Good morning and thank you for joining, Lincoln Financial Group Third Quarter 2023 Earnings Webcast. At this time, all lines are in a listen only mode. Later, we will announce the opportunity for questions, and instructions will be given at that time. [Operator instructions] Now I will turn the call over to the Chief Accounting Officer and Interim Chief Head of Investor Relations, Adam Cohen. Please go ahead, sir.

Thank you. 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, including those regarding 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 2022 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 of non-GAAP measures used on this call, including adjusted income from operations or adjusted operating income and adjusted income from operations available to common stockholders to the most comparable GAAP measures. Presenting on today's call are Ellen Cooper, Chairman, President and CEO and Chris Neczypor, Chief Financial 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 Ellen.

Thank you, Adam and good morning, everyone. Before I turn my attention to this quarter's results, I first want to provide you with an update on the reinsurance transaction we announced with Fortitude Re in the second quarter of this year. We are very pleased to announce today that both our regulators, the Indiana Department of Insurance and our partners' regulator, the Bermuda Monetary Authority have approved the transaction. With these approvals, we expect the transaction to close this month with economic benefits in line with what we originally communicated with an effective date of October 1st of this year. This significant milestone is the culmination of months of hard work on behalf of our teams and marks a big step forward in our efforts to derisk, strengthen the company's balance sheet and improve ongoing free cash flow. Now turning to this quarter's remarks, we entered 2023 with a clear focus on taking actions to support rebuilding our capital position and delivering long-term profitable growth. We have a powerful franchise brand distribution leadership and broad diversified product solutions across our four businesses. These elements serve as a solid foundation as we reposition the company to deliver increasing value to our shareholders. While our third quarter results fell short of our expectations, I firmly believe we are continuing to make good progress on improving the underlying strength of the business, taking the necessary steps to repair the balance sheet and evaluating additional actions to further accelerate our path to recovery. It is worth mentioning that the advancements we are making and the evolution taking place inside the walls of the company to reset and rebuild will not always be apparent in our quarterly financial results, and this quarter is a clear example of that. We have more work to do to…

Thank you, Ellen, and good morning, everyone. We appreciate you dialing in and listening to our call. I'm going to discuss three things this morning. First, we'll provide a recap of the quarter. Second, we'll go through the segment level financials included on our annual review of reserve assumptions. And lastly, we'll finish up with an update on our investment portfolio. So let's start with a recap of the quarter. Last night, we reported third adjusted operating income available to common stockholders of $39 million or $0.23 per share. This includes the impact from this year's assumption review, which lowered earnings by $144 million or $0.84 per share. Also included in the quarter are $48 million of unfavorable items that are nonrecurring. This consists of $40 million impacting our Life business and $8 million impacting other operations. I will discuss the impacts on life in greater detail when I discuss our segment results. Additionally, alternative returns for the quarter were $23 million lower than implied by our long-term expectation of an annualized 10% return. These items combined impacted the quarter by $215 million. However, even after adjusting for these items, the quarterly results still fell short of our expectations, and we are taking the necessary steps to address the issues. Now turning to net income. Net income available to common stockholders was $819 million or $4.79 per diluted share. The difference between net and adjusted operating income for the quarter was predominantly driven by two factors. First, there was a favorable impact to net income within nonoperating income, driven by positive market risk benefits as the benefit of higher interest rates more than offset the impact from lower equity markets. Second, as Ellen mentioned, we expect the transaction with Fortitude to close and as a result, we impaired securities down…

Thank you, Ellen and Chris. We will now being the question-and-answer portion of the call. [Operator Instructions] With that, let me turn the call over to the operator, to begin Q&A. Thank you.

[Operator Instructions] Your first question is from Alex Scott of Goldman Sachs. Please go ahead. Your line is open.

Hi. Good morning. First one I have is on free cash flow. I just wanted to see if you could opine a bit on where we are year-to-date how are we running relative to, I guess, the $300 to $500 million range. And if we should still think about Fortitude being $100 million plus and to that run rate as in the next year, I know you mentioned you're going to go into more detail early next year. But I just wanted to make sure we have sort of where we're running right now in the baseline sort of clear ahead of thinking through the components that can move it up overtime.

So, good morning Alex, I will start with Fortitude, and then I'll hand it over to Chris to talk about free cash flow and where we are for the year. So again, we're really pleased to be able to announce that we received the regulatory approval. There are no changes to the economics of the deal that we had previously communicated to all of you. So we expect upon close of the transaction, about 15 basis points of additional risk-based capital, and we do still expect about $100 million on an annual improvement as it relates to ongoing free cash flow.

