Corrected Transcript
09-Dec-2015
Lincoln National Corp.
(LNC)
Goldman Sachs U.S. Financial Services Conference
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Lincoln National Corp.
Corrected Transcript
(LNC)
Goldman Sachs U.S. Financial Services Conference
09-Dec-2015
CORPORATE PARTICIPANTS
Dennis R. Glass
President, Chief Executive Officer & Director
................................................................................................................................................................................................................................
OTHER PARTICIPANTS
Mike E. Kovac
Goldman Sachs & Co.
................................................................................................................................................................................................................................
MANAGEMENT DISCUSSION SECTION
Mike E. Kovac
Goldman Sachs & Co.
All right. We're going to get started here. Hi, I'm Mike Kov ac, the life insurance analyst at Goldman Sachs and it's
our pleasure to have Dennis Glass, the Chief Ex ecutive Officer of Lincoln with us today for a fireside chat. Lincoln
is the retail focused life insurer with some unique distribution and risk management strategies and I will turn it
ov er to Dennis for some introductory remarks.
................................................................................................................................................................................................................................
Dennis R. Glass
President, Chief Executive Officer & Director
Mike, thank y ou. Let me giv e the cautionary language out of the way first. Before beginning, I want to point out to
y ou our forward-looking statement and cautionary language, which you can find on our website, as I may make
some forward-looking statements. Thank y ou.
Mike, again, we're delighted to be here and we appreciate being inv ited. I'll just make a couple of opening
comments and then go with the format. So let me start by saying that we're really quite proud of the performance
that we'v e had ov er the last several y ears. Just a couple of statistics on that.
Operating earnings per share on an annualized basis have been in the double-digit range. And as I talk about
double-digit earnings growth, we'v e also had reasonably predictable earnings and much less v olatile than many of
our competitors, so good growth and consistency.
We'v e had a steady improvement in our ROE and our balance sheet metrics, things like risk -based capital sort of
hov ered around 500%. Capital itself has continued to grow. So the recent performance has been very good and, of
course, it has been reflected in our share price. I think this will be the third y ear – if we're doing the calculation
right now, but it'd be the third y ear in a row that we'v e outperformed the industry on the previous three -year
cy cle. So it's worked out pretty well.
How do we driv e those results? I'll just make a couple of comments. Really starts with the combination of one of
the biggest distribution platforms in the insurance industry in America, connected to a v ery profitable and wide
array of customer solutions or products.
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Corrected Transcript
09-Dec-2015
Let me put that in perspective. We sell through independent distribution. Ov er the last couple of y ears 91,000
independent financial advisors, who could chose any company in America to sell their product, have chose a
Lincoln product. And why is that important? Well, of course, they're choosing the products in the first place on the
basis of consumer v alue. But more importantly that 91,000 group of distributors has many, many end customers
and the different needs of those customers and the different financial advisors helps us do a couple of things.
First and foremost, it helps us target growth markets, which is good, and secondly, it allows us to div ersify our
product portfolio. And let me giv e you a couple of ex amples. We'v e referred to these diversifications as pivots. One
of the biggest piv ots was in our Life Insurance business where, several y ears ago, almost 65% o f the business that
we sold was one product guaranteed universal life. We'v e piv oted away from that product, again, with the strength
of this distribution and product development capability. And today, only 30% (sic) [less than 20%] of our Life
Insurance business is in that product.
Mov ing on to the Life Annuity business, a couple of y ears ago, 90% of what we sold had liv ing – guaranteed living
benefits attached to it. And today, only 7 0% of our sales hav e a liv ing benefit guarantee. By the way , we like th e
liv ing benefit business, good ROEs, we manage it well, but once again, a little div ersification I think is healthy. So
that's one reason why we'v e achieved these results that I've just mentioned.
The second one is pretty good risk managers, and let me g iv e a couple of ex amples of that. First, our VA hedge
program over the last decade has continued to provide very stable results with v ery little hedge breakage, an
important part, if y ou're going to be a successful player in the v ariable annuity liv ing ben efit business. And it's not
just me say ing that, outside ex perts, consultants such as Oliv er Wy man, rating agencies continue to say publicly
that Lincoln's V A hedge program is one of the most successful and most robust in the industry, and we appreciate
those comments.
Sticking with risk management, we have a v ery diversified investment portfolio. Only about 5% of our $80 billion
(sic) [$95 billion] general account is in below inv estment grade investments. And importantly – particularly in
this last three y ears, where we'v e seen interest rates come down so much, we'v e always had a v ery good duration,
asset liability duration program. And so that's blunted the impact on us of declining interest rates, both from a
balance sheet perspective and although we hav e seen a spread compression, it was better than it would hav e been
if we weren't so disciplined around asset liability duration.
And the final thing is capital management. First, because of our risk management capabilities, we'v e had no
significant unex pected capital calls, which is a good thing. We consistently generate capital. The business that we
sell giv es good return and generates capital. It's positive. We use that ex cess capital or that capital to do – manage
buy backs, dividends and, of course, the biggest use of newly generated capital is putting into profitable new
business sales.
Coming back to just briefly the capital management share buybacks. We bought back, since 2011, $3 billion worth
of our shares and we'v e reduced our share count by 25%. We ex pect capital management to continue as these
other two things I'v e just talked about will continue to be a part of our business as we go forward.
I think based on the franchise and all of the items that I'v e just mentioned – I shouldn't say I think, I ex pect,
looking forward, that we'll continue to perform well. I've mentioned this a couple of times, but just from
distractions that other companies might have, we're not in the crosshairs of dual regulation. We don't hav e that
problem. We hav e a 1 00% do mestic footprint, so we're not subject to international turmoil, capital markets,
ex change rates, things like that.
