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Lincoln National Q4 2021 Earnings Call Transcript


Listen to Conference Call View Latest SEC 10-K Filing

Participants

Corporate Executives

  • Al Copersino
    Vice President, Head of Investor Relations
  • Dennis R. Glass
    President & Chief Executive Officer
  • Randal J. Freitag
    Executive Vice President, Chief Financial Officer & Head of Individual Life

Presentation

Operator

Good morning, and thank you for joining Lincoln Financial Group's Fourth Quarter 2021 Earnings Conference Call. [Operator Instructions]

Now, I would like to turn the conference over to the Vice President of Investor Relations, Al Copersino. Please go ahead, sir.

Al Copersino
Vice President, Head of Investor Relations at Lincoln National

Thank you, Catherine. Good morning, and welcome to Lincoln Financial's Fourth 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 1995. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from current expectations. These risks and uncertainties include those described in the cautionary statement disclosures in our earnings release issued yesterday as well as those detailed in our 2020 annual report on Form 10-K, most recent quarterly reports on Form 10-Q, and from time to time in our other filings with the SEC.

These forward-looking statements are made only as of today and we undertake no obligation to update or revise any of them to reflect events or circumstances that occur after this date. We appreciate your participation today and invite you to visit Lincoln's website, www.lincolnfinancial.com, where you can find our press release and statistical supplement, which include 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.

Dennis R. Glass
President & Chief Executive Officer at Lincoln National

Thank you, Al. Good morning, everyone. In the fourth quarter and full year, we again experienced elevated claims related to U.S. COVID debts. Since the pandemics onset, we have been providing important financial protection for our customers during the most serious global health crisis in over a century. Despite the magnitude of claims, our earnings have been strong enough to continue our share repurchase program, buy capital for new sales, and maintain our overall financial strength.

Looking through the significant COVID claims experience 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 2020's comparable figure and representing a 14% underlying ROE on book value, excluding AOCI. 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 to less capital-intensive products, and add new solutions that expand our consumer value propositions. We have been executing against the strategy and achieving our objectives. 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 while improving operational effectiveness and the customer and producer experience. Lincoln has a long history of 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. 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 of variable annuities without guaranteed living benefits. Our sales of VA's 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 third quarter.

The ongoing shift in sales mix towards products without living benefits started several years ago. We further advanced that effort by launching and indexed 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 have risen to over 70% of VA sales more than twice the percentage in 2018.

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 will continue to decline. We entered 2022 with solid footing in the Annuities business, with strong coordination among manufacturing, risk management, and distribution.

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. Fourth-quarter total deposits were up double digits, both sequentially and compared to the prior-year quarter. Full-year total deposits rose 8% to $10.8 billion, a record, with growth in both first-year sales and recurring deposits, contributing to our seventh 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(k), healthcare, government, and not-for-profit, as evidenced by our consistent multi-year track record of positive net flows and strong returns.

Turning to Life Insurance. 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 seven new products contributing to fourth-quarter sales growth of 53% sequentially and 121% 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. For instance, variable MoneyGuard represented 42% of total MoneyGuard sales. In 2021, we also continue 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 was in our new partnership in the P&C channel. New producers across channels are finding our repositioned and expanded product portfolio attractive, demonstrating the synergies between our product innovation and distribution expansion.

Finally, we continue to build on our digital capabilities. In 2021, our cost per life application continue to decline as our automated underwriting and digital processing capabilities are driving efficiencies while improving the customer experience. In 2022, we will 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.

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 fourth quarter. Group's full-year underlying margins normalized for above-target alternative income and then a 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 three-part strategic effort.

First is continued pricing discipline. We strengthened pricing in 2020 and continue to make additional changes where necessary. Second is claims management, including our ongoing investment in the claims staffing combined with a more streamlined and effective approach to claims operations. Lastly is 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%, and successful execution of ongoing rate increases. Sales declined 17% for the full year and 14% in the fourth quarter as we maintained our pricing discipline. Our focus on 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. As the industry continuously evolves, the strength of our distribution franchises remain at constant. We are known in the marketplace for our consistent distribution presence with broad reach across distribution channels. Over 90,000 active producers sell our products, and through strategic investments in technology and training, we are influencing where and how we engage with financial professionals leading with a virtual first model for the long term.

