Transcription
Corrected Transcript30-Jul-2015Lincoln National Corp.(LNC)Q2 2015 Earnings CallTotal Pages: 211-877-FACTSET www.callstreet.comCopyright 2001-2015 FactSet CallStreet, LLC
Lincoln National Corp. (LNC)Corrected TranscriptQ2 2015 Earnings Call30-Jul-2015CORPORATE PARTICIPANTSChristopher A. GiovanniRandal J. FreitagSenior Vice President & Head-Investor RelationsChief Financial Officer & Executive Vice PresidentDennis R. GlassPresident, Chief Executive Officer & Director.OTHER PARTICIPANTSJamminder S. BhullarColin W. DevineJPMorgan Securities LLCJefferies LLCSteven D. SchwartzMike E. KovacRaymond James & Associates, Inc.Goldman Sachs & Co.Suneet L. KamathJay H. GelbUBS Securities LLCBarclays Capital, Inc.Robert R. GlasspiegelJanney Montgomery Scott LLC.MANAGEMENT DISCUSSION SECTIONOperator: Good morning, and thank you for joining Lincoln Financial Group's Second Quarter 2015 EarningsConference Call. At this time, all lines are in a 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 now like to turn the conference over to Senior Vice President of Investor Relations, ChrisGiovanni. Please go ahead, sir.Christopher A. GiovanniSenior Vice President & Head-Investor RelationsThank you, Bridgette. Good morning, and welcome to Lincoln Financial's second quarter earnings call. Before webegin, I have an important reminder. Any comments made during the call regarding future expectations, trendsand market conditions, including comments about sales and deposits, expenses, income from operations andliquidity and capital resources are forward-looking statements under the Private Securities Litigation Reform Actof 1995. These forward-looking statements involve risks and uncertainties that could cause actual results to differmaterially from current expectations. These risks and uncertainties are described in the cautionary statementdisclosures in our earnings release issued yesterday and our reports on Forms 8-K, 10-Q and 10-K filed with theSEC.We appreciate your participation 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-GAAP21-877-FACTSET www.callstreet.comCopyright 2001-2015 FactSet CallStreet, LLC
Lincoln National Corp. (LNC)Q2 2015 Earnings CallCorrected Transcript30-Jul-2015measures used in the call, including income from operations and return on equity, to the 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 the question-and-answer portion of the call.I would now like to turn the call over to Dennis.Dennis R. GlassPresident, Chief Executive Officer & DirectorThank you, Chris. And good morning, everyone. Operating earnings per share increased over the first quarter ofthis year, as we saw significant earnings improvement in our Group Protection business. Elevated mortality inIndividual Life, driven by abnormally-high claims severity, resulted in EPS being roughly flat versus the prior-yearquarter. Excluding notable items in both periods, EPS would have increased mid-single-digits.Positive momentum in key business drivers across our four segments is encouraging and supports our growth,profitability and capital management initiatives.Let me quickly touch on each of these areas before commenting on segment results. First, growth. In the secondquarter, sales, compared to the first quarter, increased 9% or more in all of our businesses and we continued tobenefit from various product introductions and refinements. Importantly, our mix of sales is increasinglydiversified and returns on new business remain very, very attractive. We also, once again, generated positive netflows in every business, which contributed to total average account values being up 6% to a record 224 billion.Next, turning to profitability. We are encouraged by the earnings improvement we saw this quarter in GroupProtection as management actions, aimed at restoring profitability, are beginning to gain traction. Total earningsprogress was masked by adverse Individual Life mortality, but our positive outlook for this business has notchanged, and I hope you will get a better sense of our earnings potential in a more benign Individual Life mortalityquarter and as Group Protection continues to recover.Lastly, capital management. Our balance sheet remains a source of strength and capital generation continues tosupport active capital management with another 150 million of share repurchases completed in the quarter. Wehave put more than 2.5 billion towards buybacks over the past four years, driving our share count to a postmerger low.Now turning to our business lines, starting with Annuities. It was another quarter of great results, as our highquality income stream continues to