Lincoln National Corporation (LNC) Q3 2021 Earnings Report, Transcript and Summary

Good morning and thank you for joining Lincoln Financial Group's Third Quarter 2021 Earnings Conference Call. At this time, all lines are in listen-only mode. Later, we'll announced the opportunity for questions and instructions will be given at that time. [Operator Instructions]. Now, I would like to turn the conference over to the Vice President of Investor Relations, Al Copersino. Please go ahead, sir.

Thank you, Catherine. good morning and welcome to Lincoln Financials’ Third Quarter earnings call. Before we begin, I have an important reminder. Any comments made during the call over corporate in future expectations, 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 2020 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 reconciliations of the non-GAAP measures used on the call, including adjusted return on equity and adjusted income from operations or adjusted operating income to the 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 comments, 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, Al. Good morning everyone. Third quarter operating earnings were reduced by pandemic claims and other charges and helped by strong alternative investment results. Adjusting out these various items, our underlying earnings and earnings growth potential remains strong. Our expectation remains to be at the high-end or above our 8% to 10% EPS growth target in the intermediate and longer-term. Intermediate term expectations are primarily based on recovering sales momentum, strong fees on assets under management, incremental expense management initiatives, and the combination of $900 million of buybacks related to our recent block sale and ongoing share repurchases. Taking each of these in turn, sales year-to-date, are consistent with our expectations of building off the levels achieved as we exited 2020, we are also achieving returns in the low-to-mid teams on capital backing sales across all business lines. Overall, sales growth is reemerging due to our distribution strength, added shelf space, digital capabilities, and product innovation. After introducing 10 new products since the beginning of the year, including the industry's first combined life plus long-term care policy built on a variable chassis, we have more updates planned and additional products in development. Expense efficiency has long been a key focus for Lincoln. This quarter, we once again reported a lower expense ratio across most of our businesses. We also have a track record of delivering on past cost savings initiatives. We expect SPARK, our new costs savings initiative, to drive savings well in excess of the impact of spread compression through 2024 and to improve both our operational effectiveness and the customer experience. Finally, our buyback strategy, as just mentioned, is comprised of 2 components. First, our ongoing repurchases, which returned to pre -COVID levels this year. Driven by the capital efficiency of our products, including the impact of the recently announced VA living benefit flow reinsurance deal. Low levels of credit losses, and net ratings upgrades in our high-quality investment portfolio, and our well-managed hedge strategy. Second, the buybacks funded by the block deal. Before turning to the business segments, I want to congratulate Ellen Cooper. In August, the board announced that Ellen will succeed me as CEO after our annual shareholders meeting next May. Since joining Lincoln in 2012, Elon has worked with me and the rest of our executive team to shape and execute on Lincoln strategy. She joined us as Chief Investment Officer, and her responsibilities have grown to include leading our enterprise risk efforts and our annuities business. And is a gifted leader with a proven track record of empowering high-performing teams, and executing effectively in challenging environments. I know that Lincoln will be in great hands with Ellen at the helm as she moves forward in fully capitalizing on the exciting opportunities ahead for Lincoln. Ellen will be joining Randy and me on the First Quarter's earnings call. Now, turning to the business segments. in annuities, we reported sales growth of 7% over the prior-year quarter, driven by our industry-leading product breadth and distribution force, plus shelf space added over the last two years. Sales were down sequentially as we lead the industry with rate reductions on index, variable annuities in response to market conditions, as well as typical Third Quarter seasonality. We remain pleased with our sales mix of guaranteed and non-guaranteed products, providing us diversification and attractive new business returns. Looking forward, we're expanding customer choice by adding new investment options and index strategies. And have improved the attractiveness of our index variable annuity product, setting us up for sales growth in the fourth quarter. Finally, we expect our earnings to continue to benefit from high quality and diversified in-force book we have built over the years. In Retirement Plan Services, we reported another quarter of excellent results and remain well-positioned with award-winning digital technology, a competitive cost structure, and expanding set of product solutions and scale in our target markets. Total deposits were up 2% despite being negatively