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 two industry awards in 2021 for innovation in virtual training and digital marketing.

Briefly on investments, the fourth quarter capped a year of outstanding results. We again reported excellent credit performance with another quarter of positive net ratings, migration, and negligible losses. In 2021, the portion of our fixed-income assets rated investment grade or equivalent rose to 97%. This quarter, we invested new money at 2.9%, the 20 basis point sequential increase as we continue to benefit from a multi-manager platform. During 2021, we invested 65% 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. Finally, we reported a quarterly return on 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 for full-year 2021, underlying EPS grew substantially. We expect our top-line momentum to continue. We expect the smart 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. 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.

Randal J. Freitag
Executive Vice President, Chief Financial Officer & Head of Individual Life at Lincoln National

Thank you, Dennis. Last night, we reported fourth quarter adjusted operating income of $286 million or $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 million or $1.08 per share, while results benefited from alternative investment income boosting earnings by $29 million or $0.16 per share above target.

Additionally, we experienced some unfavorable non-pandemic impacts to mortality and morbidity that I will discuss further in the Life and Group Protection commentary. Our underlying earnings power continues to be strong as we exit the quarter.

Net income totaled $220 million or $1.20 per share. A strong performance from our credit portfolio was offset by hedge breakage and non-economic variable annuity nonperformance risk. For the full year, net income EPS came in at 91% of adjusted operating EPS with the difference, primarily driven by noneconomic 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, and book value per share excluding AOCI grew 9% and stands at $78.05, an all time high.

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 million to $300 million pre-tax in run-rate savings by the end of 2024, and this remains unchanged. Looking at 2022, we expect a net impact in a negative $25 million to $65 million range, pre-tax, as 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 investments through the Other Operations segment while the savings will be spread throughout the businesses.

Now turning to segment results, starting with Annuities. Operating income for the quarter was $332 million compared to $289 million in the prior-year period. The increase was primarily driven by higher account values which were the result of growth in the equity markets and expense efficiency. Average account values of $171 billion increased 13% year-over-year while 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 with the net amount at 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 income of $57 million compared to $49 million 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 fourth-quarter average account values up 17% to $98 billion. 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. 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 million versus $144 million in the prior-year quarters. This quarter's results were impacted by pandemic claims, an unfavorable underlying mortality with some offset from alternative investment income. Elevated mortality related to the pandemic was $66 million in the quarter compared to $113 million in the prior-year quarter. This quarter's impact per 10,000 U.S. COVID deaths improved year-over-year and sequentially as expected. In addition to the impacts of the pandemic, underlying mortality was negatively impacted by $24 million. This was primarily driven by claims incurred during the third quarter but not reported until the fourth.

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 million of excess alternative investment income. A recent block reinsurance transaction reduced Life earnings by $10 million in line with our expectations. And as a reminder, the results from the prior-year quarter included a $20 million 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 of a 5 to 10 basis point decrease annually.

Our 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 of the business.

Group Protection reported an operating loss of $115 million compared to an operating loss of $42 million in the prior-year quarter, with the decrease primarily driven by $131 million of pandemic claims. Additionally, group earnings were negatively impacted by other items during the quarter, including $25 million to $30 million of seasonally higher fourth quarter disability claims and expenses, and approximately $15 million of underlying disability results. We attribute the underlying disability results to a combination of normal quarterly volatility and the indirect influence of the pandemic. Like prior quarters, the pandemic impact was primarily mortality related with $115 million of life claims and $16 million of disability claims. The life claim impact per 10,000 U.S. COVID death declined from third-quarter levels to $9.2 million as the percentage of working-age death 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 $10.4 billion of statutory capital and estimate our RBC ratio at 428%. The NAIC's new C1 factors went into effect at year-end which lowered our RBC ratio by approximately 20 percentage points this quarter. Cash at the holding company stands at $1.1 billion above our $450 million target as we have prefunded our $300 million 2022 debt maturity and retained $400 million of proceeds from the life block sale for additional incremental share repurchases. This will commence shortly via an accelerated share repurchase program that should be completed by the end of the first quarter.

