Lincoln National Q4 2021 Earnings Call Transcript

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February 2, 2022

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Earnings Conference Call
Lincoln National Q4 2021
00:00 / 00:00

There are 10 speakers on the call.

Operator

Good morning and thank you for joining Lincoln Financial Group's 4th Quarter 2021 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. Now, I would like to turn the conference over to the Vice President of Investor Relations, Al Capricino, please go ahead, sir.

Speaker 1

Thank you, Catherine. Good morning, and welcome to Lincoln Financial's 4th quarter earnings call. Before we begin, I have an important reminder. Any comments made during the call regarding 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 1990 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 on Form 10 ks, most recent quarterly reports on Form 10 Q and from time to time in our other filings with the SEC.

Speaker 1

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 the non GAAP measures used on this 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.

Speaker 2

Thank you, Al. Good morning, everyone. In the Q4 full year, we again experienced elevated claims Related to U. S. COVID deaths, since the pandemic's onset, we have been providing important financial protection for our customers During the most serious global health crisis in over a century.

Speaker 2

Despite the magnitude of claims, Our earnings have been strong enough to continue our share repurchase program, provide capital for new sales and maintain Looking through the significant COVID claims experienced in 2021 And adjusting out excess alternative income and notable items, we view underlying earnings power at about $10.50 per share, up 13% over 20 twenty's comparable figure And representing a 14% underlying ROE on book value We saw broad based sales growth this year in most of our businesses, Good expense management, significant share repurchases and an improved capital position. Looking forward, we expect EPS growth to meet or exceed our long term expectations, Also supported by our actions to increase sales, significant expense savings related to the Spark initiative And share buybacks. Turning to our earnings growth drivers. As interest rates dropped, We started a new product strategy to reprice our portfolio to achieve target returns, shift our emphasis Less capital incentive products and add new solutions that expand our consumer value propositions. We have been executing against this strategy and achieving our objectives.

Speaker 2

During 2021, We introduced 13 new products with more planned in early 2022. We continued our disciplined repricing across our portfolio contributing to strong new business returns. By combining these actions with the Power of our distribution, we achieved significant 2021 sales growth in most businesses And drove increased operating revenues across all our businesses. We continue to successfully manage expenses Successful cost savings initiatives, most recent of which is our Spark initiative as announced last quarter. By improving efficiency, leveraging automation and upskilling our workers, we expect Spark to be very additive to our compound annual EPS growth rate from 2021 through 2024.

Speaker 2

Finally, Share buybacks have been and are expected to remain an important element of our EPS growth. Now turning to the business segments. In Annuities, sales grew 20% compared to the prior year quarter And 4% for the full year. We expanded consumer choice within our already broad product portfolio And added new producers to our industry leading distribution force. Full year sales growth was driven by sales Variable annuities without guaranteed living benefits.

Speaker 2

Our sales of VAs with living benefits Are generating strong returns, helped by a favorable competitive environment, rising rates and the return enhancing flow reinsurance deal we executed in the 3rd quarter. The ongoing shift in sales mix towards products without living benefits started several years ago. We further advanced that effort By launching an index variable annuity in 2018, we supported the launch with increased shelf space And have since continued to innovate, adding new investment options to both our indexed VA And our traditional VA without living benefits. As a result, VAs without living benefits The strategic sales shift has also diversified our account value mix. VAs with living benefits Now account for less than half of our in force annuity account value and based on our current sales mix We enter 2022 with solid footing in the annuities business In Retirement Plan Services, we are successfully capitalizing on the opportunities in the market, thanks to our innovative Product portfolio, differentiated high-tech, high touch service model and breadth and depth of distribution.

Speaker 2

4th quarter total deposits were up double digits, both sequentially and compared to the prior year quarter. Full year total deposits rose 8% to $10,800,000,000 a record with growth in both 1st year sales and recurring deposits contributing to our 7th consecutive year of positive net flows. Retirement Plan Services enters 2022 in terrific shape with a robust Sales pipeline and an expanded product portfolio. We are benefiting from the improved Environment for retirement businesses as wage growth, contribution rates and increases in employer deposits are all serving as tailwinds for deposit growth. Finally, we remain well positioned Competitively in our target markets of small and mid case 401, healthcare, Government and not for profit as evidenced by our consistent multi year track record of positive net flows Turning to life insurance.

