Good morning and thank you for joining Lincoln Financial's Third Quarter 2024 Earnings Conference Call. 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 would like to turn the conference over to Senior Vice President, Head of Investor Relations, Tina Madon. Please go ahead.

Thank you. Good morning, everyone, and welcome to our third quarter earnings call. We appreciate your interest in Lincoln. Our quarterly earnings press release, earnings supplement, and statistical supplement can all be found on the Investor Relations page of our website at www.lincolnfinancial.com. These documents include reconciliations of the non-GAAP measures used on today's call, including adjusted income from operations or adjusted operating income, and adjusted income from operations available to common stockholders to their most comparable GAAP measures. Before we begin, I want to remind you that any statements made during today's call regarding expectations, future actions, trends in our businesses, prospective services or products, future performance or financial results, including those related to deposits, expenses, income from operations, share repurchases, 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 our actual results to differ materially from our current expectations. These risks and uncertainties include those described in the cautionary statement disclosures in our earnings release issued earlier this morning, as well as those detailed in our 2023 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 today. Presenting this morning are Ellen Cooper, Chairman, President and CEO; and Chris Neczypor, Chief Financial Officer. After their prepared remarks, we'll address your questions. Let me now turn the call over to Ellen. Ellen?

Thank you, Tina and good morning, everyone. Thank you for joining our call today. We are pleased with our third-quarter adjusted operating income, which was our highest quarterly earnings in over two years, reflecting continued progress in our strategic realignment. These results were driven by strong underlying performance in all four businesses as we continue to achieve consistent momentum advancing against the operating initiatives we outlined earlier this year. We are executing on tangible actions to deliver sustained long-term value creation and support our strategy built upon three objectives; a strong capital foundation to ensure enterprise stability across market cycles and support investment for future growth, and optimized operating model to advance a scalable framework to maximize our resources, and businesses and products that deliver profitable growth to improve free cash flow and grow the franchise. This is a multi-year journey, and as with any journey, a strong capital foundation lays the base for sustained long-term success. We continue to build capital with another sequential quarter of RBC in excess of our 420% buffer. We also continue to progress in optimizing our operating model with a focus on expense efficiencies, investment strategy optimization, and the launch of our Bermuda Reinsurance subsidiary last quarter to further strengthen our ability to deliver against our priorities. Lastly, we advanced against our objective of delivering profitable growth as we transformed Lincoln into an organization characterized by businesses, market segments, and products with more stable cash flows and higher risk adjusted returns. As we look ahead, we expect to continue to grow and diversify our Group and retirement businesses with targeted segment strategies to serve the unique needs of our customers, evolve our annuity business with a diversified product mix that includes expansion of spread-based products and realign our life business to emphasize more risk…

Thank you, Ellen and good morning, everyone. Our third quarter results demonstrate broad-based improvements across all our businesses, highlighting the positive momentum driven by our strategic priorities and disciplined execution. While the strength we experienced across all four businesses may not always occur simultaneously like we saw this quarter, overall, we are pleased with continued progress in our results. I'm going to focus on three areas this morning. First, I'll recap our third quarter results, including a review of our segment-level financials and our annual review of reserve assumptions. Second, I'll touch on capital. And third, I'll review our investment portfolio. So let's start with a recap of the quarter. This morning, we reported third quarter adjusted operating income available to common stockholders of $358 million or $2.06 per share. This includes the impact from this year's assumption review, which increased earnings by $8 million or $0.05 per share. Additionally, our alternative investment portfolio delivered an 11% annualized return in the quarter or $100 million. On an after-tax basis, this amount was $7 million above our return target or $0.04 per share. Turning to net income for the quarter, we reported a net loss available to common stockholders of $562 million or $3.29 per diluted share. The difference between the net loss and adjusted operating income was predominantly driven by two factors. First, there was a negative change of $446 million in the fair value of the GAAP embedded derivative related to the Fortitude Re reinsurance transaction. This change was primarily driven by the impact of lower interest rates on available-for-sale securities in the funds withheld portfolio backing the agreement with the corresponding offset flowing through accumulated other comprehensive income, or AOCI. And second, there was unfavorable non-economic impact of $381 million within non-operating income, in part driven by the…

Thank you, Chris. Let me turn the call over to the operator to begin the Q&A.

Thank you Tina. [Operator Instructions]. Your first question comes from the line of Suneet Kamath from Jefferies. Please go ahead.

Thanks and good morning everyone. I wanted to start with free cash flow. Chris, you gave us a couple of comments. I think you said above expectations and you took a dividend out of LNBAR, so can you just maybe give us a sense of where you are kind of year-to-date in terms of your free cash flow and maybe how you still feel about that 2026 guide that you gave us previously?

