Lincoln(US:LNC)2023-05-10 19:48Financial Data and Key Metrics Changes - The company reported first quarter adjusted operating income available to common stockholders of $260 million or $1.52 per diluted share, with alternative investments falling short by $19 million or $0.11 per share [18][19] - A net loss available to common shareholders was reported at $909 million or $5.37 per diluted share, primarily due to changes in market risk benefits and hedge instrument valuations [19][20] - The estimated RBC ratio at the end of the first quarter was approximately 380%, with expectations to reach closer to 400% post-reinsurance transaction [46][34] Business Line Data and Key Metrics Changes - Group Protection reported operating income of $71 million, a significant improvement from a loss of $46 million in the prior year quarter, driven by better disability results [21] - Annuities delivered operating income of $274 million, down from $317 million in the prior year quarter, primarily due to lower account values and higher expenses [25] - Retirement Plan Services reported operating income of $43 million, down from $58 million, largely due to lower prepayment income and higher expenses [27] Market Data and Key Metrics Changes - Group Protection sales increased by 22%, with a notable 50% growth in employee-paid sales [53] - Indexed Universal Life sales rose by 34%, marking a record first quarter for IUL sales, while overall Life Insurance sales decreased by 16% [49] - Retirement Plan Services net flows were strong at $535 million, supported by a high-touch customer experience [53] Company Strategy and Development Direction - The company is focused on improving capital efficiency and free cash flow generation, with initiatives like the Spark Initiative and a repositioned VA hedge program [8][48] - The strategy includes a shift towards a more capital-efficient product mix, particularly in Life Insurance, with a focus on Indexed Universal Life [59] - The company aims to strengthen its balance sheet and reduce financial leverage while maintaining financial flexibility for long-term sustainable value creation [48] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the ongoing improvement of the capital position and long-term free cash flow profile, despite headwinds in the Life business [39][32] - The company anticipates that many of the current headwinds will normalize over the next few years, leading to improved GAAP earnings and free cash flow [60][31] - Management highlighted the importance of strategic investments in technology and distribution to support growth in Workplace Solutions businesses [52] Other Important Information - The company reported a high-quality investment portfolio, with 97% of the portfolio being investment grade and a focus on disciplined credit risk management [35] - The commercial mortgage loan portfolio is primarily composed of high-quality loans, with a significant reduction in office exposure [36][38] - The recent reinsurance transaction is expected to enhance free cash flow by over $100 million annually and improve the RBC ratio by about 15 points at close [34][66] Q&A Session Summary Question: Strategic view on the individual Life business and potential improvements - Management acknowledged the need for further optimization of the in-force business and emphasized a capital-efficient product mix shift [11][60] Question: Confirmation of cash flow expectations for 2023 - The company confirmed expectations of $300 million to $500 million of free cash flow for 2023, after interest expenses [65] Question: Thoughts on S&P capital model changes - Management indicated that they would review the new S&P capital model and work closely with S&P to ensure it captures potential risks adequately [68] Question: Inclusion of fixed annuity block in the recent deal - The decision to include the fixed annuity block was strategic to enhance the attractiveness of the transaction and improve free cash flow [72] Question: Trends in annuity and life insurance surrender activity - Surrender rates in the annuity block increased as expected due to the higher interest rate environment, but overall surrenders were in line with expectations [92][106] Question: Residual exposure from the reinsurance transaction - Management confirmed that some risk is retained in the transaction, but it is considered manageable [108] Question: Outlook for capital deployment ability post-transaction - Management expressed confidence in improving capital deployment and free cash flow generation over time, with a focus on capital efficiency [85][100]