grow. Total annuity sales of 3.4 billion were consistent with the outlook weprovided in the first quarter. Recall we expected sales to exceed 3 billion. Sales grew 13% from the first quarterand increased sequentially for the first time in the last year, a testament to our consistent approach to the marketand our commitment to this high return business.Variable annuity sales totaled 3 billion, and our strategic goal to increase the percentage of VA sales fromproducts without living benefits to 30% has almost been attained. This quarter, we reached 28%, marking theeighth straight quarter of sequential increases. When factoring in the impact on sales covered by our reinsurancetreaty, non-guaranteed products comprised 59% of total VA sales.An important contributor to this risk diversification strategy has been the very successful launch of InvestorAdvantage, our investment focused VA product, that provides an efficient platform for account value performance.31-877-FACTSET www.callstreet.comCopyright 2001-2015 FactSet CallStreet, LLC
Lincoln National Corp. (LNC)Q2 2015 Earnings CallCorrected Transcript30-Jul-2015It is worth noting that in the first year, Investor Advantage sales exceeded 650 million, marking another verysuccessful pivot for Lincoln.Net flows totaled nearly 400 million, more than double first-quarter levels. When combined with favorableequity markets through most of the second quarter, average account balance increased 6% to 126 billion, all ofwhich supported another solid earnings quarter.We have produced a track record of consistent, high-quality annuity earnings. We expect this to continue as newbusiness returns remain attractive. Demographic tailwinds still support product demand. And we believe ourdisciplined approach to risk management, combined with product innovation, will enable us to respond to futurechanges in the marketplace.Turning to Individual Life, we recognize there will be a focus on our second straight quarter of adverse mortality.We continue to view this as a fluctuation in mortality, and note the underlying experience in each quarter was verydifferent. Randy will touch on this later.In terms of sales, total life insurance sales in the quarter were 201 million, a 17% increase from prior-yearquarter, as results benefit from a large COLI sale. Sales across our aggregate life portfolio continue to achieve our12% to 15% hurdle rate for returns.The strength of our distribution, along with product breadth, enables us to advance our product portfoliodiversification, including selling more products without long-term guarantees. This quarter, no single productrepresented more than 23% of our total production, an improvement from last year, and 73% of our sales did nothave long-term guarantees, up from 58% in the prior year quarter.Focusing on individual life insurance, sales increased 12% sequentially as the strong momentum we discussed onour first quarter earnings call was sustained. MoneyGuard sales increased 15% over the prior-year quarter, as weare benefiting from the expansion of our MoneyGuard II product, which we released in 2014. Indexed universallife sales are growing as the marketplace adapts to new illustration requirements that take place beginningSeptember 1. Growth in these two products is being offset by decline in VUL and term, though we expect newproduct launches to help drive future sales in these products.Our outlook for the Life Insurance business remains positive. Drivers continue to indicate mid-single-digitearnings growth as our diversified product portfolio, combined with depth and breadth of our distribution,distinguishes Lincoln in the marketplace.Turning to Group Protection. As I noted earlier, we are encouraged by the earnings improvement this quarter andreiterate that we expect to approach our target margin range of 5% to 7% by late 2016, early 2017. Second-quartersales of 62 million were down 15% compared to the prior-year quarter. Our pricing actions continue to putdownward pressure on new business opportunities, and we expect sales growth to remain soft as we move throughthe year.We continue to make inroads on our targeted strategy to further expand the employee-paid voluntary market.This is an important element in our overall strategy to achieve and sustain profitable growth in this business. Inthe quarter, 44% of our sales were employee-paid, up slightly year-over-year.So, the bottom line in Group Protection is we are encouraged by the earnings improvement we saw this quarter;management actions aimed at restoring profitability are gaining traction and position us well to achieve our targetmargin range.41-877-FACTSET www.callstreet.comCopyright 2001-2015 FactSet CallStreet, LLC
