Transcription
Corrected Transcript30-Apr-2015Lincoln National Corp.(LNC)Q1 2015 Earnings CallTotal Pages: 201-877-FACTSET www.callstreet.comCopyright 2001-2015 FactSet CallStreet, LLC
Lincoln National Corp. (LNC)Corrected TranscriptQ1 2015 Earnings Call30-Apr-2015CORPORATE PARTICIPANTSChristopher A. GiovanniRandal J. FreitagSenior Vice President & Head-Investor RelationsChief Financial Officer & Executive Vice PresidentDennis R. GlassPresident, Chief Executive Officer & Director.OTHER PARTICIPANTSSuneet L. KamathErik J. BassUBS Securities LLCCitigroup Global Markets, Inc. (Broker)Ryan J. KruegerHumphrey Hung Fai LeeKeefe, Bruyette & Woods, Inc.Dowling & Partners Securities LLCSeth M. WeissRandy BinnerBank of America Merrill LynchFBR Capital Markets & Co.Thomas George GallagherEric N. BergCredit Suisse Securities (USA) LLC (Broker)RBC Capital Markets LLCSteven D. SchwartzRaymond James & Associates, Inc.MANAGEMENT DISCUSSION SECTIONOperator: Good morning, and thank you for joining Lincoln Financial Group's First Quarter 2015 EarningsConference Call. At this time, all lines are in listen-only mode. Later we will announce the opportunity forquestions and instructions will be given at that time. [Operator Instructions]At this time, I would like to turn the conference over to the Senior Vice President of Investor Relations, ChrisGiovanni. Please go ahead, sir.Christopher A. GiovanniSenior Vice President & Head-Investor RelationsThank you, Liz. 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 futureexpectations, trends and market conditions including comments about sales and deposits, expenses, income fromoperations, and liquidity and capital resources are forward-looking statements under the Private SecuritiesLitigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties that could causeactual results to differ materially from current expectations. These risks and uncertainties are described in thecautionary statement disclosures in our earnings release issued yesterday and our reports on Forms 8-K, 10-Q and10-K filed with the SEC.21-877-FACTSET www.callstreet.comCopyright 2001-2015 FactSet CallStreet, LLC
Lincoln National Corp. (LNC)Q1 2015 Earnings CallCorrected Transcript30-Apr-2015We appreciate you participating today and invite you to visit Lincoln's website, www.lincolnfinancial.com whereyou can find our press release and statistical supplement, which include a full reconciliation of the non-GAAPmeasures used in the call, including income from operations and return on equity to their most comparable GAAPmeasures.So presenting on today's call are Dennis Glass, President and Chief Executive Officer; and Randy Freitag, ChiefFinancial Officer. After their prepared remarks, we will move to question-and-answer portion of the call.I would now like to turn things over to Dennis.Dennis R. GlassPresident, Chief Executive Officer & DirectorThank you, Chris, and good morning, everyone. Operating earnings per share once again increased over the prioryear quarter, albeit slightly, as operating earnings were down due to elevated mortality in Individual Life and poorGroup Protection results. We acknowledge that the start to the year was lower than analysts' projections, but weremain comfortable with our financial planning and business targets. Our confidence is grounded on severalfronts.First and foremost, our broad and deep distribution franchise consistently gives Lincoln a competitive advantage.This enables momentum and long-term revenue and earnings drivers to continue. We saw this in the first quarterwith positive net flows in all of our businesses, sales that benefited from various product introductions andrefinements which resulted in good sales growth as the quarter progressed and has continued in April, accountvalue growth in every business with total balances up 6% to a record 222 billion.Next, we have a rigorous approach to expense management. This quarter, we once again saw our expense ratiodecrease from the prior year. Also, our balance sheet strength and capital generation enables us to complementorganic earnings with capital management, further augmenting earnings per share growth.All of this supports key shareholder metrics, several of which showed impressive growth this quarter includingbook value per share excluding AOCI increasing 9% from the prior year, the repurchase of 350 million of Lincolnshares, a post-financial crisis high, and a 25% year-over-year increase in our common stock dividend. While ourROE was negatively impacted by the earnings items I noted upfront, our ROE in a seasonally weak quarter and inthe midst of a continued turnaround in Group Protection exceeded 11% which is consistent with returns generatedby our peers