Good morning and thank you for joining Lincoln Financial Group's Third Quarter 2020 Earnings Conference Call. [Operator Instructions] Now, I'd like to turn the conference over to the Corporate Treasurer, Chris Giovanni. Please go ahead sir.

Thank you, Katherine. Good morning and welcome to Lincoln Financial's third quarter earnings call. Before we begin, I have an important reminder. Any comments made during the call regarding future expectations, trends and market conditions, including comments about sales and 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 2019 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 to the non-GAAP measures used on the call including adjusted return on equity and adjusted income from operations or adjusted operating income to their most comparable GAAP measures. 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 remarks, we will move to the question-and-answer portion of the call. I would now like to turn the call over to Dennis.

Thank you, Chris. Good morning everyone. Lincoln is responding well to the health, economic and capital market challenges, ensuring we maintain our competitive advantages and capitalizing on opportunities become stronger. Third quarter adjusted operating results after normalizing for our annual review recovered significantly from the second quarter consistent with our expectations. Returns on the alternative investment portfolio were strong in the quarter at nearly 7% compared to our targeted return of 2.5% or 10% annually. And while we continue to see effects from the pandemic related to elevated claims in our Life and Group Protection businesses, ultimately, we expect claims return to normal levels after the pandemic. Low long-term interest rates are a headwind but we are solving this through profitable top line growth, in force management and expense efficiencies. Our underlying earnings are firmly intact, and we are positioned for growth. We're taking actions to sustain market leadership positions across our businesses and on our terms by expanding product breath and strengthening our world class distribution. Specifically, we continue to aggressively execute our re-priced shift and add new product strategy to bolster our businesses with enduring and all-weather product portfolios. Here today, we have taken 86 different pricing actions across our product suite and we plan to introduce eight new products during the first half of next year. This strategy will enable us to capitalize on the breadth of our existing product portfolio at appropriate returns, while adding new products that increase consumer choice and expand customer value propositions. This combination will position us well to improve sales volumes and drive long-term top and bottom line growth. As we expand our portfolio of customer solutions, we are focused on designing more capital efficient products, which will ultimately help improve our free cash flow. In addition to these top line…

Thank you, Dennis. Last night, we reported a third quarter adjusted operating loss of $133 million or $0.72 per share. As we noted in the earnings release, results included net unfavorable notable items of $552 million or $2.84 per share, predominantly from this year's annual review of DAC and reserve assumptions. This year's annual review resulted in a net charge of $489 million with negative $547 million included within adjusted operating income and positive $58 million in non-operating. Included in adjusted operating income was negative $524 million related to interest rates with approximately one third of the impact coming from a 50 basis point reduction in our long-term ultimate interest rate assumption to 3% and two-thirds from nearly 170 basis point decline in new money rates. It is important to note that this is a non-cash charge does not impact our RBC ratio, and does not change our view on the potential impact of statutory capital from reserve strengthening if rates stay low where we expect no impact at the end of this year. Outside of interest rates, there was a $23 million net unfavorable impact with an adjusted operating income, with policyholder behavior in the Life business coming in negative partially offset by favorable policyholder behaviors in the annuity business. Beyond these factors, all other components of the annual review had an immaterial impact. As part of this year's review, we did not unlock the reversion to the mean corridor, which still provides an approximate $155 million pretax cushion against declines in the equity markets. In addition to the significant impacts from the annual assumption review, this quarter was also impacted by a few items. First COVID-19 related claims reduced earnings by approximately $101 million or $0.52 per share, which included a $95 million mortality impact, and $6 million…

Thank you, Dennis and Randy. 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 only one follow-up, and then re-queue if you have additional questions. With that, let me turn the call over to Katherine to begin Q&A.

First question was on the Group Life mortality. We haven't really seen, I guess non-COVID related - elevated levels of non-COVID mortality record by other companies. So hoping you could provide a little bit more detail on what you're seeing. And if you think it will continue as COVID continues or if you think it's more of a one quarter anomaly?