And then Alex, the question more broadly, I would say probably something similar as to last quarter where you can see RBC is up modestly, let's say, and given the dividend for the year, we're tracking at that $300 range. We did take a $50 million dividend out of Lumbar this quarter. But obviously, we also had the higher preferred on a quarterly basis from the [Indiscernible]. So to answer the question, I think we're tracking similar to what we described last quarter. To Ellen's point, Fortitude should add $100 million to the run rate. And then when we're with you all early next year, we hope to be able to provide more of an outlook. I think we started to talk this quarter about a number of other things that we're looking at expenses as an example. So I'll just say stay tuned.

Got it. One nuance follow-up I had. I know you got rid of some of the SG while through this or you're going to upon closing with the Fortitude transaction. But for the portion of the SGUL that remains -- I mean, there was a statutory impact from the cash flow testing last year rates or much higher. I know that rate does get updated. I mean is there any relief that you expect to get on the remaining SGUL reserves that are incremental above sort of the standard statutory reserves that we should be contemplating around year-end?

So Alex, I think what we've said in the past is -- well, and if we haven't, I'll just say now, but the majority of the SGUL reserves that had the AD impact last year are part of the NOVA transaction. So all of the reserve that is attached to that would be part of that, and I wouldn't expect anything incremental. Differently, it's contemplated in the way we've structured the deal.

Okay. Thank you.

Your next question is from Tom Gallagher of Evercore ISI. Please go ahead. Your line is open.

Good morning. Ellen, yes, it's good to hear that you're you still expect the same benefits on the deal. Any -- has anything changed on the terms of the deal, the mix of the reserves and the risks that are being transacted on, so any terms in -- any change in the terms of the deal? And any -- can you provide a little bit of insight as to why it took longer.

Sure, Tom. So thanks again for the question. So there are -- in addition to no changes to the economics of the deal, there is no change to the structuring of the deal as well. So we had previously communicated $28 billion, the same amount of GUL so no changes at all to the economics or to the overall structure. Yes, it did take longer than we had expected. We had obviously, when we announced the transaction earlier in the year, we had announced a close date, we went beyond that. What I would say there is that this is a very complex transaction. We had regulators that -- as you would imagine, did a very thorough review and analysis, working with us and also our partner. And we really believe that in particular, that the overall attention that we received and the focus and hard work of the regulators, it just very much substantiates the overall value of the transaction in the work. So it took longer than we got there. We're very, very pleased. And again, I just want to reinforce the fact that upon close of this deal that we really do think of this as a major milestone for the company and an important step as we continue to move forward to rebuild our capital position and to improve the ongoing free cash flow of the company.

Got it. Thank you. And then just for my follow-up, Ellen, when you mentioned what comes next and the things you're contemplating internal, external reinsurance. My question is, on the external reinsurance, would you say in-force deal another in-force deal is more likely is flow reinsurance, a stronger consideration? And finally, would you consider entering into a strategic partnership with an investment manager like we've seen some of your peers in the industry do? Is that something you're considering?

Yes. So Tom, to address this, I want to say a couple of things. First of all, we recognize the importance around clarity, not just around our outlook and our key metrics, and we plan to update you on that in the beginning of next year, but also around the drivers and the strategic actions that will really enable us to be able to reposition and rebuild the company. So obviously, the Fortitude transaction is a step in that direction. At the moment, we're focused on the close of that. We identified in our overall remark that there are a number of places that we are evaluating, that's internal, external solutions as it relates to the in-force. We have been active. I also want to mention that while we have been focusing on the rebuild of our capital position, we also have been focused on profitable growth. And that profitable growth as it relates to new business and sales we've been focused very much on capital efficiency there. And one of the ways that we've been able to maintain a robust level of sales there while being capital efficient, has been through flow agreement. So that's been an active part of the strategy, this year and we continue that going forward. As it relates to additional actions as it relates to the in-force and new business, just stay tuned. Again, we'll be able to update you more as it relates to all of this in the beginning of next year. And I just want to reiterate again that we recognize the importance of keeping you updated and being fully transparent. .

Okay. Thanks.

Your next question is from Ryan Krueger of KBW. Please go ahead. Your line is open

Hi. Thanks. Good morning. I had a question on expenses. So you had the Spark initiative in place, which you previously detailed the potential benefits from -- you didn't directly reference that when you were talking about evaluating expenses. So my question is, are you looking at expense actions that would be different and above the Spark initiative? Or you are -- you kind of doing a full new analysis on how to think about expenses?

