00:01 Good morning and thank you for joining Lincoln Financial Group's Fourth Quarter 2021 Earnings Conference Call. At this time, all lines are in a listen-only mode. Later, we'll announced the opportunity for questions and instructions will be given at that time. 00:23 Now, I would like to turn the conference over to the Vice President of Investor Relations, Al Copersino. Please go ahead, sir.

00:31 Thank you, Catherine. Good morning and welcome to Lincoln Financials’ fourth quarter earnings call. Before we begin, I have an important reminder. Any comments made during the call regarding future expectations, 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. 00:56 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 2020 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. 01:22 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, including adjusted return on equity and adjusted income from operations or adjusted operating income to the most comparable GAAP measures. 01:57 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 comments, we will move to the question-and-answer portion of the call. 02:11 I would now like to turn the call over to Dennis.

02:15 Thank you, Al. Good morning everyone. In the fourth quarter and full-year, we again experienced elevated claims related to U.S. COVID deaths. Since the pandemics onset, we have been providing important financial protection for our customers during the most serious global health crisis in over a century. 02:39 Despite the magnitude of claims, our earnings have been strong enough to continue our share repurchase program by capital for new sales and maintain our overall financial strength. Looking through the significant COVID claims experienced in 2021, and adjusting out excess alternative income and notable items, we view underlying earnings power at about $10.50 per share, up 13% over 2020s comparable figure, and representing a 14% underlying ROE on book value, excluding AOCI. 03:27 We saw broad based sales growth this year in most of our businesses, good expense management, significant share repurchases, and an improved capital position. Looking forward, we expect EPS growth to meet or exceed our long-term expectations. Also supported by our actions to increase sales, significant expense savings related to the Spark Initiative and share buybacks. 03:59 Turning to our earnings growth drivers. As interest rates dropped, we started a new product strategy to reprice our portfolio to achieve target returns, shift our emphasis to less capital incentive products and add new solutions that expand our consumer value propositions. 04:22 We have been executing against the strategy and achieving our objectives. During 2021, we introduced 13 new products with more planned in early 2022. We continued our disciplined repricing across our portfolio, contributing to strong new business returns. 04:44 By combining these actions with the power of our distribution, we achieved significant 2021 sales growth in most businesses and drove increased operating revenues across all our businesses. We continue to successfully manage expenses, while improving operational effectiveness…

18:15 Thank you, Dennis. Last night, we reported fourth quarter adjusted operating income of $286 million or $1.56 per share. There were no notable items in the current or prior year quarter. However, this quarter's results were impacted by pandemic related claims, which reduced earnings by $197 million or $1.08 per share. 18:47 While results benefited from alternative investment income, boosting earnings by $29 million or $0.16 per share above target. Additionally, we experienced some unfavorable non-pandemic impacts to mortality and morbidity that I will discuss further in the Life and Group protection commentary. 19:11 Our underlying earnings power continues to be strong as we exit the quarter. Net income totaled $220 million or $1.20 per share, as strong performance from our credit portfolio was offset by hedge breakage and non-economic variable annuity non-performance risk. For the full-year, net income, EPS came in at 91% of adjusted operating EPS with the difference primarily driven by non-economic variable annuity non-performance risk. 19:52 Moving to the performance of key financial metrics. Average account values increased 10%, a continued focus on expense management led to a 10 basis point improvement in our expense ratios. And the book value per share, excluding AOCI grew 9%, which stands at $78.05, an all-time high. 20:19 Before turning to the segments, I want to provide an update on the Spark Initiative as we close out the year. Last quarter, we provided details on Spark, which we expect will result in 260 million to 300 million pre-tax and run rate savings by the end of 2024. And this remains unchanged. 20:41 Looking at 2022, we expect a net impact in a negative 25 million to 65 million range pre-tax, as this year will be the peak investment year for the initiative. This compares to an immaterial impact in…

31:41 Thank you, Dennis and Randy. We will now begin the question-and-answer portion of the call. As a reminder, we expect you please limit yourself to one question and one follow-up and then requeue if we have additional questions. 31:54 With that, let me turn the call over to Catherine to begin Q and A.

32:00 Thank you. Our first question comes from Tom Gallagher with EVR. Your line is open.

32:23 Thank you. First question, can you talk about the strength in individual life insurance sales for the quarter? They roughly doubled. Did you announce pricing changes with those sales in anticipation of that or just a little more color about what drove the strength of individual life sales?

