Lincoln National Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 31, 2024

Key Takeaways

  • Adjusted operating income for Q3 reached $358 million ($2.06 per share), the highest in over two years, driven by strong performance across all four business segments.
  • Group Protection delivered a record quarter with earnings more than doubling year-over-year, supported by disciplined pricing and margin expansion, though seasonal headwinds are expected in Q4.
  • Annuities saw a 25% year-over-year sales increase to $3.4 billion, with spread-based products comprising two-thirds of sales and the second-generation Ryla product hitting its highest sales in nearly two years.
  • Retirement Plan Services produced its highest first-year sales in over a year at $1.7 billion and maintained positive net flows, although Q4 net flows may be impacted by plan termination timing.
  • Capital strength improved with an RBC ratio above a 420% buffer, 50 basis points of leverage ratio reduction, and the launch of a Bermuda reinsurance subsidiary to support future growth.
AI Generated. May Contain Errors.
Earnings Conference Call
Lincoln National Q3 2024
00:00 / 00:00

There are 7 speakers on the call.

Operator

Good morning and thank you for joining Lincoln Financial's Third Quarter 2024 Earnings Conference Call. At this time, all lines are in 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 Senior Vice President of Investor Relations, Tina Madden. Please go ahead.

Speaker 1

Thank you. Good morning, everyone, and welcome to our Q3 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.

Speaker 1

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 ks, 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 Nezapour, Chief Financial Officer.

Speaker 1

After their prepared remarks, we'll address your questions. Let me now turn the call over to Ellen.

Speaker 2

Thank you, Tina, and good morning, everyone. Thank you for joining our call today. We are pleased with our Q3 adjusted operating income, which was our highest quarterly earnings in over 2 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 3 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.

Speaker 2

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 4 20 percent 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 transform 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 sharing within accumulation and protection products.

Speaker 2

Our progress to date has clearly been driven by broad based execution and sets the stage for continued success as we leverage our competitive advantages, including our powerful franchise, distribution leadership, broad product portfolio, and trusted brand. On the topic of brand, I would be remiss if I did not spend a minute mentioning a recent brand refresh. Collectively, our 4 businesses deliver financial protection and security to more than 17,000,000 customers today, customers who rely on us to support their financial futures. As we look forward, we seek to enable more people to confidently succeed their way, and we treat every customer's future with care. Our new logo is intended to drive brand recognition, and our new tagline, Your Tomorrow, Our Priority, embodies our focus on stewardship and our enduring commitment to being there for our customers today and tomorrow.

Speaker 2

Now turning to our Q3 performance, excluding the impact of our annual assumption review. Key highlights at the segment level included Group Protection delivering record 3rd quarter results with earnings more than doubling year over year. Annuities earnings increased by 15% for the same period and delivered substantial sales growth. Retirement plan services sustained its momentum producing another quarter of sequential earnings growth and 1st year sales that more than tripled year over year. Life Insurance generated sequential sales growth for a second quarter.

Speaker 2

We have made significant progress against our objectives and our results have exceeded our expectations. Now shifting to our businesses and starting with Retail Solutions, which includes our Annuities and Life businesses. Our Annuity strategy is taking hold as we execute on growing while diversifying our earnings mix to more spread based products. We aim to achieve this with the continued expansion of our addressable market and increasing our competitiveness by enhancing our capabilities, including an optimized investment strategy, capital efficient reinsurance solutions and increased expense efficiencies. Total annuity sales for the quarter of $3,400,000,000 were up nearly 25% from the prior year quarter with increases in all product categories and double digit growth in spread based products.

Speaker 2

We remain focused on delivering profitable growth over top line growth that meets our targeted risk adjusted returns in each product segment while leading with our distribution network to provide a broad holistic set of product solutions that address customer preferences in various market environments. Ryla continues to be a strategic focus and demonstrated another quarter of solid momentum with sales increasing year over year by 13% and 10% sequentially to the highest sales level in nearly 2 years. We successfully launched our 2nd generation Ryla product last quarter and its refreshed features and unique crediting strategies are resonating in the market. While our fixed annuity sales increased by more than 30% year over year and were approximately $1,000,000,000 for the quarter, sales levels were down sequentially. As a reminder, we built the capabilities over the course of the last year to sustain a consistent and growing presence in the fixed marketplace and expect to leverage our new Bermuda affiliate for this product in the future.