Speaker 2

We entered 2021 with a well positioned portfolio of solutions, repriced to ensure strong returns in a low interest rate environment. Throughout 2021, we launched new Innovative risk sharing solutions to help grow the top line. We introduced 7 new products Contributing to 4th quarter sales growth of 53% sequentially and 120 1% over the prior year quarter. This sales strength was broad based with every Major product category reporting double digit growth, including record term life sales And substantial growth in Executive Benefits. Even more significantly, Nearly 30% of our sales this quarter consisted of solutions and features That didn't exist before 2021.

Speaker 2

For instance, variable MoneyGuard represented 42% of total MoneyGuard sales. In 2021, we also continued to build on our distribution force, Adding over 12,000 new producers who had never sold a Lincoln Life policy before. An example of this growth Our new partnership in the P and C channel, new producers across channels are finding our repositioned Finally, we continued to build on our digital capabilities. In 2021, our cost per life application continued to decline As our automated underwriting and digital processing capabilities are driving efficiencies, while improving the customer experience. In 2022, we'll continue to innovate with product launches planned for the first half of the year, expand our distribution franchise And enhance our operations with digital investments.

Speaker 2

Now moving to Group Protection. Let me Focus first on profitability. The group business is managing through a challenging environment As pandemic claims increased in the 4th quarter, group's full year underlying margins normalized for above target Alternative income, pandemic claims and a notable item was slightly below our targeted 5% to 7% range. We expect to achieve ongoing margin improvement in group, building to the high end of our target With improvement coming from a 3 part strategic effort. First is continued pricing discipline.

Speaker 2

We strengthened pricing in 2020 and continue to make additional changes where necessary. 2nd is claims management, including our ongoing investment in claims staffing, Combined with a more streamlined and effective approach to claims operations. Lastly, there's cost efficiency Aided by our recently announced Spark initiative, we expect these three efforts to drive approximately equal contributions to margin expansion. Turning to the top line, We achieved 4% premium growth for the year and 6% for the quarter, which is a result of strong persistency, Up over 2 percentage points for the full year to 89.2 percent and successful execution of ongoing rate increases. Sales declined 17% for the full year And 14% in the 4th quarter as we maintained our pricing discipline.

Speaker 2

Our focus Our strategic market segments has resulted in an increase in employee paid products, Which comprised 43% of total sales in 2021, up from 39% in 2020. And we are starting to see a shift towards supplemental health solutions, including our new hospital indemnity product. This shift is still in its early days, but we expect it will ultimately add to our earnings diversity And consumer value propositions. Although the pandemic is a challenging time, the Group business remains a key contributor to Lincoln's diversified business portfolio, and we are confident in its earnings potential. A few words on one of our key competitive advantages, our powerful distribution force.

Speaker 2

As the industry continually evolves, The strength of our distribution franchises remain a constant. We are known in the marketplace for a consistent distribution presence With broad reach across distribution channels, over 90,000 active producers As wholesalers and reps have begun to meet in person with their clients, they continue to leverage virtual tools, Which improve the service we deliver, raise productivity and help lower costs. And our efforts are being recognized As we received 2 industry awards in 2021 for innovation in virtual training and digital marketing. Briefly on investments. The 4th quarter capped a year of outstanding results.

Speaker 2

We again reported excellent credit performance With another quarter of positive net ratings migration and negligible losses. In 2021, A portion of our fixed income assets rated investment grade or equivalent rose to 97%. This quarter, we invested new money at 2.9%, a 20 basis point sequential increase, As we continue to benefit from a multi manager platform. During 2021, We invested 65 percent of new money in assets other than public corporates, yielding approximately 100 basis points More than comparably rated public corporates of similar duration. For full year 2021, Our new money duration fell to about 7.5 years from 10 years, with the decline reflecting Lincoln's disciplined approach to asset liability management and our shift to a less interest rate sensitive product mix.