impacted by some sales shifting into the fourth quarter. While we reported slightly negative flows this quarter, trailing 12-month net flows remained strong at positive $1.2 billion, and we expect full-year 2021 net flows to be positive. Sales of year path, our alternative to target date funds, remained strong. We have continued to innovate, enhancing our in-plan income solution called Path Builder Income. And integrating the solution inside our year path investment option. As a result of the secure act, we also see significant long-term opportunities around in-plan guarantees, pooled employer plans solutions, and adviser managed accounts. Finally, the macro environment continues to [Indiscernible] a tailwind to retirement plan services. In addition to healthy equity markets, the economic recovery is contributing to better wage growth, higher employee contribution rates, and a greater employer deposits. Retirement business is having an outstanding year as we continue to execute on our strategy. In life insurance, our focus on expanding both consumer value propositions and distributions shelf space resulted in sequential sales growth of 32% this quarter, with sales totaling $166 million. And all product categories reporting double-digit increases. The focus on expanded customer choice aligns with our ongoing efforts, to diversify our product risk profile. As examples in the life business are variable, MoneyGuard and our principal BUL products, offer the customer the choice of lower guarantees and higher upside potential. Sale of these types of products have been growing faster than the segment-wide sales. The products have less potential tail risk and better capital efficiency. In addition to the property and casualty distribution partnership we added in the second quarter, we recently launched a variable MoneyGuard product at 2 of our largest strategic partners, providing 25,000 more advisors with access to this first of its kind solution. Complementing our distribution and product expansion efforts, our digital first focus continues to drive a lower cost per policy and an improved customer experience. Looking ahead, we are enthusiastic about the future of life business. We are introducing new solutions that will further expand our customer and distribution reach, with more introductions planned for the first half of 2022. Lastly, our Group Protection business continues to be impacted by the pandemic, particularly as the Delta variant affected more individuals under age 65, driving increased claims. While the pandemic continues to be a headwind, the underlying fundamentals of the business are strong, and we're pleased with the progress we're making. We achieved 5% premium growth over the prior year, which is a result of a stronger persistency rate of nearly 90% and renewal rate increases implemented earlier this year. Year-over-year sales are flat as we stick to our pricing discipline, we're seeing more sales from our higher-margin employee paid products year-to-date, 59% of group protection sales have come from these products, as more individuals see the value of them. Within this category, we have begun to quote our new hospital indemnity product, rounding out our suite of supplemental health products. Underlying margins after adjusting primarily per pandemic-related claims, or again, in the middle of our target range this quarter. We will continue to build on our progress and expect margins growth toward the top end of our 5% to 7% target range. As we remain disciplined on pricing, new business, reducing costs, and managing claims. Briefly on investment results. Credit quality remains excellent. Our general account portfolio is predominantly comprised of fixed income investments, of which 97% are investment-grade equivalent. We continue to expect a benign credit outlook, and have seen favorable credit trends within our portfolio. With minimal credit losses and positive net credit migrations. During the quarter, we invested new money at an average yield of 2.6% with 1.5 in shorter duration assets versus 1/3 for the full-year of 2020, reflecting the increase in shorter duration product sales and our disciplined asset liability matching. Approximately 60% of our purchases were in investments other than public corporates, providing diversification and good relative value, and yielding approximately 100 basis points over comparability rated public corporates. Lastly, our alternative investment performance was once again strong, with an 8% return in the quarter, exceeding our long-term targeted quarterly return of 2.5%. In summary, reported results this quarter continue to reflect ongoing impacts from the pandemic in Life Insurance and Group Protection. Our product strategy, distribution strength, and ongoing innovation are helping to build sales momentum at attractive returns. Our new expense savings initiative is expected to more than offset spread compression, improved overall operational effectiveness, and drive earnings growth, and ongoing share buybacks driven by our strong balance sheet and free cash flow generation combined with the incremental buybacks enabled by our recent flock deal, will further boost EPS. In some, our underlying earnings power is improving and we remain confident in our ability to grow EPS at or above our 8% to 10% target range. I will now turn the call over to Randy.