during 2014. That being said, we clearly expect our ROEs to recover and remain above peers.Let me now turn to our business lines starting with Annuities. Favorable equity markets and positive net flows ledto a 7% increase in our average account balances and another solid earnings quarter. Our consistent marketpresence continues to produce quarterly sales in the 3 billion range and positive net flows. Variable annuitydeposits of 2.7 billion decreased 8% from the first quarter of last year, but we are encouraged by the salesmomentum we saw over the course of the first quarter.To provide some context, average daily sales in March were up 15% compared to January and February. And thistrajectory has continued in April. As a result, we expect quarterly annuity sales to exceed 3 billion in the nextquarter, which should also enhance net flows. We remain focused on pushing the percentage of variable annuitysales from products without living benefits to 30%. This quarter, we reached 27%, up from 19% in the prior-yearperiod making the seventh straight quarter of sequential increases.31-877-FACTSET www.callstreet.comCopyright 2001-2015 FactSet CallStreet, LLC
Lincoln National Corp. (LNC)Q1 2015 Earnings CallCorrected Transcript30-Apr-2015When factoring in the impact of sales from sales covered by our reinsurance treaty, nonguaranteed productscomprised 58% of total VA sales. Our consistent market presence and proven track record of offering valuablecustomer solutions that also enable Lincoln to achieve good returns and manage risk still holds true today. In a VAmarketplace that remains rational, we are confident we are positioned for growth.Turning to Individual Life, total Life Insurance sales in the quarter were 153 million, a 6% increase from theprior-year quarter. With one of the broadest product portfolios in the industry, we continue to deliver growth witha diversified mix of sales and by selling more products without long-term guarantees. This quarter, no singleproduct represented more than 29% of total production, down from 32% last year; and 62% of our sales did nothave long-term guarantees, up from 59% in the prior-year quarter.Equally important, within each product, we have different features and options that enable our distributors toexpand consumer reach, but also give Lincoln another tactic to diversify risk. An example of this is ourMoneyGuard product where roughly half of our sales this quarter were flex pay and the other half single pay. Thisreduces interest rate sensitivity.Focusing on Individual Life Insurance, sales decreased 2% in the quarter; however, similar to my prior commentsaround variable annuity sales, we are encouraged by the sales momentum we saw in March and the carry-throughto April. Also of note, most products contributed to this momentum.COLI and BOLI sales were 14 million in the quarter compared with just 3 million in the prior-year quarter. Ouroutlook and appetite for COLI and BOLI has not changed, as we will remain opportunistic. Overall sales here meetthe same 12% to 15% return hurdle we target for our entire Life portfolio.Looking forward, while we did see a bump in mortality, which Randy will speak to later, we expect profitable salesgrowth in 2015 given the depth and breadth of our distribution relationships and product diversity combined withprudent underwriting.Turning to Group Protection, Randy will touch on our operating earnings loss shortly. The lack of earningsimprovement is disappointing but does not change our expectations of approaching our target margins toward theend of 2016 to 2017 timeframe. We are beginning to see traction on the actions we have been implementing andare encouraged by the underlying pricing and claims management trends. We remain focused on taking pricingactions aiming at our employer-paid businesses and enhancing claims management to restore profitability.First quarter sales of 56 million were down 13% from the same period last year. Our pricing actions continued toput downward pressure on new business opportunities particularly in the 1,000-plus market which historicallyhas been a more competitive segment of the market. Looking forward, we see sales growth remaining pressured aswe continue to push for rate increases.In Retirement Plan Services, earnings were impacted by some spread compression through, though we areencouraged by underlying business drivers. Notably, we returned to positive net flows. Flows of 115 millionimproved significantly when measured against outflows in the fourth quarter and prior-year quarter. Positive netflows in the first quarter is consistent with our year-end outlook that called for positive net flows for the first halfof 2015. Our optimism and visibility now extends through the third quarter.A few pieces to this outlook: First, our pipeline is strong. This should benefit first year sales in the next couple ofquarters. Also, our expectations around retention remain favorable. We attribute this to our constant traded efforton improving planned sponsor and participant experiences. We remain optimistic on the growth outlook for our41-877-FACTSET www.callstreet.comCopyright 2001-2015 FactSet CallStreet, LLC
