Good morning, and thank you for joining Lincoln Financial Group’s First Quarter 2023 Earnings Conference Call. [Operator Instructions] Now, I’d like to turn the conference over to Vice President of Investor Relations, Al Copersino. Please go ahead, sir.

Thank you. Good morning, and welcome to Lincoln Financial’s first quarter earnings call. Before we begin, I have an important reminder. Any comments made during the call regarding future expectations, including those regarding 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 2022 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 this call including adjusted income from operations or adjusted operating income and adjusted income from operations available to common stockholders to the most comparable GAAP measures. A slide presentation containing supplemental first quarter 2023 investment portfolio information is also posted on our website in the Investor Relations section. Presenting on today’s call are Ellen Cooper, President and CEO; and Chris Neczypor, Chief Financial Officer. 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 Ellen.

Thank you, Al, and good morning, everyone. During the first quarter, we continued to take the necessary steps and have made substantial progress to strengthen the balance sheet, improve our free cash flow and position the business for long-term sustainable growth. We have a differentiated business model, including a powerful distribution franchise, broad product offerings and a diversified, high-quality investment portfolio. These strengths have the foundation for successful execution of our enterprise priorities, and we will continue to focus on actions that deliver on our objectives. Our first quarter financial results were within the range we disclosed on last week’s call. Our earnings for the quarter reflect the 2023 headwinds we have discussed previously, such as higher expenses, lower prepayment income and the pressures highlighted in our Life Insurance business that we expect to begin to dissipate or be offset by larger positives in 2024 and beyond. Chris will go through the details of the headwinds in Life and where we see opportunity for improvement in its financial performance over time. Before discussing our business unit highlights, I will spend some time discussing our progress in executing our strategy. We are continuing to make headway in improving our capital position and our long-term cash flow profile with 3 of our businesses delivering solid free cash flow for the company. And the fourth, our Life business which will be improved post the close of the recently announced reinsurance transaction. We estimate the RBC ratio at the end of the first quarter to be approximately 380% and following the close of the reinsurance transaction, we expect to be closer to our near-term target of 400%. We also continue to expect to generate $300 million to $500 million of free cash flow this year before the impact of the reinsurance transaction and to…

Thank you, Ellen, and good morning, everyone. We appreciate everyone dialing in and listening to our call. I’m going to discuss 3 things this morning. First, we’ll go through the financial results for the quarter, then I’ll touch on capital and then we’ll finish up with details around our investment portfolio. So let’s start with the financial results. Last night, we reported first quarter adjusted operating income available to common stockholders of $260 million or $1.52 per diluted share. There are 2 items to call out as it relates to these results. The first is that alternative investments were $19 million below target or $0.11 per share. Second, our Annuities business had a favorable tax item of $11 million or $0.06 per share. Additionally, with this being the first quarter under the new accounting framework of LDTI, we reported a net loss available to common shareholders of $909 million or $5.37 per diluted share. The main difference between the net and adjusted operating income is the change in the market risk benefits and hedge instrument valuations. Offsetting this loss was a favorable MRB related item that flows through AOCI. As we’ve discussed, with the adoption of LDTI, we expect GAAP net income volatility to increase partly due to noneconomic drivers. Now turning to the segment results. Let’s start with the highlight, which was Group Protection. This quarter, Group Protection reported $71 million in operating income compared to a loss of $46 million in the prior year quarter. This significant improvement was primarily due to improved disability results driven by strategic investments in our business. In addition, as the pandemic turns to endemic, similar to what you’ve heard from peers, the impact on our earnings has declined. The loss ratio for Group Life was 80.4%, an improvement of 11 points from…

Thank you, Ellen and Chris. 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 one follow-up and then requeue if you have additional questions. With that, let me turn the call over to the operator to begin Q&A.

[Operator Instructions] We’ll take our first question from Erik Bass with Autonomous Research.

I was hoping you could talk more about your intermediate to longer-term strategic view on the individual Life business? And are there further things you can do to improve returns on the in-force block? And then bigger picture, do you still want to be one of the biggest sellers of Life Insurance? Or do you want to narrow the focus of the product set of either what you sell or what you’re retaining on your balance sheet?