Thank you, Dennis. Last night, we reported third quarter adjusted operating income of $307 million or $1.62 per share. As noted in the earnings release, adjusted operating income included net unfavorable notable items of $108 million or $0.57 per share, including $93 million from legal related expenses and a $15 million net charge from this year's annual review of DAC and reserve assumptions. Also, this quarter's results were impacted by pandemic related claims, which reduced earnings by $180 million or $0.95 Per-share. While results benefited from strong performance in the alternative investment portfolio boosting earnings by $89 million or $0.47 per share above target. Additionally, we experienced some unfavorable non-pandemic mortality in the Life Insurance segment that I will discuss further in the life commentary. From a reported adjusted operating income standpoint, it was a bit of a noisy quarter, but we have strong underlying earnings power as we exit the quarter. Net income totaled $318 million or $1.68 per share, boosted by gains in the investment portfolio and strong performance from the variable annuity hedge program. Moving to the performance of key financial metrics. Consolidated adjusted operating revenue grew 9% from the prior year. Which included growth in each of the four businesses. Average account values increased 17% and book value per share, excluding AOCI, grew 8% and stands at $76.96, an all-time high. Now turning to segment results, starting with annuities. Operating income for the quarter was $338 million which included a $5 million net unfavorable impact from our annual review, compared to $196 million in the prior-year quarter which included a $101 million net unfavorable impact from the annual review. Adjusting for notable items in both periods, operating income increased 15% from the prior-year quarter, driven by record average account values of $170 billion, up 17% over the past year. The current quarter included $10 million of favorable alternative investment income. The expense ratio improved 80 basis points compared to the prior-year period. As our focus on expenses continues to benefit the bottom line. Return metrics remained solid with return on assets coming in at 80 basis points, And return on equity at 26%. Risk metrics on our VA book once again, demonstrate the quality of our in-force with a net amount at risk at 63 basis points of account values for living benefits and at 43 basis points for debt benefits. So, a great result for the annuity business with another quarter of high-quality earnings, strong returns, and solid risk metrics, leaving us well-positioned to finish the year with another excellent quarter. Retirement Plan Services reported operating income of $60 million compared to $50 million in the prior-year quarter, with the increase driven by higher fees and account values, continued expense efficiency, and higher alternative investment income. Which was $6 million favorable to our expectations in the current quarter. Our annual review had no impact in the current quarter but did have a net unfavorable impact of $3 million in the prior-year quarter. Favorable equity markets drove average account values up 21% to $97 billion. The expense ratio improved 80 basis points over the prior-year quarter as revenue growth combined with continued diligent expense management contributed to improved results. Base spreads, excluding variable investment income, compressed 10 basis points versus the prior year quarter, in line with our stated 10 to 15 basis point range as crediting rate actions continue to take hold. Overall, the retirement business had an excellent quarter and continues to a well-positioned to drive strong results. Turning to life insurance, operating income for the quarter was $93 million, which included a $26 million net unfavorable impact from our annual review, compared to an operating loss of $311 million in the prior-year quarter, which included a $440 million net unfavorable impact from the annual review. Additionally, the current quarter included an unfavorable notable item of $19 million related to a legal expense associated with the reinsurance arbitration award. Adjusting for notable items in both periods, operating income increased 7% from the prior-year quarter, driven by higher alternative investment income, as the current quarter included $65 million compared to $37 million in the prior year quarter. Elevated mortality related to the pandemic with $60 million in the quarter, compared to $70 million in the prior-year quarter. This quarter's impact for 10,000 COVID debts of $6 million was down year-over-year as expected, but was up sequentially as the severity of our average COVID claim was elevated. We believe this elevation is normal volatility as we had a few larger COVID claims in the quarter. In addition to the impact of the pandemic, underlying mortality was negatively impacted by $34 million. We believe this was driven by 2 factors. First, over the course of the pandemic, when COVID cases have been increasing, which they did in the Third Quarter, we have seen elevated non-COVID mortality as well. And second, normal quarterly volatility had point out that we experienced favorable underlying mortality in the prior two quarters and reviewed on a year-to-date basis our actual to expected mortality ratio remained under 100% better than expected. Earnings drivers continue to grow with average account values up 9% and average life insurance in force up 7% over the prior year. This spreads, excluding variable investment income declined 13 basis points compared to the prior-year quarter above a 5 to 10 basis point expectation. Our expense ratio improved 30 basis points over the prior-year quarter as our efficiency efforts continue to benefit margins. This was a noisy quarter for life earnings. Our growth in earnings drivers, long-term mortality results in line with expectations, and continued expense discipline, keep us confident in our underlying business. Group Protection reported an operating loss of $32 million, which included a $16 million net favorable