Speaker 2

Finally, we reported a quarterly return alternative investments of 4% compared to our targeted return of 2.5%. For the year, we generated an outstanding 29% return versus our 10% annual targeted return. In summary, the claims environment has been challenging, but full year 2021 underlying EPS Grew substantially. We expect our top line momentum to continue. We expect the spark cost savings initiative, Which will more than offset spread compression to add to our EPS growth over the next few years, Enabled by our balance sheet and earnings strength, we continue to return capital to shareholders.

Speaker 2

In sum, our earnings power continues to grow and we remain confident in our ability to achieve Underlying EPS growth at or above the high end of our 8% to 10% target range. I will now turn the call over to Randy.

Speaker 3

Thank you, Dennis. Last night, We reported 4th quarter adjusted operating income of $286,000,000 For $1.56 per share, there were no notable items in the current or prior year quarter. However, this quarter's results were impacted by pandemic related claims, which reduced earnings by $197,000,000 or $1.08 per share, while results benefited from alternative investment income, Boosting earnings by $29,000,000 or $0.16 per share above target. Additionally, we experienced some unfavorable non pandemic impacts to mortality and morbidity But I will discuss further in the Life and Group Protection commentary. Our underlying earnings power Net income Total $220,000,000 or $1.20 per share.

Speaker 3

A strong performance from our credit portfolio was offset by hedge breakage and non economic variable annuity non performance risk. For the full year, net income EPS came in at 91% of adjusted operating EPS, The difference primarily driven by non economic variable annuity nonperformance risk. Moving to the performance of key financial metrics. Average account values increased 10%. A continued focus on expense management led to a 10 basis point improvement in our expense ratio.

Speaker 3

And book value per share, excluding AOCI, grew 9% and stands at $78.05 Before turning to the segments, I want to provide an update on the Spark initiative as we close out the year. Last quarter, we provided details on Spark, which we expect will result in $260,000,000 to $300,000,000 pre tax And run rate savings by the end of 2024, and this remains unchanged. Looking at 2022, we expect a net impact in a negative $25,000,000 to $65,000,000 range pretax This year will be the peak investment year for the initiative. This compares to an immaterial impact in 2021 as we were able to accelerate savings to offset the investments made. As a reminder, We will run the investment through the other operations segment, while the savings will be spread throughout the businesses.

Speaker 3

Now turning to segment results, starting with annuities. Operating income for the quarter was $332,000,000 compared to $289,000,000 in the prior year period. The increase was primarily driven by higher account values, Average account values of $171,000,000,000 increased 13% year over year, Our revenue growth of 10% for the quarter resulted in a 110 basis point improvement in the expense ratio. Return metrics remained excellent with return on assets coming in at 78 basis points And return on equity at 25%. Risk metrics on our VA book once again demonstrate the quality of our in force.

Speaker 3

With an adamic risk at 53 basis points of account values for living benefits and at 34 basis points for death benefits. 2021 was another excellent year for the Annuities business and we are well positioned for continued Strong performance in 2022. Retirement Plan Services reported operating of $57,000,000 compared to $49,000,000 in the prior year quarter. With the increase driven by higher fees and account values, Positive full year net flows and continued expense efficiency. Favorable equity markets and the positive flows drove 4th quarter average account values up 17% to $98,000,000,000 The expense ratio improved 40 basis points over the prior year quarter and 170 basis points for the year, driven by continued diligent expense management.

Speaker 3

Base spreads, excluding variable investment income, compressed 2 basis points versus the prior year quarter and 7 basis points for the full year, better than our previously communicated 10 to 15 basis point range, a result of continued management of crediting rates. Going forward, we expect spread decline to be in the 5 to 10 basis point range. Overall, another excellent year for the retirement business capped off by a great quarter, Positioning the business for continued success in 2022. Turning to life insurance. Operating income for the quarter was $80,000,000 versus $144,000,000 in the prior year quarter.

Speaker 3

This quarter's results were impacted by pandemic claims and unfavorable underlying mortality With some offset from alternative investment income. Elevated mortality related to the pandemic was $66,000,000 in the quarter compared to $113,000,000 in the prior year quarter. This quarter's impact per 10,000 U. S. COVID deaths improved year over year and sequentially as expected.