Lincoln National Corp. (LNC)Q1 2015 Earnings CallCorrected Transcript30-Apr-2015Retirement business. Longer term, our core markets are poised to grow faster than the industry while continuedexpansion into the segments like government and small markets bode well for Lincoln.Turning to distribution, the depth and breadth of our retail wholesale and worksite teams continues todifferentiate Lincoln. We currently have over 1,400 client-facing professionals, up 4% versus the prior year. Thenumber of producers selling Lincoln products is 63,000 strong and 26% of them are cross-selling, up from theprior year. As we have discussed in the past, our large distribution force enables our mix shifts, for example ourfocus on growing variable annuities without guarantees. We now have almost 13,000 producers selling VAswithout guarantees, up 26% from a year ago. At Lincoln Financial Network, we had 163 experienced advisorschoose to affiliate with Lincoln this quarter, which puts our advisory network at more than 8,300 including a 2%increase in registered reps.Spending a minute on investment management, our new money purchases of 2.8 billion in the first quarter wereinvested at an average yield of 3.8%, which was down from the 4.3% in the fourth quarter primarily driven by thedrop in treasury rates as well as an asset mix which fluctuates from quarter to quarter. We delivered a 186 basispoint spread on new money over the average 10-year treasury, which is strong and consistent with our historicalexperience. Our yield-enhancing debt program continues to add value to our core investment strategy and added12 basis points to new money rates in the quarter. Income from alternative investments was 8 million for thequarter, which was below the prior year's quarter as well as our historical average. This result was driven byheadwinds from our energy exposure, which we believe has stabilized.Before wrapping up, I want to briefly discuss Department of Labor's fiduciary standards proposal. As you haveheard from other management teams, this is a voluminous and complex proposal and like most financial servicecompanies, we are reviewing the proposal to understand all of its potential implications. As with all pertinentregulatory matters, there is a process and the details are very important. We will be very engaged, express ourviews as well as collaborate with various industry trade groups. In the end, there likely will be some change. Webelieve companies with scale, a broad set of product offerings, and a strong and diverse distribution franchiseswith a proven ability to pivot in response to marketplace or regulatory changes will be best positioned to navigatechanges. Clearly, we are confident on all these fronts and expect this to once again differentiate Lincoln.In closing, I recognize the year started slower than many expected. However, I do not expect seasonal fluctuationsin mortality to define our year. Our franchise remains a competitive advantage, while our sales and flows outlookare strong. Both will enable our long-term revenue and earnings momentum to continue.I will now turn the call over to Randy.Randal J. FreitagChief Financial Officer & Executive Vice PresidentThank you, Dennis. Last night, we reported income from operations of 352 million or 1.35 per share for the firstquarter, up 1% from the prior year. Consistent with first quarter results the past two years, we experiencedelevated mortality, which negatively impacted earnings by 30 million compared to 18 million last year. As youknow, we do not normalize for mortality as it will fluctuate from quarter to quarter; however, we felt the deviationrelative to our expectation was large enough that it should be mentioned.Looking at key performance metrics, the top line continues to show healthy mid-single-digit growth withoperating revenue up 5% for the quarter driven by another quarter of positive net flows and the benefit offavorable equity markets. We remain focused on managing expenses which again drove margin expansion as the51-877-FACTSET www.callstreet.comCopyright 2001-2015 FactSet CallStreet, LLC