impact from our annual review of reserve assumptions, compared to operating income of $6 million in the prior-year quarter which included a $3 million net unfavorable impact from the annual review. Adjusting for notable items in both periods, operating income decreased from $9 million to an operating loss of $48 million driven by higher mortality impacts from pandemic. The current quarter also included $6 million of favorable alternative investment income. On a sequential basis, pandemic related claims in the quarter negatively impacted earnings by $120 million compared to $28 million in the Second Quarter, and included $107 million in life claim and $13 million in disability claims. In the quarter, U.S. COVID deaths significantly shifted to the working age population. In our group business, the average claim size for active employees across all ages is consistently 3 to 4 times the size of those for retirees. This significant increase in working age deaths, coupled with the higher average claim size, drove the sequential increase in mortality. Well, I've been humbled by trying to predict the impact s of the pandemic. I do believe that this quarter's increased impact reflects the current state of the pandemic. A higher percentage of that occurring in the working age population. Excluding the annual review of reserve assumptions, pandemic claims, and favorable alternative investment income, the group margin of 5.9% was consistent with the prior quarter and in the middle of our 5% to 7% targeted range. The loss ratio was 87.8% in the quarter and 8.5 percentage point sequential increase. Excluding pandemic-related claims and the impact of the assumption review, the loss ratio improved 20 basis points to 75.9%. This expense ratio remained flat despite ongoing investments in our claims organization to address elevated clean volume from the pandemic. Despite the tough quarter for Group, we are confident that the underlying business fundamentals are solid and the strength of this business will reemerge as the pandemic subsides. Turning to capital and capital management, we ended the quarter with $10.9 billion of statutory capital and estimate our RBC ratio at 463%. As a reminder, our RBC ratio includes 25 percentage points from non-economic goodwill associated with the Liberty acquisition that we expect will go away by year-end. Cash at the holding Company stands at $754 million above our $450 million target as we have prefunded our $300 million 2022 debt maturity. We deployed $200 million towards buybacks in the Third Quarter, in line with our goal communicated last quarter to have full-year buybacks in line with pre -pandemic levels of approximately $600 million excluding any incremental buybacks from transactions. Our block sale with Resolution Life, which we announced in September and closed on October 1st, generated approximately $1.2 billion of capital. $900 million of which we plan to use for incremental share repurchases. We expect these repurchases to be completed by the end of the first quarter of 2022. And began the incremental buybacks in October via a $500 million accelerated share repurchase program. Outside of the deployment of proceeds from the block sale, we expect to continue our ongoing buyback program, although I'd point out that the timing of ongoing buybacks maybe influenced by the accelerated share repurchase program. We were pleased to have executed both a LifeLock deal and a VA flow deal last quarter, and we continue to be open to additional block and flow reinsurance deals. Additionally, we announced a 7% increase in our quarterly dividend this quarter. Now to provide some details on the Spark Initiative, as we have been communicating for the past few quarters, we are excited to be embarking on another meaningful expense savings program. Teams from across the organization have been hard at work, identifying and prioritizing opportunities for us to invest and improve efficiencies through this initiative. And they've been working within and across departments to identify the best project to maximize effectiveness as part of SPARK. Because the strategic digital program is nearing its end, we have decided to integrate the balance of that program into this new cost savings initiative for ease of tracking and communication. As of the end of 2020, the total net recurring benefit from our strategic digital program is $80 million on track with our target. In addition to these savings, we expect to achieve $260 million to $300 million in run rate savings through SPARK as we exit 2024, with benefits growing steadily starting this year and ramping up in the out-years. The total expected 1-time investment to achieve the savings is $350 million to $410 million, including the $57 million in investments we've made already this year. We expect investment spend to peak in 2022 and decline in subsequent years. All numbers that I've just discussed, are pre -tax and pre - DAC. SPARK will be focused on driving efficiencies throughout all aspects of our business. From leveraging automation to simplifying and improving process efficiency. And we will continue to focus on enhancing the customer and employee experiences while modernizing our technology footprint. We are also targeting benefits beyond cost-savings, including improving the way we work by focusing on re-scaling and up-scaling are valuable employee base. A detailed breakdown of the benefits, investments, and net impact for 2021 through 2025 from Spark, combined with the remainder of the strategic digital initiatives, can be found in this quarter's press release. We will update you on our progress going forward, tying back to this disclosure. To conclude, the pandemic environment continues to challenge our Life Insurance and Group Protection segments. However, our underlying earnings in these businesses remains strong. Our annuities and retirement businesses both delivered excellent results. In some, our underlying results and earnings power are both strong and growing. With that, let me join Dennis in congratulating Ellen, and turn the call back over to Al.