Speaker 3

In addition to the impacts of the pandemic, underlying mortality was negatively impacted by $24,000,000 This was primarily driven by claims incurred during the 3rd quarter, but not reported until the 4th. For full year 2021, excluding the impact of the pandemic, Our actual to expected mortality ratio came in at 100%. While alternative investment income was less favorable than the prior year quarter, the current quarter did include $22,000,000 of excess Our recent block reinsurance transaction reduced Life earnings by $10,000,000 in line with our expectations. And as a reminder, the results from the prior year quarter included a $20,000,000 favorable One time item. Key metrics impacted by the transaction include average account values, which would have been up 7%, Excluding impacts from the deal and base spreads, which were favorably impacted and should move back towards our expectation 5 basis point decrease annually.

Speaker 3

While strong sales drove an increase in the quarterly expense ratio, We did see improvement in the full year results with the expense ratio declining 20 basis points. So we continue to expect some impacts from the pandemic, growth in earnings drivers, Underlying long term mortality results in line with expectations and continued expense discipline keep us optimistic about the future Group Protection reported an operating loss of $115,000,000 compared to an operating loss of $42,000,000 in the prior year quarter, with the decrease primarily driven by $131,000,000 of pandemic claims. Additionally, Group earnings were negatively impacted by other items during the quarter, including $25,000,000 to $30,000,000 of seasonally higher 4th quarter disability claims and expenses and approximately $15,000,000 of underlying disability results. We attribute the underlying disability results to a combination of normal quarterly volatility and indirect influence Like prior quarters, the pandemic impact was primarily mortality related With $115,000,000 of life claims and $16,000,000 of disability claims, The life claim impact per 10,000 U. S.

Speaker 3

COVID deaths declined from 3rd quarter levels to $9,200,000 As the percentage of working age deaths declined somewhat. While the pandemic's Impact on group earnings will vary quarter to quarter. We remain confident that the fundamentals of the business are solid And the actions we are taking will over time get us to the high end of our targeted margin range. Turning to capital and capital management. We ended the quarter with 10 point The NAIC's new C1 factors went into effect at year end, Which lowered our RBC ratio by approximately 20 percentage points this quarter.

Speaker 3

Chesapeake Holding Company stands at $1,100,000,000 above our $450,000,000 target As we have pre funded our $300,000,000 2022 debt maturity and retained $400,000,000 of proceeds from the LifeLock sale for additional incremental share repurchases. These will commence shortly Via an accelerated share repurchase program that should be completed by the end of the Q1. We deployed $650,000,000 towards buybacks in the 4th quarter, including $150,000,000 of ongoing Quarterly share repurchases and $500,000,000 in incremental share repurchases with proceeds from the block reinsurance deal. As I mentioned last quarter, the timing of ongoing buybacks may be influenced To conclude, 2021 was certainly a year that continued to be challenged by the pandemic. But as we enter 2022, we feel confident in our ability to continue to tackle any challenges that lie ahead As we have positioned Lincoln to continue its track record of delivering for customers, Employees and shareholders, in summary, we delivered on our promises to customers with nearly $650,000,000 of pandemic related earnings impacts.

Speaker 3

While continuing to strengthen our balance sheet, Ending the year with estimated RBC ratio of 428%, while absorbing the impacts from the C1 factor changes. We continued to achieve organic growth with a portfolio including new and innovative products Driving strong returns. We delivered powerful earnings growth with reported operating EPS excluding notable items, Up 20%. We continued our strong track record of capital return With $1,400,000,000 of buybacks and dividends and with the addition of the Spark initiative have positioned Lincoln to continue to grow EPS over the next 3 years atoraboveourlongterm aspirations With that, let me turn the call back over to Al.

Speaker 1

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 Q and A.

Operator

Thank you. Our first question comes from Tom Gallagher with EVR. Your line is open.

Speaker 4

Thank you. First question, can you talk about the strength in individual life insurance sales for the quarter? They roughly doubled. Did you announce pricing changes for those sales in anticipation of that or just a little more color about what drove the strength of Individual Life sales.