So thank you for the question. And let me just start by saying that as we discussed in our upfront remarks, we were really, really pleased with the announcement of the transaction last week, and that really goes, first of all, to our focus on really trying to maximize the value of the in-force business. And we recognize that we have an in-force business that has -- that is legacy, and we have also communicated to all of you that it has a fair amount of pressure as it relates to free cash flow and also as it relates to our GAAP earnings. And at the same time, we feel really good about all of the business that we’re putting on the books. And so from an overall Life Insurance business, we feel good about the fact that we are in process right now of very much a capital-efficient product mix tilt that has us in this particular quarter with overall Life sales that are down year-over-year, but targeted, for example, in higher indexed universal life and lower term. And so we’re going to continue to execute on all of that as we go forward. And we’re also going to continue to look for ways to optimize the in-force. And as we mentioned last week, and we’ll say it again, we know we’re not done. So we’ve got more work to do there. I think importantly, the headwinds and, in particular, some of the potential for upside and normalization that Chris highlighted in his remarks, those will serve both in terms of improving the GAAP earnings’ profile as well as our free cash flow profile as we move forward.

And then you mentioned doing regular investment portfolio stress testing and appreciate the additional disclosure you gave. I was just hoping you could share some detail on maybe what are the outcomes from those stress tests and the estimated potential credit loss and ratings migration impacts on capital and stress scenario?

Sure. So I’ll take that question as well. So we have been talking for some time, first of all, about the fact that our investment portfolio, overall credit quality has been improving. And we saw, as Chris mentioned, the seventh consecutive quarter now of net positive ratings migration. We also have talked about the fact that we utilized a multi-manager framework across the entire portfolio. And so we leverage our external managers and their very professional advice in terms of how we think about potential scenarios and stress testing for particular economic scenarios. And so in those particular cases, we will go sector by sector, we will go name by name, and we will stress test, and we will then evaluate potential names and potential credits that may experience significant credit deterioration in the event of a credit cycle. And as a result of that, over the last 5 to 6 years, we’ve done some very significant derisking and also shifts in terms of the overall portfolio. So one of the things that we highlighted this morning was within our commercial mortgage loans. And I’ll come back to how we’re stressed to do that in a moment. But just to give you a sense of how this has worked in terms of the overall shift. So over the last couple of years, we have been shifting, first of all, away from public corporates. We have increased the overall credit quality. So if you look year-over-year, our single A and above has increased by about 200 basis points, and the decrease has come from -- we have a lower allocation now to overall BBBs. And within there, the lowest allocation that we’ve ever had to BBB- and BBB minuses on negative outlook, and our below investment grade has also decreased by…

Next, we’ll go to Tom Gallagher with Evercore ISI.

Just a few questions. I just want to confirm the $300 million to $500 million of cash flow for 2023. Is that after interest expense or before interest expense?

No, that’s after, Tom. So we create distributable earnings in the Life Insurance companies and LINBAR and so forth. And then we pay the interest expense as well as the preferred dividend as a use of that and what flexes what we think of as the free cash flow. So $300 million to $500 million is after all of the expenses at the holdco.

Got you. And then the other -- so pro forma, this deal, it would be $400 million to $600 million on an annualized basis?

Yes. I think that’s right. I mean I understand the math. Keep in mind that the deal itself creates about 15 points at close, right? But on a run rate basis, yes, we’re saying this year, $300 million to $500 million. And then for the deal itself, that will add $100 million going forward. We’ll talk more about 2024 and beyond later this year, but that’s the $100 million from the deal on a run rate basis is incremental free cash flow.

Next, we’ll go to Michael Ward with Citigroup.

I was just wondering if you could share any views on the S&P capital model changes. I know the new ones just came out yesterday, but just curious overall thoughts prior to yesterday.

So Michael, the S&P capital just came out, the revision just came out, I believe, yesterday as you noted. Our team, obviously, will go through that. I don’t -- we don’t have any specific comments for you today. What we can tell you is that we know that when the original updates came out, we were working very closely with S&P as well as with all of our peers. And at the end of the day, we work across the industry to really ensure that there are good models and that they are adequately capturing the potential risks and that we’re holding capital relative to that. And we believe that S&P in partnership with us and the rest of the industry wants to have a good model as well. And that’s one of the reasons why about a year ago, they took all of our comments and they came back with a revision. So more to come as we have the opportunity to go through it and speak to our peers, speak to S&P and see what the implications are.

Okay. Great. And then on the -- I guess, post the recent deal, just curious if that changes your outlook for capital deployment ability or timing. And then are there certain product lines that you have earmarked that you definitely want to stay in versus product lines from here that you would look to be doing more reinsurance deals?