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 one follow-up and then re-queue if you have additional questions. With that, let me turn the call over to Catherine to begin the QA.

Thank you. [Operator Instructions] Our first question comes from Jimmy Bhullar with JP Morgan. Your line is open.

Good morning. First, answer the question on your -- elevated COVID claims that you saw. I guess you had higher claims in the Group Life business, which is partly related to the pandemic affecting more younger individuals than you had elevated COVID life claims in the Individual Life side and then also I think non-COVID mortality. So how do these -- what do you think is sort of something that might continue in the near-term versus maybe being more of an aberration. And just the result of normal volatility and mortality?

Hey, Jeremy, it's Randy. I think as I said in my script, when it comes to the group business, we think that the results we saw in this quarter reflect the state of the current pandemic, which is that duster occurring more frequently in the working age population. If you look at the numbers, it's pretty proud this quarter, when you see BC data here, 40% of a 100,000 or so COVID deaths were in the working age population. And in previous quarters, we're pretty consistently that had been between 15% and 20%. So, you've seen a pretty dramatic shift. I don't know of any reasons why that shift should not continue into the fourth quarter. So, I think what you saw in the group business reflects the state of the pandemic. [Indiscernible] -- even though we do believe that the impact of the pandemic, the number of people dying, should continue to trend down over time as immunizations, both natural and the vaccination, continue to increase over time. On the life side, we think of the impact, which was largely driven by severity this time, is more ran dom. It's pretty consistently over the first 5 quarters or so of the pandemic. The average COVID claim we saw was right in the $130 thousand, $140 thousand range. And this quarter was simply an outlier, the average COVID claim saw this quarter was about $260,000 and there is really no example of that impact in any preceding quarter. I think of it as more random this quarter in the Life business really driven by a few large claims that we saw. Hope that helps, Jimmy.

Yes. And then on the retirement business, I think you mentioned some -- year flows were obviously negative, you mentioned some of the sales shifted into 4Q. Can you talk about what you're seeing in terms of employer behavior on matching employee behavior on deferrals and stuff and how the underlying trends are in that market?

Jimmy, just in general, this is Dennis, the -- as I mentioned, my script is recovery and the economy is occurring, people are contributing a little bit more to their plans. Employers. are increasing or returning to making contributions. So, in general, it's a positive story.

Thanks. And just lastly, on the accounting changes, I was wondering where you are internally on sort of figuring out what the impact is on Lincoln and when do you think you'll actually end up sharing that with the street or quantifying at least some of the impact?

Yes, Jimmy, I think we've been pretty consistent in saying we see a discussion with investors in the middle of next year is the most likely timing in terms of when we discussed. I've listened to some of the calls, I've read some of the questions, and I do know that there were some questions around impacts that some companies in the group business. We're talking about this quarter. We don't see that as the biggest driver of any [Indiscernible] impact for us. In fact, I would say that impact we would expect to be rather small in terms of [Indiscernible] specifically, the impact on groups claims [Indiscernible].

Okay. Thank you.

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

Hi, thank you. Can you provide some more details on how you expect the upfront investment related to the SPARK Initiative to flow through the P&L from a timing perspective? And also, where should we expect the savings to show up across the different businesses?

Yes, thank you for the questions. We're going to follow the methodology that we did with the strategic digital program and that you're going to see the investments slow through other operations, and we'll probably just continue that methodology going forward for this program and that benefits them, so you'll see a pure throughout the Company, through the forward businesses. Now in terms of what you should expect from a dollar standpoint, we had a disclosure in the press release. If you compare to 2021 where we had net incremental benefits of $50, and we're anticipating we'll have roughly $75 million in investments This year for a negative $25 million impact. We'd expect that net impact to roughly grow by if I use the midpoint, roughly $20 million next year. So relatively modest, incremental negative when you think about the outer years, we ultimately expect the net benefit to grow to the $260 to $300 million ratio. Pretty substantial impact across the organization and something that will be very supportive and why Dennis and us we're very confident we talked about our ability to grow at or above the top end of our 8 to 10% CCS ranges. I hope that helps here.