We deployed $650 million towards buybacks in the fourth quarter equally, the $150 million of ongoing quarterly share repurchases, and $500 million in incremental share repurchases with proceeds from the block reinsurance deal. As I mentioned last quarter, the timing of ongoing buyback may be influenced by the accelerated share repurchase program. To conclude, 2021 was certainly 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 position 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 million of pandemic-related earnings impacts 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 $1.4 billion of buybacks and dividends. And with the addition of the Spark Initiative that positions Lincoln to continue to grow EPS over the next three years at or above our long-term aspirations of 8% to 10%.

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

Al Copersino
Vice President, Head of Investor Relations at Lincoln National

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


Questions and Answers

Operator

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

Thomas Gallagher
Analyst at Evercore ISI

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 with those sales in anticipation of that or just a little more color about but what drove the strength of individual life sales?

Randal J. Freitag
Executive Vice President, Chief Financial Officer & Head of Individual Life at Lincoln National

Tom, it's Randy. Number of factors that drove that outcome which was in line with our expectations. We went back to the fourth quarter of last year first we talked about. That was the point when all of our products had been repriced over shortly to be repriced -- after priced 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 life sales standpoint. And then in addition to all those reprice products, this year, we added as Dennis mentioned, seven new products. He used one example, MoneyGuard, MoneyGuard product, variable MoneyGuard product which did not exist in the fourth quarter of last year but represented 42% of the sales in that particular product area. Dennis also mentioned some new distribution partners in the P&C channel and that really drove some great results, especially in the term business. So it's the combination time of all of those new products. The fact that last year was as we communicated and expected low point.

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

Thomas Gallagher
Analyst at Evercore ISI

Okay, thanks. And then my follow-up is if I look at the performance of your group business the deterioration in 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 always all you need in terms of what you see lying ahead?

Dennis R. Glass
President & Chief Executive Officer at Lincoln National

Tom, Dennis. At the top, we think we have a very strong book of business and we're very confident that these two or three 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 it's significantly -- significant opportunity to increase our 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?

Randal J. Freitag
Executive Vice President, Chief Financial Officer & Head of Individual Life at Lincoln National

Yeah. Tom, thanks for the question. I think from a starting point you've got the pandemic, which over the back half of 2021 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 and who was dying from COVID, an approximate doubling of the working-age population percentage of COVID-related deaths. Now that came down a little bit in the fourth quarter and went from 40% in the third quarter to 35% in the fourth 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 fourth quarter, an impact of $131 million, $115 million of that for mortality. So that's that aspect.

Now there are two other aspects about our quarter and let me talk about those. The first is I talked about in my prepared remarks, Tom, $15 million 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 fourth quarter, that was a little over 83% last year in the fourth quarter, it's up about 4 points and that's $15 million of underlying negative result that I talked about.

We think there is two factors in there. First, we saw a blip and severity. Severity is run at a pretty tight channel for an extended period of time, it was that jump up this quarter, we think that sort of normal volatility and I mentioned that in my script. The other factor that we see when we look at our results is incident 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 has been some deferred care, there are 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. So that's the underlying component.

Additionally, I talked about the seasonality, which we here at Lincoln have seen for some time in the fourth quarter, $25 million to $30 million that's made up of expenses, which typically go up a little bit in the fourth quarter. And then in the -- on the disability results, when we think about why do we have seasonality in the fourth quarter in our disability results, there is really three things that we typically see. The first is on the incidents side. You really have to do our biggest incurl quarter from an STV standpoint is the second quarter and so we can -- those roll -- in the fourth quarter after a six-month waiting period. The second factor we typically see is resolutions seasonally their lowest in the fourth quarter. We think that has a lot to do with holidays etc, at doctor's 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 fourth quarter and we saw that again. And then last side is we typically also see seasonally our security offset drop in the fourth quarter and once again we saw that. So that's what we attribute the seasonal aspect. We would expect that to go back to what we've seen in the first quarter. So I hope that helps, Tom, and answers your question.

Thomas Gallagher
Analyst at Evercore ISI

That does. Thanks, guys.

Randal J. Freitag
Executive Vice President, Chief Financial Officer & Head of Individual Life at Lincoln National

Yeah.

Operator

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

Suneet Kamath
Analyst at Jefferies Group

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?