We spent a fair amount of time analyzing this broadly. We have looked at a number of industry studies. I think the SLA does a good work of aggregating information from across the industry. We participate in a number of our peer companies. And there is roughly 20 companies that participate. And as we've analyzed that data has come in over the course the year, you've really seen this emergence of what we've described as pandemic related mortality. So I think as you think about expectations for the near term, I think it's reasonable to think that will continue in the near term, but I think it's also reasonable to think that it will go away once we've developed the virus and figured out a way to manage the pandemic in a better way. In broader terms, Ryan, if you think about the overall impact of COVID-19 on the company, inside the individual life business, we continue to run in line with our original rule of thumb. I think as you think about that, I think it's probably and once again, I'm just having to hypothesize because you're not going to get exact information on this. But if you go back to when we established our 8 million per 10,000 rule of thumb at the beginning of the pandemic, all the evidence was this was something that was going to impact older age individuals, death rates were relatively high, we established our rule of thumb, it worked for the second quarter, it worked for the third quarter, I think underneath that, once again, you're never going to know for sure, there probably is some trend, because we've done a better job, we've brought death rates down with treatments. You've seen us do a better job, I think of protecting older age people. So inside of the 8 million that we continue to experience, there probably has been some shift from pre-COVID to sort of this other pandemic related, but it still is working in total, that's a little different on the group business. If you think about when we established our original rule of thumb, there really was not much evidence that COVID-19 was going to become a significant issue for the working age population. But as this has gone on in America, and it is spread into other aspects of the population besides older age, you started to see that and in addition to that, you started to see the emergence of this what we're calling pandemic related. When we look at that study, we see it across all causes of death, we see heart disease up 35%, year-over-year, cancer up roughly 12% year-over-year, other respiratory up about 42%. So I would expect, Ryan that was a long answer to your original question that. Yes, I would expect to continue for the near-term.

And then just one quick one, do you just given its relatively large assumption review impact, would you expect much of an ongoing impact to earnings power within the life insurance business from this?

I think it's similar Ryan to previous years and answering these questions. And every time we've made these sort of assumption changes around interest rates, it has had a bit of an ongoing negative impact. It's been something that we've worked to overcome. And if you think about over the years, we've done this, what, four or five times and it hasn't really been something that has made a material impact going forward. So similar to last time, Brian yet does have a bit of a negative impact, but not something we're going to specifically strike out. We're work hard to overcome that impact.

Our next question comes from Humphrey Lee with Dowling & Partners. Your line is open.

Just looking at the ROA, especially to normalize ROA for annuities and RPS, both were pretty strong in the third quarter. Clearly, the market had an impact, but do you see kind of these less sustainable going forward, assuming the market continues to cooperate?

Humphrey, thanks for the question. I think in the Annuity business, we've been reporting an ROA in around 80 basis points for about as long as I can remember, maybe as long as I've been sitting in this seat, then we were 82 in a quarter. So yes, I think all evidence would indicate that, an ROA in around that ranges is right in line with our expectations. I think I mentioned in the return business, it was a strong quarter, they did have some benefit from the strong alternatives. It's roughly $4 million in the quarter. So I think 25 is sort of at the upper end of what you'd expect to see them in a normal quarter. So probably a little above their ongoing ROA.

And then in terms of kind of the default Group Protection, I think the industry wide has definitely seen some headwinds for premium growth or top line growth given the economy and the employment conditions. I guess, can you elaborate on your thinking about how the top line will trend especially as we enter into the enrollment periods?

Humphrey, it'sDennis. Just the statistics we're up 5% third quarter year-to-date versus last year's third quarter year-to-date. Some of that has been that premium increases we've discussed is driven by good retention. Some of it's driven by new sales. And we'll have to see how those trends develop as we move into 2021, but we're pretty comfortable that we'll see premium growth.

Our next question comes from Tom Gallagher with Evercore. Your line is open.

First question, can you comment at all about what type of level of buyback you're planning on? Would it be lower than prior levels just given the environment or do you think you might get all the way back to where you are running free basically?