So Mike, I’ll take this and then I’ll hand it over to Chris to add anything else. So I want to make clear that, first of all, we have been at really advancing relative to the strategic objectives that we communicated here for about 2 quarters. And we are very much focused on as, number one, the rebuild of capital; and number two is the improving of our ongoing capital generation. And we’ve talked to you about a number of initiatives that are underway, some of which we’re seeing immediate impacts such as the capital efficiency as it relates to our sales. And some of these are initiatives that are underway now where we’re seeing some level of improvement such as the Spark Initiative and our Group Protection margins, but some of this we’re going to see more as we go forward. Importantly, as we think about beyond 2023, we’re not yet going to prove experience doing a comprehensive review and will be back later this year with additional thoughts around a clear range and how to think about ‘24 and beyond.

Next, we’ll go to Jimmy Bhullar with JPMorgan Chase.

So first, just a question for Chris or maybe Ellen. The inclusion of the fixed annuity block in your deal that you did with Fortitude, was that just to improve the overall sort of attractiveness of what you were trying to transact for Fortitude or is there a strategic reason for deemphasizing fixed annuities?

Jimmy, it’s a good question. No. So look, stepping back, right, you can think about what we were trying to accomplish last year and into this year, as we were thinking about our strategic objectives, right? The goal was really how do we derisk the balance sheet. How do we create capital day 1? And how do we improve the free cash flow, right? So we focused with the GUL block as a starting point and then said, what is the right mix of liabilities to include with that to increase the attractiveness of the deal overall. And so where we landed was the optimal mix for us and the transaction was a combination of MoneyGuard, fixed annuities and GUL and that’s what ended up making the most sense for us. So nothing specific about the annuity block itself. But when you look at these transactions, you’re always trying to think about what is the maximum economics that you can create relative to the risk that you’re seeing.

That makes sense. And then on -- can you talk about your long-term RBC target? And I’m assuming it’s higher than 400%, given the business mix. But I think at one point from the outside in, it seems like you had to do deals to get to even 400%, but now you’re getting pretty close to that. But do you feel that you can get to whatever your target is longer term through just normal income and cash flow? Or do you feel that it’s reasonable to expect additional transactions over the next 1 to 2 to 3 years?

So Jimmy, that’s a great question. Let me step back and just talk to you about a couple of different ways to think about our free cash flow improving over time. And obviously, that would lead to growth in RBC. And as it relates to what we think the long-term target is, I would say that it will be over 400%, but we’re not -- we’re focused on getting back to 400% in the near term. But if you step back, right, and think about the free cash flow profile, I wouldn’t really say that there’s 3 things that would be drivers to improvement over time, right? So the first is that there’s a timing issue, right? And we’ve spoken to this in the past. If you think about the pre PBR Life products, right, the capital profile of them is not linear year-to-year, right? And so what we’re dealing with today is some of the increased reserves and capital associated with that block of business. But over time, that will lessen as a headwind. At the same time, as it relates to the GUL block, which we’ve talked about extensively, right, we’re dealing with some of the headwinds there. And so you’re building reserves and holding capital, but that also gets better over time as you naturally build to the level that you need to get to. So part of it is just timing. The second thing I would say is that we are, as Ellen mentioned, and we’ve talked about on multiple times, we’re being more efficient with the capital that we’re deploying, right? And so we’ve mentioned the fact that we’re deploying $300 million less new business capital a year and still trying to generate a similar level of sales and importantly, a similar level, if not…

Next, we’ll go to John Barnidge with Piper Sandler.

My question is about the commentary about Retail and Group Protection. Employee pay Group Protection sales was 70% from 57% a year ago, that quarter-to-quarter volatility with composition of products? Or kind of what level are you trying to get there?