Randal J. Freitag
Executive Vice President, Chief Financial Officer & Head of Individual Life at Lincoln National

Suneet, the portfolio is turning over so -- and -- at a big picture level, we're converting some of the gains to cash. We'll have to get back 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.

Suneet Kamath
Analyst at Jefferies Group

Got it. Okay. All right. And then I guess on the Annuities, I mean, your sales were strong for the year but the flows were still pretty negative there, I think $2.6 billion. 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.

Randal J. Freitag
Executive Vice President, Chief Financial Officer & Head of Individual Life at Lincoln National

Yeah. The outflows were made up of both open put more on the fixed annuity side which as a result of our repricing of that business. The fixed annuities is a good business if properly priced, draws a lot of capital so you have to make sure the return is appropriate. On the VA side, I think what we're seeing is our ratio of sort of ongoing surrenders and so forth is staying pretty consistent but at the same time, account values are going up. And so you have a little bit more account value in tact on the outflow rate. So we're confident from the Annuity business to be growing over time, how the net flows work out, they function with couple of different things, but good business. I would say we're getting excellent returns on the capital that we're putting behind of both the business, 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 and in good times and bad times, we have reduced 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.

Suneet Kamath
Analyst at Jefferies Group

Okay, thanks.

Operator

Thank you. Our next question comes from Tracy Benguigui with Barclays. Your line is open.

Tracy Benguigui
Analyst at Barclays

Thank you. Good morning. I noticed that you grew your VA with GLB 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?

Dennis R. Glass
President & Chief Executive Officer at Lincoln National

Tracy.

Randal J. Freitag
Executive Vice President, Chief Financial Officer & Head of Individual Life at Lincoln National

Tracy, this is Randy. Yeah, that was a component of growing sales, right. If you remember, on the Talcott deal, it had a maximum sales of 1.5 billion and it ran through next June, so, yeah, it was definitely component. Now in and of itself, the growth, I think it's once again it's similar to the life story. The fourth quarter of last year was the lowest quarter we've ever had. It was a very low fourth quarter 2020, so I think some of that growth. If you look at more recent quarters, sequential quarters, much more smooth pattern of growth. There is no specific strategy to, hey, we're going to grow VA with living benefits or we're going to grow, that's once again we -- our strategy is to price the products appropriately, have a very diversified portfolio, and let consumers choose from among those products as their preference of shift.

What we believe that's going to lead to overtime is something similar to what you saw this year, right, about a quarter of our sales over the course of 2021 were 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 comp values are VA with guarantees and the current sales mix is about 25%, so it will take a long time but that's where you would eventually expect to move over time. Does that help, Tracy?

Tracy Benguigui
Analyst at Barclays

Okay. Yeah, that helps. Thank you. And then also last quarter, you talked about spread compression running between 2% and 3% that that could trend down to 1% to 2%. I 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 rates, albeit, is there -- there is a flattening yield curve.

Randal J. Freitag
Executive Vice President, Chief Financial Officer & Head of Individual Life at Lincoln National

Tracy, spread compression has come down, it's come down as we 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 guidance.

Tracy Benguigui
Analyst at Barclays

Okay. Got it. Thank you.

Operator

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

Alex Scott
Analyst at The Goldman Sachs Group

Hi. First question I had was a little bit of a housekeeping item. I guess I just wanted to confirm on the -- at the higher end of the 8% to 10% EPS growth that you kind of talked about 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?

Randal J. Freitag
Executive Vice President, Chief Financial Officer & Head of Individual Life at Lincoln National

I think you should think about those altogether, right. So a 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 900 million of buybacks that we're doing as part of the life blocks there.

Alex Scott
Analyst at The Goldman Sachs Group

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 experience investors probably remember from the 2016 time period?

Dennis R. Glass
President & Chief Executive Officer at Lincoln National

Yeah. 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 is no overriding concern about the effect of the 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.

Alex Scott
Analyst at The Goldman Sachs Group

Thanks.

Operator

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

Joshua Shanker
Analyst at Bank of America

Yeah. I just wanted to get a 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 FIA's and multi-year guarantees and whatnot and Lincoln wasn't going to chase price and now the growth is pretty good. Is that a behavior that's changing among your distributors? Has the price come into a point where Lincoln's product is more attractive but how is that working exactly?