Tom it's Randy. I think as always, we really take this one quarter at a time, right. And so in our prepared remarks as I mentioned, we're planning on $50 million in the fourth quarter. And then we'll talk to you about 2021 as we get into the next quarters and beyond. So, but when you think about the fourth quarter, buybacks returning capital to shareholders, the buybacks it starts with the balance sheet. And as I mentioned in our script where, we're very comfortable with the strength of our balance sheet, the 444% RBC ratio, the $756 million of cash at the holding company, the fact that we've prefunded debt maturities through 2023. And the fact that we added to our toolkit, a contingent capital facility of $500 million in the third quarter, so the strength of the balance sheet is definitely there. So then you might ask, why aren't you going back at your historic level, which is more in range with $150 million a quarter, which is what we've done historically on average. So when we think about that, I would just point out a couple of things. First the credit, expectations have come down substantially from where they were, back in March. But if you look at the expectation, I think it's fair to say that the confidence interval around that is still relatively wide or wider than it is than a normal. So I think, we're reflecting the fact that credit is improved significantly, but there still is some uncertainty in the environment. And the other thing I would point out Tom, is that just from capital generation, we still are being impacted in the quarters, I mentioned $101 million by COVID, and then another $28 million, so roughly $130 million from mortality related claims across our business. So, eventually that will be behind us, but in the near term we still are being negatively impacted by this pandemic.

Thanks, Randy. And then just my follow-up on, you obviously had a competitor announcing a variable annuity risk transfer deal. Curious what your thoughts are there, if that's something you'd be willing to consider, particularly given that it was kind of a deep in the money block, that effectively freed up and capitalized that block at about an 8 PE, well above where Lincoln and the rest of the sectors trading? Does that give you a new data point to consider and would you move down that path or how are you thinking about that?

Tom, this is Dennis, let me take that. Let me answer your specific questions and add a couple more comments. When we say a deal like that capital in the market in the way that and that transaction, that's positive. Overall as we've said, we remain in the flow for opportunities to sell either any of our blocks or any of our business - if it makes economic sense. So just on the point, good for the marketplace, we're staying in the flow. And if we can do something that makes sense economically, we will do that. I also like to remind you that we’ve done block transactions in the past, of course on VA and fixed annuities. You recall that we insured the living benefit guarantee risk on 50% of a $13 billion block of VA. And that remains in place. We also did a pure, fixed annuity block reinsurance deal. And we've had four deals. So we've demonstrated a lot of creativity in the marketplace over the years, and we'll continue to participate where it makes economic sense.

But would you say more broadly, you'd be open to doing something more transformational or I guess those other deals were kind of more at the margin?

I'm not exactly sure Tom what you mean by transformational. Let's look at our strategy in the VA market. First we'll start with most of the folks on the phone know that we have at least risk, most in-force blocks in business across the industry. And so and Randy's already pointed out that we've been making 18% to 20% return on equity with no blowups in that business for years. So we think it's a very good business for Lincoln. At the moment, we're seeing strong returns across our block. We and part of the reason our VA, guaranteed business is so strong from a risk perspective, is that we remained in the market consistently. We've hedged every rider from day one. And so, we're very comfortable with the risk profile and earnings capability of particular living benefit block. Again as I said, looking forward, we're pricing all of our products to get the appropriate return. And so even though lowering the benefits on the guaranteed living benefit business has been just demand that's fine. We continue to sell it. And we continue to get great rates of return on the capital deployed at the moment. And the returns on our index, VA block are also very strong. And we're happy to see that block all the way it's been growing. So I think historically, we've demonstrated that we've managed to be a business with a fixed annuity business well and it's showing up in the earnings and returns.

Our next question comes from Erik Bass with Autonomous Research. Your line is open.

Listen given your forecast of recovery in sales next year, do you anticipate your free cash flow generation returning to more normal levels or did the product changes that you've talked about reduce the expected strain And I guess the strain on new sales?