Speaker 3

Tom, it's Randy. There's a number of factors That drove that outcome, which was in line with our expectations. If we went back to the Q4 of last year first, we talked about That was the point when all of our products had been repriced over shortly to be repriced up repriced. And so we expected sales to be at a low point at that moment in time. So we're comparing to the low point from a live sales standpoint.

Speaker 3

Then in addition to all those repriced products, this year we added, as Dennis mentioned, 7 new products. Use one example, MoneyGuard, a MoneyGuard product, variable MoneyGuard product, which did not exist in the Q4 of last year, That represented 42% of the sales in that particular product area. Dennis also mentioned Some new distribution partners in the P and C channel and that really drove some great results, especially in the term business. So it's a combination, Tom, of all of those new products. The fact that last year was, as we communicated, And expected low point.

Speaker 3

And then the third factor I would just mention, the 4th quarter is typically in a normal year, The biggest quarter for live sales. It's been that way as long as I've been in the industry. So that's what I would say, Tom.

Speaker 4

Okay, thanks. And then my follow-up is, if I look at the performance of your group business, the deterioration And overall loss ratio has been worse than peers. Curious, if when you Sort of step back and look at that business, do you think there needs to be any repositioning of the block from a risk selection standpoint? Or do you think it's kind of just volatility that's occurring from the pandemic, some random aspects to it and getting enough rate Or getting rate is all you need in terms of what you see lying ahead.

Speaker 2

Tom, Dennis, At the top, we think we have a very strong book of business. We're very confident That these 2 or 3 strategies that I mentioned are going to get us to the top end of our 5% to 7% margin Over the next few years, I'm very optimistic about the group business and its Significantly, there's significant opportunities to increase earnings over the next couple of years. So we feel pretty good about it. Randy, do you want to add any details on the quarter?

Speaker 3

Yes. Tom, thanks for the question. I think from a starting point, you've got the pandemic, which Over the back half of twenty twenty one, started to hit group businesses, not just at Lincoln, across the industry in a more material way that was, We believe, as I've heard others talk about, had to do with the shift in who was dying from COVID, an approximate doubling Of the working age population percentage of COVID related deaths, that came down a little bit In the Q4, it went from 40% in the 3rd quarter to 35% in the 4th quarter. And I think that was the driver of why our mortality impact came down a little bit. But Once again, group business, our group business across the industry, when I look at it, got hit in a similar way and that impact grew over the course 2021, it culminated in the 4th quarter, an impact of $131,000,000 $150,000,000 of that full mortality.

Speaker 3

So that's that aspect. Now there are 2 other aspects about our quarter and let me talk about those. The first is, I talked about in my prepared remarks, Tom, dollars 15,000,000 of underlying Negative results in our disability business. You can really see that In the loss ratio, if you exclude the pandemic in our disability business, we had about an 87% loss ratio in the 4th quarter. That was A little over $83,000,000 last year in Q4, so up about 4 points.

Speaker 3

And that's that $15,000,000 of underlying Negative results I talked about. We think there's 2 factors in there. First, we saw a blip in severity. Severity is running a pretty tight channel for an extended period of time and we saw jump up this quarter. We think that's sort of normal volatility and I mentioned that in my script.

Speaker 3

The other factor that we see when we look at our results is incidence, which ticked up a little bit. We think that's more influenced by the pandemic. If you think about care across The United States healthcare system throughout the pandemic, I think there's been some deferred care. There's some other things that have caused A slight tick up in incidents, and I think that's going to take a little longer to work out. I think we're going to be working on that over the course of 2022.

Speaker 3

So that's the underlying component. Additionally, I talked about the seasonality, which we here at Lincoln have seen for some time in the 4th quarter, $25,000,000 to $30,000,000 that's made up of expenses, which typically go up a little bit in the 4th quarter and then On the disability results, when we think about why do we have seasonality in the Q4 in our disability results, there's really Three things that we typically see. The first is on the incident side. It really has to do Our biggest and current quarter from an STD standpoint is the 2nd quarter. And so we can and those roll in the 4th quarter after a 6 month waiting period.

Speaker 3

The second factor we typically see is resolutions. Seasonally, they're lowest in the Q4. We think that has a lot to do with Holidays, etcetera, doctors' offices, it's just harder to get information. So we typically see we still have a good result, but Seasonally, we typically see it at its lowest level in the Q4 and we saw that again. And then the last side is we typically also see seasonally Our Social Security offset dropped in the Q4 and once again we saw that.