Speaker 2

Spread based products represented 2 thirds of our total sales in the quarter as we continue to extend our reach to new segments. Finally, our traditional variable annuity sales increased 31% year over year as we experienced strong growth in variable products with and without guaranteed living benefits. Variable annuities further enhance the diversification of our product suite while delivering strong risk adjusted returns. As we look ahead to the Q4, while we anticipate sales to be lower than the record 2023 Q4, we expect sales growth for the full year. In summary, with the depth of our distribution leadership and the breadth and diversification of our product suite, we believe we are uniquely positioned to competitively differentiate.

Speaker 2

This is and will continue to be reflected in the results that drive the strength of our Annuities business. Now turning to our Life business. Life achieved sequential sales growth of 16% for a 2nd consecutive quarter of double digit growth as our distribution and product actions gained further traction. We remain focused on realigning our Life product portfolio to offer solutions that generate more stable cash flows and higher risk adjusted returns. Specifically, this means we are targeting growth in accumulation and protection products, which have more risk sharing.

Speaker 2

As I mentioned last quarter, we are supporting this objective with our repositioned Life distribution team to optimize our wholesaler footprint. This improves our customer reach and elevates our coverage to better enable and accelerate our product shift. While realigning our Life business will continue to take time and we expect that sales growth may not be linear, we are confident that leveraging our product, distribution and underwriting teams will increase our competitive differentiation and drive higher earnings growth over time. Next, turning to Workplace Solutions, which includes our Group Protection and Retirement Plan Services businesses. As I highlighted earlier, Group's earnings more than doubled year over year as we continue to execute on our strategy to grow profitably by prioritizing margin expansion over top line growth.

Speaker 2

Year over year premium growth remained at 3% in the 3rd quarter, reflecting our disciplined pricing approach to both new and renewal business where we are achieving persistency in line with our expectations while undertaking a repricing effort, reinforcing the strength of our relationships and ability to deliver value to our customers. In what is typically our lowest sales volume quarter of this year, group sales increased 18% year over year and supplemental health sales doubled during the same period. These outcomes reflect the significant progress we have made in executing on our targeted segment strategies, which are key pillars of our margin expansion efforts as we build on the tailored solutions we offer with unique products and services within each segment. In our local market segment, we are expanding our growth through enhancements to our products and upgrading our operating model to improve access, ease and affordability. In our regional segment, we are creating a unique value proposition focused on elevating the customer experience and further strengthening key strategic partnerships.

Speaker 2

As a market leader in our national segment, we are continuing to leverage our consultative approach and expanded product strategy to grow profitably. We are strategically investing in the capabilities to meet our customers where they want to be met, including talent, technology, and infrastructure to improve the customer experience by expanding our digital and self serve capabilities, upgrading our underwriting technology and reengineering our client service model. These investments along with our expanded product offerings are driving our growth. As we look forward to the Q4, which seasonally accounts for the majority of our full year sales, we anticipate year over year sales growth while maintaining our focus on profitability. In summary, Group's performance this year has exceeded our expectations driven by our strategic actions and supported by a favorable macro backdrop.

Speaker 2

Our focus remains on delivering a long term sustainable margin and we are confident we have the appropriate strategy to do so. Now turning to Retirement Plan Services or RPS. RPS sustained its momentum producing another quarter of sequential earnings growth and 1st year sales which more than tripled over the prior year. Our strategy to continue growing in our core record keeping and institutional market segments through our differentiated service model and product innovation is resonating with the market. The robust pipeline we previously communicated materialized into strong sales in the quarter of $1,700,000,000 and drove positive net flows as our targeted segment strategy and increased engagement with our distribution partners continued to deliver results.