So Ryan, thank you for this question. So we are first of all, as it relates to Spark, which we have talked about previously, and is an enterprise-wide expense initiative. We are on track, and we are going to continue to execute on everything that we've talked about previously. And so the expectation here is that we will get to an expense a run rate benefit by late 2024 of about $260 million to $300 million. And just as a reminder, for this year, that net save is more in the range of about $60 million to $100 million. So incremental improvement along the way. Now the Spark initiative has really been focused on the modernization of technology of putting applications, legacy applications onto the cloud of reengineering processes and improving automation -- and so it's definitely giving us a lift. We see an opportunity to your exact question that is bigger and broader and in addition to incremental to Spark that we are examining right now, and we'll be able to update you further in the beginning of the year. So the expense pressures, obviously go above and beyond the scope of the Spark initiative and we have every plan to take action to address them and identify the opportunities and be back to you as soon as we can with more on that early next year.

Great. Thanks. That’s helpful. And then just on Linbar, the $50 million, any sense of used to take, I guess, $100 million, $125 million a year. Do you think that's kind of the right way to think about what the eventual run rate could be again? Or is it too soon following the changes to the hedging program? .

Ryan, thanks for the question. I think that it's early, right? We're nine months into the year. I would say we feel comfortable given that third quarter, we saw some volatility and some downward moves in the markets. And so you got to see how the hedge program did with a little bit more choppy waters. Fourth quarter looks to be a little bit of a continuation of the same. So I think we felt good taking 50 out in the quarter. We obviously didn't take anything out in the previous quarter as it relates to what the long-term run rate is. I think it's a little bit too early. So we feel good about the program, it's doing better than expected, but we'd like to get a little bit more time built before we make any long-term decisions.

Got it. Thank you.

Your next question is from Mike Ward of Citi. Please go ahead. Your line is open

Hi, guys. Thank you. I was just curious about the assumption review. If you could help us sort of characterize the changes in assumptions as whether is it more just prescriptive under LDTI or is it more new behavior information or just a rightsizing of prior assumptions.

Sure. Mike, thanks for the question. So look, just to step back, it's a significant process that we undertake every year, right? We look at over $100 billion of reserves. We reviewed the key assumptions around mortality, policyholder behavior or capital markets across all our major business lines. So it is a comprehensive review LDTI, non-LDTI all four businesses. And so for this quarter, I would say we had a number of pluses and minuses. I'll just walk you through maybe at the segment level. So Life had $156 million of unfavorable that was a mix of adjustments across a number of different assumptions and really looking at the entirety of the UL block. So $145 million of that was from policyholder behavior. And there, really, we just had another year of experience as well as another year modeling improvements. $20 million was due to mortality where we've seen some weaker older age mortality, I think, similar to the rest of the industry. Annuity had $12 million of unfavorable there, that was also mostly around mortality, although $12 million relative to the size of that block is somewhat immaterial. Group actually had a positive unlocking driven by a more favorable view around our LTD claim termination rate and look, net-net, there wasn't one large assumption change that drove the aggregate charge. I do think that when you take into account that we had new leadership basically across the board as it relates to this process, we feel really good about where we landed in the validation of the assumptions. So there's always going to be some probability pluses and minuses as you move forward when you're throwing up experience, but we feel pretty good where we landed.

Got it. Okay. So then is there any change in the run rate sort of earnings profile go forward for Life or Group? .

Not for Group. For Life, there will be about a $5 million per quarter run rate impact negative. Although one of the things to look at when you see the queue, post the Fortitude deal the run rate from a GAAP perspective. So no change to the economics, but from a GAAP perspective, the run rate would actually get a little bit less onerous, so a little bit less of a negative as basically we've had to write down some of the assets over the past two quarters, and then you basically have less of a loss to amortize that over time. So the net of those two things will probably be about a wash from a run rate perspective. But to answer your question specifically, as it relates to the unlocking for Life, it will be about a $5 million run rate impact, largely offset by slightly better expectations from a GAAP perspective as it relates to the deal.

Thank you.

Your next question is from John Barnidge of Piper Sandler. Please go ahead. Your line is open.

Thank you very much. Appreciate the opportunity. Can you talk about the legal accrual? Other companies with retirement businesses have reported accruals for electronic communications. Thank you.

So John, what I would say is we're not going to comment on legal accruals. I would refer you back to the language in the 10-K, where we put in disclosures what we can. So I wouldn't -- we're not going to comment on legal accurals.

Okay. I appreciate that. And then as we think about the opportunity for expense reductions above and beyond the Spark initiatives, is there an opportunity to create an offshore captive for parts of that? Thank you.