Speaker 3

So that's what we attribute the seasonal aspect and we expect that to go back to What we've seen in the Q1. So I hope that helps, Tom. Hope that answers your question.

Speaker 4

That does. Thanks, guys.

Speaker 3

Yes.

Operator

Thank you. And our next question comes from Suneet Kamath with Jefferies. Your line is open.

Speaker 5

Great, thanks. Just first on the alternatives, can you give us a sense of how much of this year's VII was marks as opposed to realized gains and maybe how that compares to prior years?

Speaker 6

Suneet,

Speaker 2

the portfolio is turning over. So at a big picture level, we're converting some of the gains to cash. We'll have to get back to you on the details, but it's not just an increase in the marks. We're converting into cash and reinvesting the proceeds In new business, new investments, excuse me.

Speaker 5

Got it. Okay. All right. And then I guess on the annuities, I mean, your sales were strong The year, but the flows were still pretty negative there, I think $2,600,000,000 I guess what is your outlook as we think about 2022 and beyond, at what point does this business start to return into inflows? Thanks.

Speaker 2

Yes. The inflows are made up of both A little bit more on the fixed annuity side, which is a result of our repricing The fixed notice is a good business, if properly priced, draws a lot of capital, so you have to make sure that the return is appropriate. On the VA side, I think what we're seeing not I think, what Our ratio of sort of the ongoing Surrenders and so forth are staying pretty consistent, but at the same time, account values are going up. And so you have a little bit more account value Impact on the outflow rate. So we're confident of the annuity business to be growing over time, How the net flows work out is a function of a couple of different things, but good business.

Speaker 2

I would say we're getting excellent returns on the capital that we're putting behind both the business with Guaranteed living benefits as well as the business without guaranteed benefits, living benefits. And I'll just come back to what we've been saying about this business for a long time. By staying in the market consistently In good times and bad times, we have produced one of the best quality in force books of business in the industry and we expect that to continue and to help drive earnings over the next couple of years.

Speaker 5

Okay. Thanks.

Operator

Thank you. Our next question comes from Tracy Banghi with Barclays, your line is open.

Speaker 7

Thank you. Good morning.

Operator

I noticed that

Speaker 7

you grew your VA with GLBs by a healthy 65% year over year. I guess, is some of the thinking that this is really an investment only VA considering your reinsurance flow deal with Talcott, So that basically allows you to grow but not take incremental risk?

Speaker 2

Tracy?

Speaker 3

Tracy, this is Randy. Yes, that was a component of Growing sales, right? If you remember on the Telkat deal, it had a maximum sales of 1,500,000,000 And it ran through next June. So yes, it was definitely a component. Now in and of itself, The growth, I think it's once again, it's similar to the Life story.

Speaker 3

The Q4 of last year was the lowest quarter we've ever had. It was a Very low Q4 2020. So I think some of that growth. If you look at more recent quarters, sequential quarters, you have a much more Smooth pattern of growth. There's no specific strategy to, hey, we're going to grow VA with living benefits or we're going to grow this.

Speaker 3

Once again, our strategy is to price the products appropriately, Have a very diversified portfolio and let consumers choose from among those products as their preferences shift. What we believe that's going to lead to over time is something similar to what you saw this year, right? About a quarter of our sales Over the course of 2021, where VAs with guarantees, about 75% were fixed or VAs without guarantees. I think that's a reasonable expectation. And that mix over time should pull our overall Account value mix towards that over time and just as a reminder, Dennis said in his script, We've reached a point now where less than 50% of our account values are VA with guarantees and the current sales mix is about 25%.

Speaker 3

So It will take a long time, but that's where you would eventually expect to move over time. Does that help, Tracy?

Speaker 7

Okay. Yes, that helps. Thank you. And then also last quarter, you talked about spread compression running between 2% and 3%, but that could And down to 1% to 2%. Just wanted to know your latest outlook, just given some of the asset allocation updates you made in 2021 on new money And also considering rising interest rate, LVA, there's a flattening yield curve.