Lincoln National Corp. (LNC)Q1 2015 Earnings CallCorrected Transcript30-Apr-20154% growth in G&A net of capitalized expenses trailed revenue growth. It is also worth noting the elevatedexpenses, which I attributed to seasonality in the fourth quarter, did normalize.Book value per share excluding AOCI grew 9% to 49.70, an all-time high. As Dennis noted, operating return onequity came in at 11.2%, negatively impacted by the adverse mortality and poor results in Group Protection. Ourbalance sheet remains an important source of strength which gives us significant financial flexibility. Net incomeresults for the quarter were negatively impacted by 28 million from variable annuity net derivative losses and 10 million of losses within our general account.Now I will turn to segment results and start with Annuities. Reported earnings for the quarter were 239 million,an 11% increase over last year. Operating revenues increased 9% from the first quarter of 2014 as positive netflows continued and we benefited from further tailwinds in equity markets, which combined drove a 7% increasein average account values that reached 123 billion at the end of the quarter.Return metrics whether measured by ROA or ROE remain strong. ROA increased 3 basis points versus the prioryear and stands at 78 basis points while ROE came in at 25%, consistent with the fourth quarter. We continue toexpect profitable growth in deposits and net flows which will add to our record asset levels and drive furtherupside to Annuities earnings.In Retirement Plan Services, we reported earnings of 35 million. First quarter revenue growth was up 1% yearover-year. Account values benefited from positive net flows in the first quarter along with favorable equity marketperformance. As a result, account values increased sequentially and ended the quarter at 55 million, up 5%versus the prior year. Normalized spreads compressed 13 basis points versus the prior-year quarter consistentwith our expectations for spreads to decline by 10 basis points to 15 basis points annually in the Retirementbusiness. Our return on assets was 26 basis points for the first quarter, within the 25 basis point to 30 basis pointrange we have discussed in the past.Turning to our Life Insurance segment, earnings of 111 million were down as a result of the fluctuations inmortality. 26 million of the quarter's adverse mortality hit the Life Insurance segment versus 18 million in theprior-year quarter. As we have discussed in the past, our focus on retaining more mortality exposure, combinedwith the business recaptured at year-end should lead to some increase in quarterly volatility. And looking atmortality experience in the current quarter and understanding that we don't yet have complete information, we dobelieve the severe winter weather and flu season likely played a part in our experience, consistent with commentsmade from others in the industry.It is worth noting that we typically have seen seasonally high mortality in the first quarter, only to see mortalityimprove over the course of the year. To provide some context, Individual Life's first quarter earnings for the pastcouple of years have averaged 20% of full-year earnings. So while Life's first quarter results were once againnegatively impacted by elevated mortality, we expect that when viewed over more extended period of time,experience will be in line with our longer term expectations.It is also worth mentioning that our outlook for the business we recaptured at year-end has not changed. Notably,it will have a modest negative impact on the Individual Life earnings and slightly increase our quarterly earningsvolatility, but be accretive to EPS given the benefit of incremental share buybacks.Turning quickly to the Life earnings drivers, average account values were up 5% with average in-force baseamount up 4% both consistent with recent performance. Normalized spreads came in around 166 basis points,down 5 basis points from the prior year, once again in line with our expectations. Group Protection fell short of61-877-FACTSET www.callstreet.comCopyright 2001-2015 FactSet CallStreet, LLC
Lincoln National Corp. (LNC)Q1 2015 Earnings CallCorrected Transcript30-Apr-2015expectations, as we reported a loss from operations of 6 million in the first quarter compared to a gain of 20million the prior year. The earnings do mask significant sequential improvement in key metrics.Our non-medical loss ratio improved from 81% in the fourth quarter of last year to 78% this quarter. Importantly,our dis
Lincoln National Corp. (LNC) Q1 2015 Earnings Call Corrected Transcript 30-Apr-2015 1-877-FACTSET www.callstreet.com 2 . LLC When factoring in the impact of sales from sales covered by our reinsurance treaty, nonguaranteed products comprised 58% of total VA sales. Our consistent market presence and proven track record of offering valuable