Speaker 2

Our small market sales reflected the strength of our LFD distribution franchise and ongoing product innovation. In the mid large segment, we leveraged our service model, which drives high client satisfaction to attract new plan sponsors in markets where our value proposition is resonating. We continue to innovate and build capabilities in our retirement business, improving our products and services, enhancing our customer experience and increasing operational efficiency as we further optimize our operating model to drive sales and earnings growth. In closing, our strong performance this quarter reinforces the momentum of our strategic execution as we continue to reposition Lincoln for sustainable growth and value. We are leveraging our competitive advantages to grow profitably, advance operational efficiency and build the capital flexibility of our franchise.

Speaker 2

While our transformation is a multiyear journey, we are building a durable path to deliver lasting value for our shareholders, customers, partners and employees. With that, let me turn the call over to Chris.

Speaker 3

Thank you, Ellen, and good morning, everyone. Our Q3 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 3 areas this morning. First, I'll recap our Q3 results, including a review of our segment level financials and our annual review of reserve assumptions.

Speaker 3

2nd, I'll touch on capital. And 3rd, I'll review our investment portfolio. So let's start with a recap of the quarter. This morning, we reported Q3 adjusted operating income available to common stockholders of $358,000,000 or $2.06 per share. This includes the impact from this year's assumption review, which increased earnings by $8,000,000 or $0.05 per share.

Speaker 3

Additionally, our alternative investments portfolio delivered an 11% annualized return in the quarter or $100,000,000 On an after tax basis, this amount was $7,000,000 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 $562,000,000 or $3.29 per diluted share. The difference between the net loss and adjusted operating income was predominantly driven by 2 factors. First, there was a negative change of $446,000,000 in the fair value of the GAAP embedded derivative related to the Fortitude Re Reinsurance transaction.

Speaker 3

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 an unfavorable non economic impact of $381,000,000 within non operating income in part driven by the negative movement in market risk benefits as the impact of lower interest rates more than offset the impact from higher equity markets. Of note, our hedge program continues to perform in line with our expectations. And as a result, we were able to take a $50,000,000 distribution from LendVAR. Before turning to our segment results, I want to briefly touch on the impacts of our annual review of reserve assumptions.

Speaker 3

As I noted earlier, the net operating impacts from the review this quarter were minimal, resulting in an $8,000,000 benefit to adjusted operating income. The majority of the benefit stemmed from updates made in our Life business, which favorably benefited earnings by $8,000,000 In our Annuities business, we had a small benefit of $1,000,000 which was offset by an equally small negative impact in our Group business of $1,000,000 As it relates to our life assumptions, it is important to highlight that both GUL policyholder behavior and mortality assumptions continue to be in line with our experience and expectations. The impacts of our annual assumption review on our segment results in the prior year period are detailed in our earnings release issued this morning. Let's now start with Group, which had a record Q3. Excluding the impact of the assumption review, Group reported operating income of $110,000,000 and a margin of 8.5% compared to $44,000,000 in the prior year quarter and a margin of 3.5%.

Speaker 3

The year over year improvement was driven by several factors and given the considerable improvement in our results not only in the Q3 but also year to date, I want to provide additional color on the drivers supporting our earnings growth. First, our strategic focus on diversifying our book of business, discipline in our pricing actions, and strong operational execution within our disability business has led to improvements in the core earnings of the business. This will continue to be supportive of our results in the quarters to come. 2nd, we continue to experience improving mortality trends. And while there can be some volatility in mortality results in any given quarter, overall we expect that trend to persist as we become further removed from the pandemic.

Speaker 3

And 3rd, the benefits from the favorable macro backdrop persisted, supporting the strong results within disability. However, as the current tailwinds from the macro backdrop are unlikely to persist indefinitely, we anticipate that when these conditions normalize, overall growth could moderate for a period of time as the benefits from our strategic actions and improving mortality will temporarily be offset. Now turning to Group product line results for the quarter excluding the impacts of the annual assumption review. The disability loss ratio was 71%, improving by approximately 5 percentage points year over year. The loss ratio remains favorable relative to our longer term expectations and benefited from low claim incidents and strong LTD recoveries, enabling positive return to work outcomes for our claimants.