32:48 Tom, it's Randy. A number of factors that drove that outcome, which was in-line with our expectations. If we went back to the fourth quarter of last year first, we talked about – that was the point when all of our products had been repriced over shortly to be up repriced and so we expected sales to be at a low point at that moment in time. So, we're comparing to the low point from a life sales standpoint. 33:20 Then in addition to all those repriced products, this year, we added as Dennis mentioned seven new products. Used one example, MoneyGuard product, variable MoneyGuard product, which did not exist in the fourth quarter of last year, but represented 42% of the sales in that particular product area. 33:43 Dennis also mentioned some new distribution partners in the P&C channel and that really drove some great results, especially in the term business. So, it's a combination Tom of all of those new products. The fact that last year was as we communicated an expected low point. And then the third factor, I would just mention, the fourth quarter is typically in a normal year the biggest quarter for life sales. It's been that way as long as I've been in the industry. So, that's what I would say, Tom.

34:16 Okay, thanks. And then my follow-up is, if I look at the performance of your Group business, the deterioration in overall loss ratio has been worse than peers. I’m curious, if – when you sort of step back and look at that business, do you think there needs to be any repositioning of the block from a risk selection standpoint or do you think it's kind of just volatility that's occurring from the pandemic, some random aspects to it and getting enough rate or getting rate is all you need in terms of what you see lying ahead?

34:54 Tom, Dennis. At the at the top, we think we have a very strong book of business and we're very confident that these two or three strategies that I mentioned are going to get us to the top end of our 5% to 7% margin over the next few years. I'm very optimistic about the group business and it's significantly – a significant opportunity to increase earnings over the next couple of years. So, we feel pretty good about it. 35:30 Randy, do you want to add any details on the quarter?

35:35 Yeah. Tom, thanks for the question. I think from a starting point, you've got the pandemic, which over the back half of 2021 started to hit Group businesses not just at Lincoln, across the industry in a more material way that was we believe as I've heard others talk about had to do with the shift and who was dying from COVID. An approximate doubling of the working age population percentage of COVID-related deaths. 36:08 As it came down a little bit in the fourth quarter and went from 40% in the third quarter to 35% in the fourth quarter. And I think that was the driver of why our mortality impacts came down a little bit, but once again Group business, our Group business across the industry when I look at it got hit in a similar way and that impact grew over the course of 2021. It culminated in the fourth quarter, an impact of $131 million, of that for mortality. So, that's that aspect. 36:40 Now, there are two other aspects about our quarter. And let me talk about those. The first is, I talked about in my prepared remarks Tom, 15 million of underlying negative results in our Disability business. You can really see that in the loss ratio. If you exclude the pandemic in our disability business, we had about an 87% loss ratio in the fourth quarter, that was a little over 83%, last year in the fourth quarter. It’s up about 4 points. And that's that 15 million of underlying negative results that I talked about. 37:19 We think there's two factors in there. First, we saw a blip in severity. Severity is run in a pretty tight channel for an extended period of time, and we saw jump up this quarter.…

39:34 That does. Thanks guys.

39:38 Thank you. And our next question comes from Suneet Kamath with Jefferies. Your line is open.

39:44 Great. Thanks. Just first on the alternatives, can you give us a sense of how much of this year's VII was marks as opposed to realized gains and maybe how that compares to prior years?

40:00 Suneet. The portfolio is turning over. So, at a big picture level, we're converting some of the gains to cash. We'll have to get back down the details, but it's not just an increase in the marks. We're converting into cash and reinvesting the proceeds in new business – new investment, excuse me.

40:31 Got it. Okay. All right. And then, I guess on the annuities, I mean your sales were strong, for the year, but the flows were still pretty negative there I think 2.6 billion, I guess, what is your outlook as we think about 2022 and beyond at what point does this business start to return into inflows? Thanks.

40:51 Yes, the outflows are made up of both – a little bit more on the fixed annuity side, which is a result of our repricing of that business. The fixed annuities is a good business, if properly priced draws a lot of capital, so you’d have to make sure the return is appropriate. 41:14 On the VA side, I think what we're seeing, not I think, what we're seeing is, our ratio of, sort of the ongoing surrenders and so forth is staying pretty consistent, but at the same time account values are going up. And so, you have a little bit more account value impact on the outflow rate. So, we're confident of the annuity business to be growing over time of how the net flows work out? It’s a function of couple of different things, but good business. 41:49 I would say, we're getting excellent returns on the capital that we're putting behind, both the business with guaranteed living benefits, as well as the business without guaranteed benefits, . And I'll just come back to what we've been saying about this business for a long time by staying in the market consistently in good times and bad times, we have produced one of best quality in-force books of business in the industry, and we expect that to continue and to help drive earnings over the next couple of years.

42:33 Okay. Thanks.

42:38 Thank you. Our next question comes from Tracy Benguigui with Barclays. Your line is open.

42:45 Thank you. Good morning. I noticed that you grew your VA with GLB by a healthy 65% year-over-year. I guess, is some of the thinking that this is really an investment only VA considering your reinsurance flow deal with ? So that basically allows you to grow, but not take incremental risk?