Speaker 3

Tracy, Spread compression has come down. It's come down as we've moved into 2022 as rates have moved up a little bit. We're definitively at the low end of that range, and we expect it to continue to decline. I think when you look forward, there will be a point In the not too distant future, where we formally communicate it more in the 1% to 2% range than the 2% to 3%, which is our current public

Operator

Thank you. Our next question comes from Alex Scott with Goldman Sachs. Your line is open.

Speaker 8

Hi. First question I had was

Speaker 2

a little bit of a

Speaker 8

housekeeping item. I guess, I just wanted to confirm on the I guess, I just wanted to confirm on the higher end of the 8% to 10% EPS growth that you kind of talked Rather or even exceeding it, should I think about that completely separate from the 5% accretion that You sort of communicated around the Life Closed Block transaction?

Speaker 3

I think you should think about those altogether, Right. So part of the reason we are very confident in our ability To grow above at or above that 8% to 10% guidance is the impact of the Spark initiative, But also it's the fact that we'll have a slightly elevated share count reduction embedded in that analysis Associated with the $900,000,000 of buybacks that we're doing as part of LifeLock sale.

Speaker 8

Understood. Okay. And then second question, unrelated, we've gotten more inquiries about the Department of Labor and just sort of the process that they seem to be Beginning to ramp up potentially to take another look at the fiduciary rule. And I guess I'd just be interested in your perspective on that and what's going on. And also, what might be different like this time around versus I think the experienced investors probably remember from the 2016 time period?

Speaker 2

Alex, I don't know that we have any more insight than anyone else does because It's evolving as we speak. But as a general observation, I think Because of the changes the last time around and the way the industry has reacted to them and Lincoln in particular that there's No overriding concern about the effect of expansion of the fiduciary rule on the way we do business. We think we can accommodate Most of the range of outcomes that we expect.

Speaker 5

Thanks.

Operator

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

Speaker 6

Yes. I just wanted to get a little color on the FIA sales. I don't know where interest rates are, whether it's attractive. There were during the pandemic a lot of less rated companies besides Lincoln that were successful in selling FIAs Multi year guarantees and whatnot, Lincoln wasn't going to chase price and now the growth is pretty good. Is that a behavior that's changing among your distributors?

Speaker 6

Has the price come into a point where Lincoln's products more attractive? How is that working exactly?

Speaker 2

Josh, we're very comfortable with the business that we're selling and getting the appropriate returns on it. The sort of the competitive environment can change very quickly. I think we change our rates every 2 weeks based on what's happening in the marketplace. I want to come back to but not we're very careful about getting the right return on the capital we're deploying Hi, new sales. We have very strict rules and governance around that.

Speaker 2

And And candidly, the overall risk profile of the products over time. So we feel good about fixed income annuity pricing, The product risk characteristics from a shareholder point of view and the return that we're getting on new capital.

Speaker 6

And why do you think they didn't sell so well 12 months ago? It sounds like they weren't being sold

Speaker 2

in the market at all. For Lincoln or for the industry?

Speaker 6

For the I mean, compared to the industry, Lincoln, Lincoln seem to I mean, you might have been pulling back to some extent, but obviously, I don't know if the rates have That much or maybe they have, maybe the economics are very different from what they were a year ago.

Speaker 2

Rates are Improving as we all know and that affects the value proposition for the customer. We've also added some new indexes That have made the breadth of customers' interest wider, which helps increase our sales. So it's this consistent product development, adding new features. I actually mentioned this in my comments And maintaining a good risk profile for the product as well as return on capital behind the products.

Speaker 3

Josh, I would just point out that we're very as Dennis said, we're very happy with the returns we're getting and very happy with the sales we're seeing. If you look over a longer term like this year compared to last year, I think our fixed sales are actually down compared to last year. So Over the longer term, we continue to price to get our targeted returns and the sales will come as they do. Thanks.

Speaker 2

Thanks.

Operator

Thank you. Our next question comes from Elyse Greenspan with Wells Fargo, your line is open.

Speaker 9

Hi, thanks. Good morning. My first question, I just was hoping to get some more Color on what drove that elevated mortality away from COVID within the Life business in the quarter? And any You can give us when we think about modeling in the Q1, 2022 and beyond.