Speaker 3

The group life loss ratio was 72%, a 9 percentage point improvement versus the prior year quarter. The lower loss ratio was driven by favorable volatility in Group Life incidents, which more than offset slightly elevated severity. As we look to the 4th quarter, consistent with historical trends, we expect seasonal headwinds within our disability results to drive a sequential decline in earnings but continue their improvement year over year. Overall, with our focused execution against our margin expansion strategy and the benefits from the favorable macro tailwinds, we are positioned to deliver over 200 basis points of margin expansion over our 2023 result. As we look beyond 2024, while the results this year are encouraging and reflect our focus on expanding Group to become a larger and more profitable part of our overall business, our priority remains sustaining a margin at or above 7% in the quarters to come.

Speaker 3

Now turning to Annuities. Excluding the impact of the assumption review, Annuities reported operating income of $300,000,000 compared to $260,000,000 in the prior year quarter. The strength we experienced in the first half of the year continued this quarter resulting in year over year improvement driven by a broad set of factors including higher account balances, increased spread income and reduced expenses. Turning to account balances. Ending account balances totaled $165,000,000,000 a nearly 13% increase versus the prior year quarter as higher equity markets more than offset the impact of outflows.

Speaker 3

Ryla account balances surpassed 20% of total account balances for the first time and were up 3 percentage points versus the prior year quarter. As we continue to optimize our investment strategy and leverage our capital efficient strategies, total spread earnings will continue to grow as Ryla and fixed products become a larger part of our overall business mix. Our Annuities results this quarter reflect the benefits of higher account balances and improving spread income. While we expect seasonally higher expenses and elevated reinsurance financing charges in the Q4 to outweigh the tailwinds we've been experiencing through the 1st 3 quarters of the year, overall Annuities will continue to be supported by the strong underlying fundamentals of the business. Now turning to Retirement Plan Services, which reported operating income of $44,000,000 compared to $43,000,000 in the prior year quarter as tailwinds from higher equity markets were offset by elevated participant driven stable value outflows over the last 12 months driven by the higher interest rate environment.

Speaker 3

Our base spread for the quarter was 105 basis points, compressing roughly 5 basis points compared to the prior year quarter. And while we've experienced a modest level of sequential expansion over the last two quarters, as we look ahead, we expect our 4th quarter spread to stabilize at around 100 basis points. Turning to net flows for the quarter. Net flows were $651,000,000 which were supported by the strong sales that Ellen noted in addition to an improvement in stable value participant activity. While we are pleased with the moderating levels of stable value outflows and the overall level of net inflows during the quarter, as we look ahead it is important to remember that Q4 sales and terminations can be lumpy as plans typically change providers.

Speaker 3

As a result, we anticipate that net flows will be impacted by the timing of known planned terminations, challenging positive net flows for the Q4. Now turning to account balances. Average account balances for the quarter increased 15% year over year and end of period account balances were nearly $114,000,000,000 up 21% versus the prior year quarter. Overall, earnings continue to trend in a positive direction as a number of the headwinds that pressured the business over the last year dissipate. While spreads will be a slight headwind as we look towards the Q4, overall higher account balances, increased sales and our ongoing focus on expenses will continue to be supportive of retirement earnings.

Speaker 3

Lastly, turning to Life Insurance. Life reported operating income of $14,000,000 compared to operating income of $23,000,000 in the prior year quarter excluding assumption review impacts in both periods and $40,000,000 of significant items in the prior year quarter. The run rate impacts of the Fortitude re transaction and slightly elevated mortality in the quarter were partially offset by above target alternative investment income and lower expenses. Expanding on mortality results for the quarter, the slightly elevated mortality we experienced was primarily due to an increase in severity from a small number of large claims in our universal life type products. Our term experience for the quarter was in line with expectations.

Speaker 3

Net G and A expenses were down $12,000,000 versus the prior year quarter. The improvements in the expense base highlight our ongoing focus on targeted expense reductions and over time we continue to see an opportunity to further increase operating leverage in the Life business. As we look towards the Q4, we currently expect elevated mortality driven by a small number of large claims that have occurred this month. While this could create quarter over quarter pressure on Life results, this type of volatility is within the range of our long term expectations. Let me now touch briefly on company wide expenses.