Lincoln National Corp. (LNC)Q2 2015 Earnings CallCorrected Transcript30-Jul-2015In Retirement Plan Services, earnings were impacted by higher expenses, in part related to investments for futuregrowth combined with lower spread income, though underlying business drivers remain firmly intact. Secondquarter deposits of 1.9 billion were up 3% from a year ago, and included growth in both recurring deposits andfirst year sales. Deposits increased 9% sequentially due to a pick-up in first year sales activity. We believe thismomentum is driven by investments we are making in our sales force and technology, and we expect to benefitfurther from these investments over time as we grow into our improved infrastructure.Net flows remain a strong story in our Retirement business. Net flows of 306 million in the quarter increased ouryear-to-date total to 422 million, compared to just 5 million in the prior quarter (sic) [period] (11:24). Successis being driven by a number of factors, including strong sales momentum in the mid-large market, where we havehad nearly three times as many wins compared to this time last year.Our pipeline remains strong. And as a result, our outlook for positive net flows is intact and we now expect flowsin the third quarter to exceed the second quarter, marking the third straight quarter of sequential growth. Fourthquarter is when we typically see large case movement, which reduces our ability to forecast net flows at this point,but we can provide more insight next quarter.In distribution, we had another strong quarter. The depth and breadth of our retail, wholesale and worksite teamscontinue to be a differentiator, enabling us to drive sequential increase in sales I noted in my business segmentcommentary. Distribution also enables us to shift our business mix. Notably, 69% of our total sales did not havelong-term guarantees, up from 62% a year ago.We continue to invest in and grow our client-facing professionals, as total head count now stands at over 1,400, up3% versus the prior year. These professionals help tell our compelling story to the 64,000 producers that soldLincoln products over the past year and the 91,000 that have sold our products in the last 24 months. You'veheard me say many times that distribution is a competitive advantage for Lincoln, and I expect this to continue asour strong diverse distribution franchises are well positioned to navigate future product and marketplace changes.And briefly on investment management, we put new money to work in the second quarter at an average yield of4.3%, which was up from 3.8% in the first quarter, as we benefited from rising market yields and asset mix. Wecontinue to see value in less liquid asset classes where yields and underlying fundamentals remain attractive. Weare not reaching for yield in below-investment-grade assets which represented 4.4% of purchases this quarter andis less than our total portfolio's below-investment-grade assets of 5.2%. Alternative investment income improvedto 28 million compared to 8 million in the first quarter, with positive contributions from both our privateequity and hedge fund strategies.Lastly, with respect to the Department of Labor fiduciary standards proposal; consistent with the DOL's goals, wewant Americans to buy the right product at the right price with a complete understanding of the cost and benefits.The tug and pull is around how best to achieve these objectives. We submitted comment letters last week with ourrecommendations, as did a number of other industry participants and major trade associations. Importantly, theDOL seems to be showing a willingness to listen and make changes to the proposal.We recognize there are questions on the implications to our business. However, it is still early and hard to predictwhere this will end up. I would say, if there is short-term sales disruption, lowering sales for some reason, wewould be able to reallocate capital to share buybacks to blunt much of the earnings-per-share impact. Over thatperiod, we would be very active pivoting to new products, expanding our reach in existing markets, whileaccessing our broad and diverse set of producers to drive future sales growth. You have seen us do this repeatedly51-877-FACTSET www.callstreet.comCopyright 2001-2015 FactSet CallStreet, LLC