43:08 Tracy, this is Randy. Yes, that was a component of growing sales, right. If you remember on the deal, it had a maximum sales of 1.5 billion and it ran through next June. So, yeah, it was definitely component. Now, in and of itself, the growth, I think it's – once again, it's similar to the life story. The fourth quarter of last year was the lowest quarter we've ever had. It was a very low fourth quarter of 2020. 43:44 So, I think some of that growth. If you look at more recent quarters, sequential quarters, you have a much more smooth pattern of growth. There's no specific strategy to, hey we're going to grow VA with living benefits or we're going to grow this. Once again, our strategy is the pricing of products appropriately have a very diversified portfolio and let consumers choose among those products as their preference shift. 44:13 What we believe that's going to lead to over time is something similar to what you saw this year, about a quarter of our sales over the course of 2021, where VA is with guarantees, about 75% were fixed or VAs is life guarantees. I think that's a reasonable expectation and that mix over time should pull our overall account value mix towards that over time. 44:43 And just as a reminder, Dennis said in his script, we reached a point now where less than 50% of our comp values, our VA with guarantees and the current sales mix is about 25%. So it'll take a long time, but that's where you would eventually expect to move over time. Did that help, Tracy?

45:02 Okay. Yes, that helps. Thank you. And then also last quarter you talked about spread compression running between 2% and 3% so that could trend down to 1% to 2%, just wanted to know your latest outlook just given some of the asset allocation updates you made in 2021 on new money and also considering rising interest rates albeit through the flattening yield curve?

45:28 Tracy. Spread compression has come down. It's come down as we’ve moved into 2022 as rates have moved up a little bit or definitively at the low end of that range and we expect it to continue to decline. I think when you look forward, there will be a point in the not too distant future where we formally communicated more in the 1% to 2% range than the 2% to 3%, which is our current public guidance.

45:57 Okay. Got it. Thank you.

46:01 Thank you. Our next question comes from Alex Scott with Goldman Sachs. Your line is open.

46:07 Hi. First question I had was a little bit of a housekeeping item. I guess, I just wanted to confirm on the higher-end of the 8% to 10% EPS growth that you kind of talked about or even exceeding it? Should I think about that completely separate from the 5% accretion that you sort of communicated around the life across block transaction?

46:32 I think you should think about those all altogether, right. So, part of the reason we are very confident in our ability to grow above, at or above that 8% to 10% guidance is the impact of the Spark Initiative, but also it's the fact that we'll have a slightly elevated share count reduction embedded in that analysis associated with the 900 million in buybacks that we're doing as part of .

47:05 Understood. Okay. And the second question on related, we've got more inquiries about the department of labor and just, sort of the process that they seem to be beginning to ramp up potential to take another look at the fiduciary rule, I guess I'd just be interested in your perspective on that and what's going on and also what might be different like this time around versus I think the experience investors probably remember from the 2016 time period?

47:35 Alex, I don't know that we have any more insight than anyone else does because it's evolving as we speak. But as a general observation, I think because of the changes the last time around and the way the industry has reacted to them, and Lincoln in particular that there's no overriding concern about the effect of expansion of the fiduciary rule on the way we do business, we think we can accommodate most of the range of outcomes that we expect.

48:13 Thanks.

48:17 Thank you. Our next question comes from Josh Shanker with Bank of America. Your line is open.

48:23 Yeah. I just wanted to get a little color on the sales, I don't know where interest rates are whether it's attractive, there were during the pandemic, a lot of less rated companies besides Lincoln and were successful in selling FIA’s and multi-year guarantees and whatnot and Lincoln wasn't going to chase price and now the growth is pretty good, is that a behavior that's changing among your distributors? Has the price into to a point where Lincoln’s products are more attractive? How is that working exactly?

48:58 Josh, we're very comfortable with the business that we're selling and getting the appropriate returns on it. The, sort of the competitive environment can change very quickly. I think we change rates every two weeks based on what's happening in the marketplace. But I want to come back to, but not, we were very careful about getting the right return on the capital we're deploying the high and new sales. 49:25 We have very strict rules and governance around that. And candidly, the overall risk profile of the products over time. So, we feel good about the fixed income annuity pricing, the product risk characteristics from the shareholder point of view, and the return that we're getting on new capital.

49:46 And why do you think they didn't sell so well 12 months ago? It’s sold in the market at all.

49:55 For Lincoln or for the industry?

49:57 For the – I mean compared to industry, Lincoln seemed to, I mean, you might have been pulling back to some extent, but obviously I don't know if the rates have changed that much or maybe they have, maybe the economics are much very different from what they were a year ago.

50:12 Rates are improving as we all know, and that affects the value proposition for the customer. We've also added some new indexes that have made for the breadth of customers interest wider, which helps increase our sales. 50:29 So, it's this consistent product development, adding new features, I actually mentioned this in my comments, and maintaining a good risk profile for the product, as well as return capital behind the products.