Yes. I was thinking more specifically where some of the savings would end up maybe if you can give any more details on what you're -- where the savings are coming from and are, they going to be more allocated to specific businesses or should we think of it sort of proportional to their contribution to earnings.

Let me just jump in just for a second, this is not specifically the question that you asked, but it might be helpful to the answer. Just generally speaking, first of all, we're very excited about this product project and we're investing in technology, automation, [Indiscernible] and capabilities, across to help our businesses operate more efficiently. And part of this is investing in ongoing development growth for our employees. These enhancements are across the Company, they will improve the customer experience, and as Randy has just mentioned, will have a positive impact on our bottom line over time. And I wanted to mention on this, I mentioned in my remarks that we have a good track record when we get to the point where we share this information with the investor groups, that we pretty much nailed down. The framework here and all of the investments that we need; There's a lane behind it. There's an outcome tied to it, we put it into our financial plans. We're pretty excited. And so, you can see it's across the businesses. And some of it's, for example, is coming of our IT department. Cost reductions inside the IT department. Take on new ways of doing business and those cost reductions will flow into all of the businesses. In the group area, as Randy had mentioned, where we haven't made as much investment in the digital space and in automation the last couple of years because we're focusing on integration. We'll see some pretty big benefits in that area. So, I hope that's more helpful. And Randy, you may want to add to that.

I think you nailed it, Dennis. The benefits are going to be spread across the organization with Group having maybe a little bit of an incremental boost just because for the last few years their focus has been less on digital and more on integration. So, I think you nailed it.

Great. Thank you.

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

Good morning, Randy. I just wanted to follow up on your answer to Jimmy's question about the severity within Individual Life COVID claims, which I think puts your sensitivity at $6 million per 100K this quarter. So am I right, with your response, that you would expect that to go down going forward closer to like the Q2 level of I think which was around $3 million per 10K or can you just provide a little bit of color, what sensitivity you expect on individual going forward.

Tom, I think that as you look forward and you think about the impact of COVID and the Life business, the driver of any movements and the impact is going to be severity. So -- when the incident has come down very nicely as we've talked about, pretty heavy vaccination among the population that we insure in Individual Life business. Incidents has come down substantially, and what you're going to see now is the impact is driven by severity. We do see this particular quarter; The average COVID claim of $250,000 as an outlier. It's way out of work with any of the preceding 5 quarters. We do expect severity to come back down, but once again, you couldn't get some volatility if you get a couple of big claims. But we do expect that to come down and revert more to what we've experienced over the first 5 quarters or so of this pandemic, Tom.

Got you. Thanks. And then my follow-up is, Randy, I think there have been some concerns that your GAAP earnings are going to be disproportionately negatively affected by the LDTI changes mainly because of your universal life business. I'm not asking you to give any hardcore quantitative answer, but anything to stay at a high level, whether you think that will be directionally true or not or any comments on that topic.

Tom, I can't talk about the proportionality because I don't spend time at the other companies, but I don't think the ongoing earnings impacts in the Life Insurance business I would describe as large. Really, to the best of my recollection, the big thing that's changing in the Life Insurance business is the pattern of how you amortize DAC and unearned revenue, right? We're going from a pattern that is driven by the emergence of profitability to a pattern that is more locked and loaded in terms of being more fixed. So, Tom, that's not an area where I spend a lot of time thinking about very large impacts in earnings. There could be some impact of course, but I don't see it as very large.

That's helpful. Thanks.

You [Indiscernible].

Thanks. Our next question comes from Ryan Krueger with KBW. Your line is open.

Hey, good morning. One more on -- somewhat on LDTI, but I guess as of now, I believe you use GAAP accounting framework in Linde bars to calculate your VA reserves. Do you have any sense of if you can continue to use the current GAAP accounting framework posts LDTI given that if this actually has an impact on how you think about actual regulatory reserve requirements?