Lincoln National Corp. (LNC)Q2 2015 Earnings CallCorrected Transcript30-Jul-2015and very effectively across all product lines in the past 36 months, and I'm confident we will once again respond tomarketplace or regulatory changes effectively.In closing, I'm very pleased our actions taken to restore profitability in Group Protection are gaining momentum.Our investments in RPS position us well for future growth, while in our Life business drivers continue to indicatemid-single-digit earnings growth potential. In Annuities, we once again grew our high-quality income stream.Bottom line, as we continue to see sales grow with very attractive new business returns across our franchise, weare confident future earnings growth will follow.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 371 million or 1.46 per share for thesecond quarter. Excluding notable items, EPS increased 4% year-over-year, as this quarter was negativelyimpacted by 0.03 while last year second quarter benefited 0.04.This year's results were also negatively impacted 28 million from elevated mortality in Individual Life due toseveral large claims. As you know, we do not normalize for mortality as it will fluctuate from quarter to quarter.However, we felt the abnormally high claims severity should be noted.This quarter, we produced positive results in several key performance metrics. The top line, once again, postedhealthy mid-single-digit growth, with operating revenue up 4%. Another quarter of positive net flows in all of oursegments, combined with growth in equity markets, resulted in average account values reaching 224 billion, arecord level. Book value per share, excluding AOCI, grew 8% to 50.83, as below-the-line items have beeninsignificant, enabling our operating earnings to consistently compound book value in the high-single-digit range.Operating return on equity came in at 11.7%, up 50 basis points from the first quarter, as Group Protectionearnings improved. And finally, our balance sheet remains well positioned, providing significant financialflexibility.Turning to segment results and starting with Annuities. Reported earnings for the quarter were 255 million, a12% increase over last year. Operating revenues increased 7% from the second quarter of 2014, as positive netflows continued and equity markets remain supportive. This combination resulted in a 6% increase in averageaccount values that reached 126 billion at the end of the quarter. Return metrics remain strong and consistentwith recent periods. ROA increased 4 basis points versus the prior year while ROE came in at 25%, again a verystrong result. And in fact, annuity ROEs have consistently been exceeding 20% for several years now.Strong results from our hedge program, combined with minimal policyholder behavior impacts, furtherdemonstrate the very high quality of our annuity income stream. Importantly, we also remain disciplined in howwe allocate capital to our annuity business, and this has not hampered our ability to maintain strong ROEs,something that Dennis mentioned earlier that we expect to continue.Turning to our Life Insurance segment, earnings of 105 million were down due to elevated mortality.Importantly, our claim counts declined, as expected, from a seasonally high first quarter. Sequentially, claimcounts decreased 11%, while the year-over-year increase was consistent with in-force growth. Therefore, ouradverse mortality this quarter was primarily driven by several large claims that resulted in abnormally high claimsseverity. As I noted upfront, this negatively impacted earnings by 28 million.61-877-FACTSET www.callstreet.comCopyright 2001-2015 FactSet CallStreet, LLC
Lincoln National Corp. (LNC)Q2 2015 Earnings CallCorrected Transcript30-Jul-2015Let me bring you inside Lincoln to provide perspective on how we assessed and analyzed this quarter's mortalityresults, including our key takeaways. Let's start with count experience, which measures frequency. This quarterwas favorable 2% to our expectations, while amount experience, with measures dollars of claims, was unfavorableby 14%. Favorable counts experience and unfavorable amount experience indicates claims severity as theunderlying driver of results.On a statistical basis, this quarter was a 99-percentile kind of event, equivalent to a 1-in-100 event, so veryuncommon. Included in this quarter's elevated claims severity was unfavorable experience in the large casesegment, meaning policies above 5 million. Within this cohort was an unusual concentration of injury-rel
UBS Securities LLC Robert R. Glasspiegel Janney Montgomery Scott LLC Colin W. Devine Jefferies LLC Mike E. Kovac Goldman Sachs & Co. Jay H. Gelb Barclays Capital, Inc. . MANAGEMENT DISCUSSION SECTION Operator: Good morning, and thank you for joining Lincoln Financial Group's Second Quarter 2015 Earnings Conference Call.