50:47 Josh, I would just point out that we’re very – as Dennis said, we're very happy what the returns we're getting and very happy with the sales we're seeing. If you look overall, longer-term like this year compared to last year, I think our fixed sales are actually down, compared to last year. 51:04 So, over the longer-term, you continue to price to get our targeted returns and the sales will come as they do. Thanks.

51:16 Thanks.

51:20 Thank you. Our next question comes from Elyse Greenspan with Wells Fargo. Your line is open.

51:26 Hi, thanks. Good morning. My first question, I just was hoping to get some more color on what drove that elevated mortality away from COVID within the life business in the quarter? And any expectations you can give us when we think about modeling in the Q1 2022 and beyond?

51:47 Elyse, thanks for the question. I think as I mentioned in my script, when we pull out the pandemic impacts for the full-year, our actual expected was exactly at 100%, you know right in line with our expectations. Now, inside of the quarters, that consisted of the first half of the year that was a little better than our expectations in the back half of the year, that was a little worse than our expectations. The quarter itself, the 24 million of underlying mortality, I think I mentioned this in the script. 52:18 It was driven actually by claims that occurred in the third quarter, but didn't get reported into the fourth quarter. Essentially, the IBNR was a little under stated at the end of the third quarter. Now, when you think about , I looked at it over the last few years. 52:39 If you sum up all the pluses and minuses, it adds up to exactly zero, but inside you will have some quarters where it’s a little low in some quarters where it's a little high, and then the third quarter happened to be one where we were just a little under accrued from standpoint and that hit us – that really drove to 24 million.

52:59 Okay. And then in terms of the Spark Initiative, I think you mentioned some more savings than expected came through in the quarter. Is there any sense you can give us the geography by segment? And then, is the right way to think about getting to the top end of that 5% to 7% target within group meeting in highs that we need to go through the whole Spark program and realized all of the expense savings or can you just help us think about, help us think about the timeframe there?

53:34 Elyse, let me speak to the second half of your question with respect to group margins. We're very confident in getting to the 5% to 7%. And as I mentioned, there's three components of that. That have about equal weight. The first one is the continuation of strengthening our pricing. We're getting good single-digit increases in pricing at the moment. 54:03 We expect that to help, and again, provide about a third – the improvement to the 5% to 7% over time. The second piece is, we're actually investing money in our claims management process. Systems and other types of new ways, running claims to get our claims management process, slightly better shaped than it is today. 54:36 And then the third one is the Spark Initiative. And so, it will develop over the next three years. So, once again, the in-force book of business is fine. We need to do some repricing in these three initiatives. Will get us to the 5% to 7% range over the next several years.

55:06 And then just in terms of the Spark savings, how they're trending through the segments, can you just give us a sense in the fourth quarter?

55:14 , I don't have any specific information segment by segment in the quarter, our expectation is that the 260 million to 300 million of run rate savings would be spread across the businesses, really in line with their level of expenses, compared to the total expenses. So, we expect it to be uniform when we – and how that will manifest in numbers you can see is that we expect our expense ratios to continue to climb as they've done for a long, long time across Lincoln.

55:51 Thank you.

55:55 Thank you. Our next question comes from Erik Bass with Autonomous Research. Your line is open.

56:01 Hi. Thank you. In the buffered annuity market, it looks like you’ve seated some market share in recent quarters, is this a reflection of more competition coming into the product? And are you seeing any signs of aggressive features or pricing in the market?

56:16 Erik, certainly a lot more – there are a lot more people offering the product. There's some unique product feature developments that I think are good for the space in general. We just continued to use the strength of our distribution, our pricing requirements, and sometimes together a little more market share sometimes last, but over time it's a good product, it's not guaranteed. 56:45 And back to what we've done so well in the annuity business, actually in all of our businesses, consistently in the market with good quality products delivering good consumer values, improving them, and paying a lot of attention to getting the right return on capital behind those products.

57:05 Got it. Thank you. And then as we think about ordinary dividend capacity for 2022, how much impact will there be from the high COVID loss in 2021? And will this have any material impact on cash flow to the holding company?

57:21 Erik, no. If you think about even the last two years, Indiana is a greater upstate, so our dividend capacity has been driven by the significant amount of capital inside of LNL. That was the case this year. We had no problem getting dividends out and no expectation that we’ll have any limitations in 2022 relative to our needs.

57:48 Got it. Thank you.

57:52 Thank you. And that's all the time we have for questions today. I'd like to turn the call back to Al Copersino for closing remarks.

58:00 Well, thank you all for joining us this morning. As always, we are happy to take any follow-up questions that you have. You can email us at InvestorRelations@LFG.com. Thank you all and have a great day.

58:14 This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by.