Yes, thanks for the question, Suneet. So first of all, you're right. We feel really good about the year so far and we're tracking well relative to the 2026 targets that we had put out. I think if you step back just to level set, we had talked about 2023 having a 35% free cash flow conversion ratio. And then in the outlook we gave earlier this year for 2026, we had talked about improving to 45% to 55%. And I think -- and by the way, that's alongside growth in operating earnings at the same time, right? So one of the things we had said at the time was it won't be linear. But broadly, if you thought about 35%, 40%, 45%, 50%, the question then is, how are we tracking along that. I think this year, as we've talked about, we've been generating free cash flow above what we had thought. We also had the sale of LFN. And at the same time, we're putting the building blocks in place to make sure that we get to that more sustained level of free cash flow just to reiterate some of the actions we took this year. We took action on expenses in the first half that was broad based. That was the use of some of that free cash flow. We took more targeted actions in the second half. But at the same time, we grew RBC from, call it the low 400s to a level that's in excess of our buffer and continue to grow this quarter. We also established and capitalized the Bermuda sub. So at the end of the day, we're generating free cash flow and slightly above our expectations, and we're also using it to build capital, optimize our operating model, and invest for the business. So as it relates to numbers, you can back into some broad strokes if you think about the growth in RBC. If you think about the debt pay down that we did, we repaid about $100 million this year. We spent, call it, $140 million, $150 million in a combination of severance and some legal charges. And then we obviously are on track to pay $300 million of a dividend. So we're not going to give 2024, 2025 guidance, but I would just reemphasize that we feel really good about where we are. We feel good about the year, and we remain well on target to hit the 2026 numbers.

Okay. That sounds good. And then, I guess, maybe for Ellen on Annuities. Sales were still pretty strong in the third quarter even with the pullback in rates. And so I guess my question is, do you think that there was any kind of pull forward if advisers were expecting that rates might be lower in 2025, try to sell the annuities now and somewhat relatedly, if you can just give some comments on where the growth is coming from, is it new money entering the industry or is it exchanges like we've seen in the past, just any color on those two things would be helpful? Thanks.

Sure. So first of all, thanks for the question. We feel, first of all, really good about the broad-based overall annuity sales that we are seeing. And we also very much believe that we've got a unique holistic capability in that. We are really strong in all product categories that are of interest to customers and also to advisers. Overall, with rates being higher, coupled with the fact that we've got demographics now where we just have more individuals that are approaching retirement and our ability to be able to provide both accumulation and income solutions in the annuity business are definitely important customer value proposition. So while it's true that we saw a blip of rates coming down in the third quarter, we see them back up again now. And we know that generally speaking, even as we look into 2025, that we also from just an interest rate environment perspective that we continue to see interest rates that are certainly at higher levels than they were previously. Coupled with the demographics, we expect to see continued strong demand. Additionally, what we have seen in the last couple of years is more advisers in the overall shops that we have been in for some significant period of time, be focused on annuities as a solution for their overall customers. And again, we think that, that's going to continue as we move forward. What we've also seen, by the way, Suneet, is that we recognize that very much advisers are seeing that annuities are overall providing a solution. And with having multiple chassis and multiple product segments, we're able to do that. So we feel good about the levels. We believe that we will continue to be focused on profitable growth over top line growth. That is really what's most important for us because at the end of the day, we're looking to continue, as Chris mentioned, to accelerate and to increase our free cash flow. And we're going to be less concerned with the overall absolute volume in our annuity business and in all of our businesses.

Okay, that’s helpful. Thanks for the color.

Your next question comes from the line of Elyse Greenspan from Wells Fargo. Please go ahead.

Hi, thanks. Good morning. My first question was just on the assumption review in regards to your life business, recognized like there was a modest favorable impact. I know a couple of years ago, right, when Lincoln took a charge, there was an industry study that kind of drove that passion. And I believe that, that study was updated this year. So I was just hoping you can just kind of walk us through your assumptions and why you feel confident and didn't feel like you needed to change anything significantly this year?

So Elyse, what I would say is a couple of things. One, you're right, we had a positive $8 million impact for operating income for the company. That was largely in the Life, look, we had a small $1 million benefit in annuity and then a small $1 million negative in group. But the $8 million in Life, just to remind you, I mean, this is an end-to-end process across the company really over $100 billion in GAAP reserves. We look at industry studies, we look at our experience. It's a very, very rigorous process. And so what I would say is at the end of the day, this is another year under the management team from the past two years. We've had an extensive level of analysis over the past couple of years, to your point, we took a charge of size a couple of years ago. And this year, obviously, we look at the assumptions the same way that we do every year, and we feel good about where we are. To your specific question, I would say that importantly, from the SGUL perspective, both policyholder behavior and mortality assumptions are continuing to now be in line with our experience and expectations. So there's always going to be some noise in any individual assumption. We look at policyholder behavior, we look at expenses, we look at yields, we look at reinsurance, we look at mortality. But even on an individual basis, the individual items weren't nearly as significant as they've been in years passed. So we feel good about the assumption review. Obviously, this is a very rigorous process, as we've talked about. And so we're pleased with the outcome this year.