Dennis R. Glass
President & Chief Executive Officer at Lincoln National

Josh, we were 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 two weeks based on what's happening in the marketplace. But I want to come back to but not -- we're very careful about getting the right return on the capital, we're deploying behind new sales. We have very strict rules and governance around that and with the overall risk profile of the products over time. So we feel good about the fixed income annuity, pricing the product risk characteristics from a shareholder point of view, and the return that we're getting on new capital.

Joshua Shanker
Analyst at Bank of America

And why do you think they didn't sell so well 12 months ago? It sounds like there wouldn't be anything sold in the market at all.

Randal J. Freitag
Executive Vice President, Chief Financial Officer & Head of Individual Life at Lincoln National

For Lincoln or for the industry?

Joshua Shanker
Analyst at Bank of America

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 changed that much or maybe they have, maybe the economics are not very different from what they were a year ago.

Dennis R. Glass
President & Chief Executive Officer at Lincoln National

We're 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.

Randal J. Freitag
Executive Vice President, Chief Financial Officer & Head of Individual Life at Lincoln National

Josh, I would just point out that we're very -- as Dennis said, we're very happy about the returns we're getting and very happy with the sales we're seeing. If you look over our longer term, like this year compared to last year, I think our FICC 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.

Joshua Shanker
Analyst at Bank of America

Thanks.

Operator

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

Elyse Greenspan
Analyst at Wells Fargo & Company

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 expectations you can give us thinking about modeling in the Q1 '22 and beyond?

Dennis R. Glass
President & Chief Executive Officer at Lincoln National

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 and our expectations in the back half of the year, that was a little worse than our expectations. The quarter itself, the $24 million of underlying mortality, I think I mentioned this in the script, it was driven actually by claims that occurred in the third quarter, but they get reported into the fourth quarter. Essentially, the IBNR was a little understated at the end of the third quarter. Now when you think about Life IBNR, I've looked at it over the last few years, if you sum up all the pluses and minuses, it adds up to exactly zero, but inside of it you have some quarters where it's a little low and some quarters where it's a little high and third quarter happened to be one where we were just a little under accrued from an IBNR standpoint that hit us -- and that really drove the $24 million.

Elyse Greenspan
Analyst at Wells Fargo & Company

Okay. And then in terms of the Spark 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 me -- 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 the time frame there?

Dennis R. Glass
President & Chief Executive Officer at Lincoln National

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 three components of that that have about equal weight. The first one is the continuation of strengthening pricing. We're getting good single-digit increases in pricing at the moment. We expect that to help and 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 management process slightly better shape than it is today, and then the third one is the Spark Initiative. And so it will develop over the next three years. So once again, the in-force book of business is fine. We need to do some repricing and these three initiatives will get us to the 5% to 7% range over the next several years.

Elyse Greenspan
Analyst at Wells Fargo & Company

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 fourth quarter?

Randal J. Freitag
Executive Vice President, Chief Financial Officer & Head of Individual Life at Lincoln National

Yeah. Tracy, I don't have any specific information segment-by-segment in the quarter. Our expectation is that the $260 million to $300 million 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.

Elyse Greenspan
Analyst at Wells Fargo & Company

Thank you.

Operator

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

Erik Bass
Analyst at Autonomous Research

Hi. Thank you. In the buffered annuity market, it looks like you've 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?

Randal J. Freitag
Executive Vice President, Chief Financial Officer & Head of Individual Life at Lincoln National

There are certainly a lot more -- there are a lot more people offering the product. There is 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 to 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.

Erik Bass
Analyst at Autonomous Research

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?

Randal J. Freitag
Executive Vice President, Chief Financial Officer & Head of Individual Life at Lincoln National

Erik, now, if you think about even the last two years in the end is a greater upstate, so our dividend capacity has been driven by the significant amount of capital inside of LNL. That was the case this year. We have no problem giving dividends out, no expectation that will have any limitations in 2022 relative to our needs.

Erik Bass
Analyst at Autonomous Research

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 Copersino for closing remarks.

Al Copersino
Vice President, Head of Investor Relations at Lincoln National

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 investorrelations@lfg.com. Thank you all and have a great day.

Operator

[Operator Closing Remarks]

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