Speaker 3

Expenses continued to trend favorably relative to the prior year, driven by the broad based actions we took in the first half of the year focused on reducing organizational complexity. Although seasonal items that typically contribute to sequential expense growth throughout the year resulted in slightly higher expenses compared to the previous quarter, we also took further actions during the quarter to continue streamlining the expense base. This quarter, our efforts have been centered on identifying specific actionable opportunities to reduce our expense base, particularly where ongoing expenses were misaligned with ongoing free cash flow.

Speaker 4

While the

Speaker 3

benefits from the actions we took in the Q3 will begin to materialize in 2025, in the Q4 we will have a seasonal increase in expenses. Our focus on expense management will continue to be targeted as we seek opportunities for efficiency and align with our earnings that will manifest as both reductions and investments as our businesses dictate. Shifting to capital. We ended the quarter with an estimated RBC ratio above 4 20% as our capital position continues to strengthen. The RBC ratio improvement this year has been driven by free cash flow tracking above expectations and the execution of strategic initiatives such as the sale of our Wealth Management business.

Speaker 3

Delevering remains a strategic priority for the organization and sequentially the leverage ratio improved 50 basis points driven by organic equity growth. Lastly, as we announced last quarter, with the creation of Alpine, our affiliate reinsurer in Bermuda, we continue to work towards establishing an increased reinsurance capacity centered around affiliate flow reinsurance. We remain on track to achieve the initial phase of this new business flow support starting in 2025. Now moving to investments. Overall performance was solid as we continue to focus on maintaining a high quality and well diversified portfolio while capitalizing on less liquid assets and structured asset class premiums.

Speaker 3

The portfolio remained high quality at 97% investment grade. Starting with an update on our general account optimization efforts where we continue to leverage our multi manager platform to drive increased value to the organization. We continue to source incremental yield driven by a targeted shift in our asset mix toward investment grade private assets and high quality structured products. As a result, despite declines in market interest rates during the quarter, we experienced year over year improvement in our new money yield with new money invested at a 6.4% yield, approximately 160 basis points above the yield on comparably rated public bonds during the quarter. While the prevailing interest rate environment will influence our overall new money yield, the execution of our optimization strategy will continue to generate an increased level of incremental spread.

Speaker 3

Turning to a brief update on our commercial mortgage loan portfolio. The portfolio remains high quality and represents 15% of total invested assets with office representing only 3% of total invested assets. Despite near term headwinds in the office sector, the broader office portfolio remains conservatively positioned from a debt service coverage and loan to value perspective. Additional information can be found in our quarterly earnings supplement. Lastly, our alternative investments generated a quarterly return of 2.7% this quarter, above our quarterly expectation of 2.5%.

Speaker 3

Our returns during the quarter were broad based with positive contributions from all underlying asset categories. In closing, I want to reiterate 3 points. First, our strong results this quarter reflect our sustained momentum supported by strong underlying fundamentals and continued progress towards strategic objectives. 2nd, our capital position continues to strengthen, supported by our free cash flow generation, and we are tracking well towards our 2026 outlook target. And 3rd, as I've said in recent quarters, while we remain pleased with the progress we've made thus far, our broader focus remains unchanged as we continue to execute against our longer term strategic objectives to maintain a strong balance sheet, improve free cash flow and grow the franchise.

Speaker 3

With that, let me turn the call back over to Tina.

Speaker 1

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

Operator

Thank you, Tina. We will now open for Q and A. Your first question comes from the line of Suneet Kamath from Jefferies. Please go ahead.

Speaker 5

Thanks. 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 Lindbar.

Speaker 5

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?

Speaker 3

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

Speaker 4

that

Speaker 3

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.

Speaker 3

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.

Speaker 3

That was a 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 continued 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.