Sure. So John, I’ll take that. So first of all, as we look in particular at Group Protection, and we’re clearly seeing a very strong overall supportive macro environment for the growth in terms of topline and also in terms of overall margin and profitability. So just when you think about, for example, the fact that we’ve been in a period of higher wage inflation, number one; number two, tighter labor market where it’s that much more important for employers to be providing strong benefits to their overall employees. So that’s one thing that’s very important. Secondly, as it relates to that wage inflation and additional dollars in the pockets of the employees, we are seeing an increase, and we saw it again in the first quarter of more employee direct participation in overall benefits. So the experience that we had in the first quarter and be mindful also that for us, first quarter represents about 16% of the overall sales for Group Protection for the year. But in the first quarter, we saw our overall sales were up year-over-year by 22%. And within that 22%, about a 50% overall increase in employee pay, so employees electing their own voluntary benefits. And then within the overall sales, about 25% of those overall sales were in supplemental health. And so we have been very much focused on growing supplemental health. Not only are they important benefits for overall employees and really they also, from an overall margin perspective, they will be very supportive of our long-term goals of sustaining our margins at around the 7% range. So we feel really, really good about that. And just overall, in general, as it relates to the overall Group Protection business and what we’re seeing there, I’ll make a couple of other comments. We are very focused -- while we talked about the fact that overall premium grew 7% year-over-year. We are very focused on premium growth that meets our overall objectives, capital efficient, driving profitable growth, and we recognize also that the value proposition within group is not solely about price. It’s also about the overall customer experience, customer satisfaction. And so we’re doing an awful lot to invest in the business. We’re investing in the claims organization. We’re investing in the technology to really improve the overall experience and differentiate ourselves. And so we really believe that this, at the end of the day, is a real opportunity for us going forward to continue to really focus on the overall growth of this business, and we’re excited to be reporting back to you as we continue to grow the business.

My follow-up. Can you talk about maybe how Annuity and Life Insurance surrender activity trended as the quarter progressed? Was there a step function higher in March, given some of the volatility in the market that emerged?

John, it’s Chris. Sure. It’s a good question. And you can see in the stats up increased surrender rates in the annuity block. What I would tell you is a couple of things. One, surrenders were in line with expectations, right? And so given the rate environment, the surrender profile looks as we would expect. The second thing is, just keep in mind, we aren’t a giant fixed annuity rider historically. We love the product, and we have decent sales there and so forth. But relative to our peers, in some cases and just thinking about the overall mix of our business, fixed annuities has not been as big of a sales driver for us going back a long way. And so when you look at our portfolio, we do have elevated surrenders relative to the past couple of quarters, but that’s to be expected with a higher interest rate environment. And then the last thing I would say is when you look at our numbers, they’re on a gross basis, right? And so we have some relatively large fixed annuity reinsurance deals. And so there will be an offset as it relates to the ceded surrenders that flows through in the net aggregated line. So hope that helps.

Next, we’ll go to Ryan Krueger with KBW.

I had a question on the reinsurance transaction. Is there any residual exposure from experience on the block over time? Or was 100% of the risk on those ceded blocks fully co-insured?

So Ryan, that’s a good question. I mean you’re always retaining some risk, right? So in the case of this transaction, we are retaining the risk of future YRT increases on GUL as an example, but we think the risk is manageable. We’ve recently renegotiated rates on the majority of that. I think the number was close to 80%. So it’s a complex deal. There will be risk that we retain as part of any transaction. But if you’re asking about the YRT, that’s how I would answer that.

Makes sense. And then you mentioned that you feel like you have -- you’re in an excess capital position at LINBAR at this point. Would you anticipate being in a position to reducing dividends out of LINBAR in 2024?

So great question, Ryan. A couple of things. One, so we are seeing excess capital there, but I would say markets were up 7% in the quarter. So we have a little bit of time to see how the year progresses. I would say that we would feel comfortable taking excess capital out later this year as we watch the hedge program perform. As I mentioned in the script, our hedge program performed really well in the first quarter, but we want to see a couple more quarters before we think about taking excess capital out. The other thing I would mention is just from a dividend perspective, going forward, you will see dividends coming out of LINBAR on a more regular basis. And so this quarter, we took $100 million out, but I wouldn’t characterize that as all free cash flow. So starting this year, there’s a holding company expense related to the hedge program in LINBAR, that’s paid out of the holding company, but it has an offsetting interest income stream in LINBAR. So you’ll see dividends on a more regular basis to some degree, but it’s really covering some of the holding company expense. So as it relates to the excess capital behind the VA block, the hedge program is performing well, but we want to see a couple more quarters before we start to think about taking some of that up to the holding company.

And that concludes today’s question-and-answer session. And it’s all the time we have for today. I’ll now turn the call back over to Al Copersino for any additional or closing remarks.

Thank you all for joining us this morning. We’re happy to take any follow-up questions you have, you can e-mail us at investorrelations@lfg.com. Thank you, and have a good day.

And that does conclude today’s conference. We thank you for your participation. You may now disconnect.