Thanks and then my second question, given you were talking earlier, right, about improved free cash flow conversion relative to how you guys had kind of laid things out earlier. And then obviously, you guys have spoken about in the past about a desire to pay down the press when they come due. So how do we think about just improved free cash flow conversion balanced against playing down the press, you did take the LNBAR dividend in the quarter. We put it all together, do you have any updated thoughts on when we perhaps could see return to buying back your shares?

Thanks for the question. I would point you to the outlook that we gave earlier this year and just reiterate that we are tracking well to achieving those targets. To your point, repaying the preferred and bringing down the expense of cost of that security is a priority as is overall delevering. Our leverage ratio came down, I think it was another 50 basis points in the quarter. For the year, we've repaid $100 million of debt. So what I would say is as you look out over the next year or two, the priorities are the same. We're going to invest in our business, we're going to delever, we're going to focus on fully leveraging Alpine, which is the Bermuda subsidiary as we think about establishing flow agreements for next year. And we'll continue to take targeted action around our expense initiatives. So no update relative to the guidance that we gave earlier this year, but we do feel like we're tracking well relative to the building blocks that we had laid out.

Thank you.

[Operator Instructions]. Your next question is from the line of Dan Bergman from TD Cowen. Please go ahead.

Yeah, thanks. Good morning. With one of your competitors announcing a follow-on reinsurance transaction for guaranteed universal life blocks last quarter, I just wanted to get an update on how you're thinking about your remaining ULSG exposure and just given that the seeming continued interest in these blocks [indiscernible] and any updated thoughts on the possibility for a deal and kind of what the key considerations are from your standpoint?

Yes, thanks for the question, Dan. So I would say that we are always looking at what is the right thing to do for Lincoln. Obviously, we did a large deal at the end of last year as it relates to the Legacy Life Block. What I would say is the outlook guidance that we've given does not rely on doing another deal. We think that there's a lot of ways to improve the ongoing free cash flow from the Legacy Life Block and the GUL block in particular without having to do a deal. But to your point, there's certainly an attractive market from a bidders and folks that have appetite for those liabilities. So we will look at all the different options. I would say that our priorities at the moment or as I just laid out, getting the Bermuda affiliate up and running from a flow perspective, continuing to execute on our initiatives to drive profitable growth in our businesses, and delevering. But at the end of the day, rest assured, we're always looking at what makes the most sense.

Got it, thanks. And then maybe just following up on the earlier question on annuity sales. RILA sales, in particular, were strong following the launch of the refreshed product in the prior quarter. So I just wanted to see if you could give any more detail on how that second generation product is being received in the market, how sales are compared to your expectations, and just any general update on that market and competitive conditions with, I think, another large annuity rider entering the RILA market earlier this month?

Absolutely. So RILA and exactly as you noted, we had $1.2 billion of sales in the quarter. This is our strongest sales quarter for RILA in nearly two years, first of all. As we step back, a couple of points to make about RILA; first of all, we have been in the RILA market since 2018. So we've got a pretty broad understanding. We've been in the market for a significant period of time. We've got very strong overall relationships as it relates to distribution in the RILA space. We have continued to see a number of new entrants into this market, there's no question. It's clearly a competitive market and at the same time, we've seen the overall addressable market grow as the customer value proposition, as I was talking about earlier, just becomes stronger. We definitely felt the need to refresh our product and the launch that we did in the middle of last quarter of Lincoln Level Advantage 2.0, part of what it did is it introduced a number of new features and it's one of the things that we also have done quite a bit of, which is to offer unique product features in the market, and that enables us to compete against features, not solely against price as well. And so we definitely saw some really nice traction encouraging in the quarter, and we just look forward to the continuation of that going forward. I think to your point around additional competitors entering, we do expect that we're going to continue to see the addressable market grow along with that. So yes, more competition. But yes, a larger market to go get.

Got it, that’s really helpful. Thank you.

[Operator Instructions]. There are no further questions at this time. I would like to turn the call back over to Tina Madon for closing remarks.

So thank you for joining us this morning. We're happy to address any follow-up questions you have. Please e-mail us at investorrelations@lfg.com.

This concludes today's conference call. Enjoy the rest of your day. You may now disconnect.