So John, as we mentioned, as it relates to the broader expense initiative, we are in the process of evaluating, and we view very much not only is this a top priority, but a real opportunity for is as we move forward. So just stay tuned. We will be back to you in the beginning of the year, and we'll be able to provide you additional detail on where we're headed on the strategy around it and how we also believe that an expense reduction program will support our future goals as it relates to improving ongoing earnings, free cash flow, capital, et cetera, but also the efficiency and effectiveness of the Group and expansion of talent as well.

Appreciate that. Thank you.

Your next question is from Jimmy Bhullar of JPMorgan. Please go ahead. Your line is open.

Hi. The first word, Chris or Ellen, maybe on the expense program that you're talking about, is it fair to assume that initially, it will absorb cash flows and be dilutive then, but obviously, you're hoping that over time, that will be more than offset by the incremental savings?

Jimmy, I think it's too early to get into the details. I think any time you're talking about a expense program or an efficiency program, there's the upfront cost and then there's ongoing savings, I think will be thoughtful as to whatever it is that we do. So let's just stay tuned. We're looking at all that right now.

And then how do you think about the RBC level that you'd like to be at eventually a few years out, given your business mix? And do you feel that you can get there through normal statutory income? Or is it sort of -- is it necessary for you to do more transactions to get there?

So Jimmy, what we've said is that the near-term target is to get back to the 400% RBC. I think we've also mentioned that longer term, we expect to hold a buffer to that $400 million. I think the goal is to not have a repeat of 2022. And so to have that holding excess capital above the target makes sense. To specifically your question, we can certainly get there be natural organic capital generation over the next couple of years. just thinking about the growth in free cash flow and then to the degree that there's anything strategic we can do to accelerate that, we would look at that.

Okay. Thank you.

Your next question is from Wes Carmichael of Wells Fargo. Please go ahead. Your line is open.

Hey. Good morning. I had a question on holding company liquidity. And with the debt maturity, I think that's down around $450 million. And I'm just curious what you're kind of comfortable operating with there? And if there's any potential levers that you have if there are any near-term kind of statutory earnings headwinds?

So Wes, thanks for the question. I think the level that we're operating at now is the target level. And I think you can hold excess capital at the HoldCo or you can hold excess capital at your insurance company. To me, they are relatively similar in terms of the way that you think about goals over time. You're right, we had a $500 million debt maturity during the quarter, paid that down. I think we have a long-term goal of delevering more broadly, but we feel comfortable with the amount of liquidity that we have at the holding company.

Got it. And maybe would you just -- can you comment on the statutory earnings generation in the quarter within L&L and kind of how you're thinking about overall earnings generation in the quarter?

So I think it's the same idea as to the RBC comment that we made before, whether you're looking at it from an earnings perspective or in RBC, it's the same math. We improved modestly and I think if you look at some of the items we talked about on a GAAP basis, a lot of those port over to stat as well. You referenced Ellen, I mean we have one main insurance company. And so fair to think that for a lot of the items that we discussed gap should look relatively similar to stack for some of the one-timers. So despite some noise in the quarter, we were able to modestly grow RBC. We feel good about that. And we look forward to updating you as it relates to the longer-term outlook early next year.

Thank you.

Your next question is from Wilma Burdis of Raymond James. Please go ahead. Your line is open.

Hey. Good morning. I guess, could you discuss if you freed up any RBC via the enhanced cash value surrender program in the quarter? And are there any other opportunities for Lincoln to buy back its own GUL policies and larger volumes from third parties?

Well, thanks for the question. I think we're not going to comment on future programs. Fair to say, we look at these from time to time. This quarter is a good example of some success there. As it relates specifically to that, what I would say is the net impact was basically de minimis. So we had the one-time item, but then there was -- you would imagine there would be capital freed up behind that. So no major plus or minus as it relates to RBC.

I guess should I take from that comment that the RBC freed up sort of offset the -- mostly the cost of the program? Or is that how I should think about it?

Yes. I think there's always going to be some pluses and minuses. It will, in theory, improve over time, but we're talking about a relatively small portion of the overall program.

And how would you think about that going forward once you reinsure the business, do you stop doing those types of programs? Or how should I think about that?

So Wilma, we had as part of the deal, 40% of our GUL, we have a lot to go. So I think that this will be something that we continue to look at the way that the rest of the industry does and to the degree it makes sense for us, now we'll continue to execute.

Good. Thank you.

We have completed the allotted time for questions. Lincoln Financial Group will follow-up later this afternoon with those remaining in the queue. I will now turn the call over to Adam Cohen for closing remarks.

Thank you for joining us this morning. We're happy to take any follow-up questions that you have. You can e-mail us at investorrelations@lfg.com. Thank you, and have a good day.

This concludes today's conference call. Thank you for your participation. You may now disconnect.