Speaker 3

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 $100,000,000 this year. We spent, call it, $140,000,000 $150,000,000 in combination of severance and some legal charges. And then we obviously are on track to pay $300,000,000 of a dividend. So we're not going to give 2024, 2025 guidance.

Speaker 3

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.

Speaker 5

Okay. That sounds good. And then I guess maybe for Ellen on annuities. Sales were still pretty strong in the Q3 even with 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?

Speaker 5

And somewhat relatedly, if you can just give some comments on where the growth is coming from. Is it the 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.

Speaker 2

Sure. So, so first of all, thanks for the question. We feel, 1st 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 we are really strong in all three product categories that are of interest to customers and also to advisors. Overall, with 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.

Speaker 2

So while it's true that we saw a blip of rates coming down in the Q3, 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 advisors 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.

Speaker 2

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.

Speaker 2

And we're going to be less concerned with the overall absolute volume in our Annuity business and in all of our businesses.

Speaker 5

Okay. That's helpful. Thanks for the color.

Operator

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

Speaker 6

Hi, thanks. Good morning. My first question was just on the assumption review in regards to your life business, recognize 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 action. And I believe that that study was updated this year.

Speaker 6

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?

Speaker 3

So Elyse, what I would say is a couple of things. One, you're right, we had a positive $8,000,000 impact for operating income for the company that was largely in the Life block. We had a small $1,000,000 benefit in annuity and then a small $1,000,000 negative in Group. But the $8,000,000 in Life, just to remind you, I mean, this is an end to end process across for the company really over $100,000,000,000 in GAAP reserves. We look at industry studies.

Speaker 3

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 2 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.

Speaker 3

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.

Speaker 3

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 the years past. So we feel good about the assumption review.

Speaker 3

Obviously, this is a very rigorous process as we've talked about. And so we're pleased with the outcome this year.

Speaker 6

Thanks. And then my second question, given you were talking earlier, right, about improved free cash flow conversion relative to how you guys have kind of laid things out earlier. And then obviously, you guys have spoken about in the past about a desire to pay down the prefs when they come due. So how do we think about just improved free cash flow conversion balanced against playing down the prefs? You did take the Lindvar dividend in the quarter.

Speaker 6

We put it all together. Do you have any updated thoughts on when we perhaps could see, return to buying back your shares?

Speaker 3

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 expensive costs 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 $100,000,000 of debt.

Speaker 3

So what I would say is, as you look out over the next year or 2, 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.

Speaker 3

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.

Speaker 6

Thank you.

Operator

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

Speaker 4

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 the seeming continued interest in these blocks and acquirers, and any updated thoughts on the possibility for a deal and kind of what the key considerations are from your standpoint?

Speaker 3

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 LifeLock. What I would say is the outlook guidance that we've given does not rely on doing another deal.

Speaker 3

We think that there's a lot of ways to improve the ongoing free cash flow from the legacy LifeLock and the GUL block in particular without having to do a deal. But to your point, there's certainly an attractive market from 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 are, 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.

Speaker 4

Got it. Thanks. And then maybe just following up on the earlier question on annuity sales. Ryla sales in particular were strong following the launch of their fresh product in the prior quarter. So I just wanted to see if you could give any more detail on how that 2nd generation product is being received in the market and how sales have compared to your expectations.

Speaker 4

And just any general update on that market and competitive conditions with I think another large annuity writer entering the Ryla market earlier this month.

Speaker 2

Absolutely. So Ryla and exactly as you noted, we had $1,200,000,000 of sales in the quarter. This is our strongest sales quarter for Ryla in nearly 2 years, 1st of all. As we step back, a couple of points to make about Ryla. First of all, we have been in the Ryla market since 2018.

Speaker 2

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 Ryla space. We have continued to see a number of new entrants into this market. There's no question.

Speaker 2

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.

Speaker 2

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, larger market to go get.

Speaker 4

Got it. That's really helpful. Thank you.

Operator

There are no further questions at this time. I would like to turn the call back over to Tina Madden for closing remarks.

Speaker 1

So thank you for joining us this morning. We're happy to address any follow-up questions you have. Please email us at investorrelationslfg.com.

Operator

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

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