Ryan, thanks for the question. I don't want to prejudge. I think it's all part of the analysis of the impact of LDTI. How that impact the Hedge Program and how that impacts the underlying economy that we remember. I think those are all part of the overall analysis, and I think at the end of the day, they're all very manageable in our opinion. So, it's not something that I'm losing sleep over, but it is something that we have to deal with as we go about implementing this new approach, new founding’s.

Thanks, and then how would you kick -- how did you characterize bread compression at of where it's running at this point, it's still in that 2 to 3% type range right now?

At this red-hot moment, I think we're in the middle of that 2% to 3%, but we continue to trend down over time. So, if you go out a few years, I think we'll be more in that 1% to 2%, if not the low end of it. 1% to 2%? yes, it continues to trend down to the portfolio with closer to the new money rates. But at this red-hot moment, we're in the middle of that 2% to 3% range.

Thank you.

Thank you. Our next question comes from Humphrey Lee with Dowling and Partners. Your line is open.

Good morning, and thank you for taking my question. Just to drill down on the -- currently the severity impact on Life Insurance is a little bit more, can you maybe size how much more kind of lost claims, or maybe percentage wise how this quarter that you saw versus previous quarters?

Humphrey. Thank you for the question. I think in a normal typical quarters, if you just want to -- there's a number of different ways to slice large claims, I'll talk about very large claims, claims for instance, that exceed $15 to $20 million.

Typical quarter?

We see a couple of those in this quarter. We happen to see about 3 -- I think we're at about 7. So, let’s hope that helps you, but we're talking about the largest of large claims when I spike this out.

Okay. That's helpful. And then shifting to Group Protection, these disability results seems to be pretty consistent over the past several quarters but some of your peers have talked about there's a shift in terms of SDD versus the LTV. Can you just generally talk about what you saw in the quarter in terms of your feasibility results?

Humphrey, if you look at the loss ratios that we reported, we were just reported numbers. The disability loss ratio was 79% last quarter, 77.7% this quarter. And if you go in there and you adjust for the pandemic claims that we've talked about and the benefit we got from the review of assumptions this quarter, what you would see is the underlying disability ratio increased just a little bit. It would have gone from 77.5 to 78.3. What drove that was a little bit of an uptick in incidence, offset by continued ongoing good performance from a claims resolution standpoint. But there was a little bit of an uptick in disability incidence and I would say that occurred in both the LTV and the SDD space. But they talked about we are talking about 77.5 to 78.3, so I don't see it as a huge item in the broad context of all the items that can impact disability results.

Got it. Thank you.

Thank you. Our next question comes from Josh Shanker with Bank of America. Your line is open.

Yeah. I just want to talk about the benefits business a little bit. It looks like sales were somewhat weak, especially I thought there might be a rebound post-pandemic conditions a little bit. I know third quarter is not the biggest quarter for renewals or whatnot, but fourth quarters are pretty chunky. Can you talk about your positioning and how you see the growth MF, business performance.

Yes, Josh, let me take that. The decline this quarter was driven primarily by lower sales from new customers. They are down I think in the mid-30s, that is the most competitive and price sensitive segment per se I'll say at the moment and in part because we had them at customers have been reluctant to move carriers. And so that's where the majority of the sales declines occurred. On the other hand, we are pleased with the amount of sales coming from existing customers. as we deepen our relationships and while improving our margins. And in this category, the percentage of sales coming from existing customers made up 64%, up from 56%. So, we're getting prices increases with our existing customers, developing strong relationships and as the pandemic -- and hopefully, age over time, I think the opportunity for new business from new customers will increase.

Does this condition seem to bode for continuation into 4Q?

We're seeing more opportunity for bids, but I don't think we're going to see a dramatic uptake in the fourth quarter in new business from new customers. But maybe -- it's hard to predict right now, and again, overall, we're pretty confident in maintaining our sales, increasing our premiums, increasing our margins in this business. And temporary sales issues related to the pandemic, again, are going to fade over time.

Thank you for the answers.

Thank you. Our next question comes from Andrew Kligerman with Credit Suisse. Your line is open.

Thank you for taking my questions. I'm interested in the demographics of the claims in life insurance that you had in Individual Life. Both the COVID claims and the non-COVID. Could you give a little color on the vintages of when those policies were written, the ages of the individuals, and if those were books of business from recaptured reinsurance?