Speaker 3

Elyse, thanks for the question. I think as I mentioned in my script, when we pull out the pandemic impacts for the full year, Our actual expected was exactly at 100%, right in line with our expectations. Now inside of the quarters, That consisted of a first half of the year that was a little better than our expectations and the back half of the year that was a little worse than our expectations. The quarter itself, $24,000,000 of underlying mortality, I think I mentioned this in the script. It was driven actually by claims that occurred in the 3rd quarter, But didn't get reported into the Q4.

Speaker 3

Essentially, the IBNR was a little under Stated at the end of the Q3. Now, when you think about Life IBNR, I looked at it Over the last few years, if you sum up all the pluses and minuses, it adds up to exactly 0. But inside of it, you'll have some quarters where it's A little low in some quarters where it's a little high and the 3rd quarter happened to be one where we were just a little under. Accrued from an IVR standpoint and that hit us That really drove the $24,000,000

Speaker 9

Okay. And then in terms of the Bark initiative, I think you mentioned some more savings than expected came through in the quarter. Is there any sense you can give us the geography by segment? And then Is the right way to think about getting to the top end of that 5% to 7% target within group meaning It implies that we need to go through the whole Spark program and realize all of the expense savings or can you just help us think about How about think about the time frame there?

Speaker 2

Elyse, let me speak to the second half of your question with respect to group margins. We're very confident in getting to the 5% to 7%. And as I mentioned, there's 3 components of that That have about equal weight. The first one is the continuation of strengthening our pricing. We're getting good single digit increases in pricing at the moment.

Speaker 2

We expect that To help, again, provide about a third of the improvement to the 5% to 7% over time. The second piece is, we're actually investing money in our claims management process Systems and other types of new ways of running claims To get our claims, and have been processed slightly better shape than it is today. And then the third one is the Spark initiative. And so it will develop over the next 3 years. So once again, the in force book of business is fine.

Speaker 2

We need to do some repricing and these three initiatives Will get us to the 5% to 7% range over the next several years.

Speaker 9

And then just in terms of the Spark savings, how they're trending through the segments, can you just give us a sense in the 4th quarter?

Speaker 3

Yes, Tracy, I don't have any specific information segment by segment in the quarter. Our expectation is that the $260,000,000 to $300,000,000 of run rate savings Would be spread across the businesses, really in line with their level of expenses compared to the total expenses. So we expect it to be uniform when we and how that will manifest in Numbers you can see is that we expect our expense ratios to continue to decline as they've done for a long, long time across Lincoln.

Speaker 9

Thank you.

Operator

Thank you. Our next question comes From Eric Bass with Autonomous Research, your line is open.

Speaker 5

Hi, thank you. In the buffered annuity market, it looks like Seeded some market share in recent quarters. Is this a reflection of more competition coming into the product? And are you seeing any signs of aggressive features or pricing in the market?

Speaker 2

Eric, certainly a lot more there are a lot more people offering the product. There's some unique product Feature developments, I think, are good for the space in general. We just continue to use the strength of our distribution, Our pricing requirements and sometimes we'll gather a little more market share, sometimes less, But over time, it's a good product. It's not guaranteed. And back to what we've done so well in the annuity business, actually in all of our businesses, Consistently in the market with good quality products, delivering good consumer values, improving them And paying a lot of attention to getting the right return on capital behind those products.

Speaker 5

Got it. Thank you. And then as we think about ordinary dividend capacity for 2022, how much impact will there be from the high COVID losses in 2021? And Will this have any material impact on cash flow to the holding company?

Speaker 3

Eric, no. If you think about even the last 2 years, Indiana is a greater upstate, so our dividend capacity has been driven by the significant amount of capital Inside of L and L, that was the case this year. We have no problem Getting dividends out and no expectation that we'll have any limitations in 2022 relative to our needs.

Speaker 5

Got it. Thank you.

Operator

Thank you. And that's all the time we have for questions today. I'd like to turn the call back to Al Capricino for closing remarks.

Speaker 1

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 e mail us at investorrelationslfgdot Thank you all and have a great day.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by.

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