Erik, it's Randy. Yes I don't think we see a significant change in the overall free cash flow profile. I think definitively the new product designs have lower capital leads. But as we mentioned, we expect to grow sales beyond where we are here in 2020. And so, you'll have sort of capital usage per dollar sales coming down while sales go up, maybe holding relatively level. So no big change to our expectations for levels of cash flow, even though the amount of capital lease per dollar of sales will be coming down.

And maybe following up on that. I mean, you've mentioned how the buffered annuity product is less capital intensive than guaranteed VAs? How much of difference is there in the amount of capital you have to hold as a percentage of liabilities? And so what does that mean in terms of the capital strain from sales?

Yes, without getting into the particulars and - if you rank ordered the annuities in terms of their day one capital strain, it would be fixed annuities at the upper end, and that's primarily because fixed annuities get hit with a significant C4 charge in the first year. In the middle would be VA with guarantees and then on the lower end would be IVA and then even below that would be just appear non-guaranteed VA product. So without getting into the specifics IVAs are roughly half the strain of a typical fixed indexed annuity.

Our next question comes from John Barnidge with Piper Sandler. Your line is open.

Does the alleviative non-COVID mortality that's emerging in a broader population make you think about utilizing more reinsurance because I can see that as a product that maybe grows secularly out of this?

John, I think that when we think about using reinsurance it's - every year we're looking at what is the cost of reinsurance? What are our expectations for mortality looking forward? So that's a discrete decision we're making every single year, I think the reality is that we don't use a whole lot of reinsurance in a group business. Remember that the average group claim is in the 50,000 to 60,000 range. So you're not talking about an expectation of using a significant amount of reinsurance in a group type business. Obviously, we do use it more in the individual life business where we sell a number of larger base policies. So I don't think the pandemic itself changes our view at this red hot moment of how we utilize reinsurance as part of our business model.

And then my follow-up, assuming we get a renewal of the hardship waiver. Would you anticipate possible increase withdrawals in 2021 for retirement? Thank you for your answers.

As I mentioned, John in my remarks, the consequences of the government programs on our block of business have not been great this year. And that's in part related to our concentration in the healthcare segment. So if not knowing what those new programs might be, whatever effect that has on industry close, we think we'll be at the lower end of that, because of where we sell our business. So again, we don't think that will be a significant effect.

And our next question comes from Suneet Kamath with Citi. Your line is open.

Dennis, I think you'd said in your prepared remarks that you're planning on launching, I think it was eight new products next year. I'm assuming that there is going to be a ramp up period of time required as you educate your distribution force on these products. Should we think about sort of sales may be picking up more in the second half of the year, given that ramp up or how should we think about the pattern of sales growth as we move across the year?

Yes, Suneet started from this quarter, we expect to bottom out across our businesses, mostly the life and annuity business in terms of new sales in the fourth quarter. And then in 2021, a slow build to your point through the course of the year.

And then I think you'd also said in your prepared remarks, you're talking about maybe some incremental cost savings. So just curious if you could maybe size that for us how it compares to some of the cost savings program that you've achieved in recent years?

Yes, so if you go to the digital program, which is still underway, we had sort of a $120 million target, which were net up investment, I think we're running plus $40 million and growing towards $120 million by the end of 2021. So that's a ongoing important program. I mentioned and Randy mentioned we have on top of that, a $100 million savings that is occurring in 2020, some of which sort of reflects things like people aren't travelling as much and those could spring back but in 2021, in total, we can keep that $100 million. On top of that $100 million is what we're talking about. Well, let me say two things, one, preserving that $100 million and increasing it as we go forward. That will take incremental investment. We're in the process right now Suneet of sizing that and when we get comfortable with the magnitude of that increase, we'll share it with you and others.

And our next question comes from Elyse Greenspan with Wells Fargo. Your line is open.

Hi, thanks. Good morning…

It looks like Elyse hung up.

Okay. Are there any further questions in queue?

There are no other questions in the queue.

Okay, so with that, thank you all for joining us this morning. As always, we're happy to take any follow-up questions that you have. You can email us at Investor Relations at lfg.com. Thank you all and have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.