focus is on any capital that we're deploying to be absolutely certain we're getting appropriate returns. So yes, in aggregate sales will be down in the last half of the year, we think from the first half of the year in the individual lines. But those products by line of business are getting in aggregate appropriate returns. So even though we're husbanding capital a little bit the capital that we're deploying is getting good returns on it. And then as I mentioned and Randy just discussed, lots of activity in product development, so that we can begin to rebuild sales and continue to grow earnings from new business over time. And I'd also come back to most of the pressure from interest rates and the repricing activity is going on in the individual lines and we're seeing good returns and higher levels of sales in both RPS and Group.

Okay. Thanks.

Thank you. And I'm showing no other questions in the queue. I'd like to turn the call back to Mr. Chris Giovanni for any closing remarks.

Catherine, I don't think he's off mute.

Mr. Giovanni, your line is open.

Thank you, and thank you all for joining us this morning. As always, we are happy to take your questions on the Investor Relations line or you can e-mail us at investorrelations@lfg.com. Thank you and have a good day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day. Speakers please stand by.