Andrew, thanks for the question. One of the interesting things we've noticed, and I think it's consistent with the higher vaccination rates with increasing ages that we've actually seen the average age of a COVID claim in our life business come down over the course of the pandemic. At the beginning, we were averaging 80 -- in the low 80s was sort of your average COVID claim and in most recent quarter it's come down to 72. This factoid speaks to the power by the way of the vaccinations. And having a very favorable impact on mortality. So outside of that, Andrew, and we haven't seen anything atypical, other than the fact that the average age of our COVID claim has come down over the course of this pandemic as vaccinations, as I mentioned, the vaccinations have increased in growth. Most among the older.

Got it. So, it really -- no particular policy vintages, not necessarily. We captured reinsurance policies. None of that, right?

Nothing that I've noticed now if fixed it. I mean, if you think about the average age coming down, that would actually. They could potentially even younger polishing than we've seen in the past, but haven't directly looked at that.

Got it, Randy. And then just I was curious on the coli block divested share. You certainly got a nice multiple for that, and then you're doing flow business, which is new business. But how about your like a lot of other -- of lot of your peer group competitors. They've been divesting a variable annuity blocks, individual life, fixed annuities. Do you think -- why not divest those blocks? Are the multiples not where you want them to be, are the economics not that good? What might be the reason for not doing some of those type blocks?

I think I said on my script that we remain open to both.

Totally. I just [Indiscernible] didn't do those stuff.

Andrew, this is not a factory where you just churn out things, day after day after day, right? So, we're constantly analyzing what makes sense. I think it's probably helped to think about what drives block sales and flow deals at Lincoln. So, when we think about this, we don't go, we want to reduce our risks, and that's going to drive us to do something. I remind everybody, we're in the life insurance business -- in the insurance business, that's what's driven strong earnings, growth, great performance, strong return over the years, and at the end of the day the insurance business is nothing more than the ability to price, distribute and manage risk. So, it isn't risk that drives us to think about block sales. What drives us to think about block sales is: is there somebody out there who will pay you more than the value that shareholders are giving you on your share price? And that's: do you have a chance to do something that can be accretive to shareholder value? Thankfully, we definitively did that. Yes, the LifeLock sale we just did and we continue to analyze whether things like that makes sense. I would remind you that we did it, 3 or 4 years ago, when we did the fixed annuity deal and we will continue to analyze whether these make sense. That's no guarantee, but that's not our prohibition. We will continue to be very active in looking at whether or not there are things that we believe makes sense, from a shareholder value standpoint.

Yes. Eric -- I mean Andrew, I guess I really don't even understand the question. Our business model is something that we're very comfortable with. The source of earnings, the different kind of liabilities that we sell. Take a look at the VA business. For a decade, we've had excellent experience. We have lower amounts at risk, and Life Insurance business, we have good liabilities and we're not running away from anything. Some of the companies that are spinning off their businesses want focus on something else. So, they're choosing to do -- focus on this business and not on the businesses that they're spending off. And some of that's because that's what management thinks is the right answer. So, we are very comfortable with our business mix. We are very comfortable with our strategy, and we're doing the right things at the right time to improve shareholder value. That's the way I think about it.

Thank you, Dennis. Just if I could sneak 1 quick one in on the LDTI. I [Indiscernible] answered to Tom's question on the non-traditional UL, but when Jimmy asked, my line went off. Would there potentially be a material traditional product move in reserves due to LDTI, maybe term or -- in those products?

Once again, we're working on the impacts, but no, that's not an item that's losing a lot of sleep on. The biggest single bucket of traditional liabilities is our group claims reserves. They're a little over $5 billion and it's a couple of points on that, Andrew. We have a pretty low discount rate to begin with on that business where I think our current year rate is going on at 2.5%. I think we have a discount rate that, by the time we get around to implementing this thing, is not going to be too far above the index though. Not something we're losing a lot of sleep on, Andrew.

Thanks so much. Have a great day.

Thank you and that's all the time we have for questions. I would like to turn it back to Al Copersino for any closing remarks.

Well, thank you all for joining us this morning. As always, we are happy to take any follow-up questions that you have. You can email us at investorrelations@LFG.com. Thank you all and have a great day.

This concludes today's conference call. Thank you for participating, you may now disconnect. Speakers, standby.