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Corrected Transcript
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Goldman Sachs U.S. Financial Services Conference
09-Dec-2015
And finally , we're not distracted by any close down run-off books of business. So that allows us to be v ery
aggressive in our forward planning, in our use of capital. And again, looking forward, I think our business model
will permit us to grow earnings per share in the 8% to 1 0% range. That comes from organic growth of modest
capital market headwinds and of course capital management.
Y ou may have seen we'v e produced a slide a couple of different times, how we get to 8% to 1 0%. There's a series of
driv ers that permit us to do that. And again, that slide is in our IR Materials. And so, 8% to 1 0%, I think, is a good
long-term growth rate for our business as it's presently conducted. Of course at any time world events or capital
market changes could cause us to be a little bit below that or possibly even somewhat higher than that. So, 8% to
1 0% again, I think is – our franchise in the businesses that we're in can dev elop that kind of earnings growth.
So, Mike, with that I'll just turn it back to y ou and...
................................................................................................................................................................................................................................
QUESTION AND ANSWER SECTION
Mike E. Kovac
Q
Goldman Sachs & Co.
That's great. Y eah. It's a great introductory – that's some great introductory comments there and I think we'll
touch on some of those topics over the next half hour or so here. I wanted to start with may be y our biggest
product on the Annuity side. As y ou think about the competitive landscape in v ariable, fix ed indexed a nnuities in
201 6 and beyond, you mentioned some of the current macro headwinds that might be facing some of those
products today. Can y ou describe how Lincoln v iews the competitive landscape today?
................................................................................................................................................................................................................................
Dennis R. Glass
A
President, Chief Executive Officer & Director
In the V A business or in the – in annuity business, Mike?
................................................................................................................................................................................................................................
Mike E. Kovac
Q
Goldman Sachs & Co.
In each of the – sort of separately within the different Annuity businesses.
................................................................................................................................................................................................................................
Dennis R. Glass
President, Chief Executive Officer & Director
A
Okay . So, let's take the indiv idual annuity business first. As I said, we hav e been on a path to div ersify – div ersify
is a good word, but maybe better tilt away from just being so much focused on guaranteed liv ing benefits. And
we'v e gone, from as I mentioned, already 90% of our business to 7 0%. We continue to offer new products into the
marketplace that will further diversify that business while maintaining good return on equity. And so that
business is pretty good.
The V A businesses had historically – and now I'm going back to pre-crisis, y ou've had what was referred to as
feature wars. And the people who got out of the business really got out of the business for two reasons: one, their
benefits were too rich. One of the benefits of the V A liv ing benefit is th e annual roll up; people were going up to
6% or 7 %. Pay outs were high and they didn't manage their hedge program or didn't hav e a hedge program or
didn't hav e a comprehensive hedge program.
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Corrected Transcript
09-Dec-2015
So – but that's really behind us. Since the crisis, the people wh o remain in the liv ing benefit v ariable annuity
market, our rational people, good companies, good management teams and I'm going to say this across all of our
business, it's a pretty competitive environment, but it's not crazy the way it was a couple of – before the crisis.
So the indiv idual annuity business is a good business. Again, we're diversifying in that business. We hav e such a
strong distributional organization that's going to permit us to mov e as market circumstances, consumer
preferences change. And in terms of ROEs, we'v e alway s gotten 20% or hav e over the last seven or ten y ears gotten
20% ROEs. It's v ery difficult to identify a specific cost of capital for a specific product. And we hav e done a lot of
work try ing to get the math – looking at the math on this.
My guts tell me; my 40 -y ears in the business tell me that the spread between cost of capital and return on capital
from new sales is wider in the v ariable annuity business, living benefit business than any other insurance product
sold in the United States. So I think there is a good v alue proposition there. As we div ersify, we hav e good fix ed
products, we have good indexed annuity products, we hav e good long-term care riders. So it's just a big strong
business and again the combination of distribution and product development hedge programs are v ery
comfortable about that business.
The other place where we hav e Annuities is the core chassis for the business is in the Retirement business. And we
focus on the Retirement business either with group variable annuity contracts or a mutual fund chassis in some
cases. But our business is small case to mid to large. We'v e been inv esting both in technology and in ex pansion of
our distribution in order to make that a more successful business. And I thi nk that will continue to pay off with
pretty good results.
Let me come back to distribution. So Merrill Ly nch put us 24 months ago on their platform, us being our small case 401 (k) product, Defined Contribution Product. The last thing Goldman Sachs needed was another 401(k)
product on their distribution platform. They had v ery good ones, some of our competitors. The reason they asked
us in is because they wanted to cross-sell from other product lines, Individual Annuities and hopefully, increase
the pie for them of their Retirement product sales. And that worked up quite well.
I think in Merrill Ly nch about 40% of what we sell in the small market Retirement product is the direct result –
30%, I guess is the number – 38%, in that neighborhood is the direct result of our wholesalers in their system
cross-selling from the v ariable annuity product into the Retirement product. Again, just another example of the
power of distribution and the opportunities that giv es a company like Lincoln to partner with other or ganizations
to sell what we sell. So those are the annuity businesses. I'm happy to talk about the Life business and the Group
business as well.
................................................................................................................................................................................................................................
Mike E. Kovac
Q
Goldman Sachs & Co.
Y eah. Just following up on the annuity side. One of the places that Linc oln has been innovative on this side is
making – is reinsuring some of the risks associated with the v ariable annuity side of it. To what ex tent do y ou see
appetite to continue to de-risk the v ariable annuity offerings that you hav e through both reinsuranc e through derisked products?
................................................................................................................................................................................................................................
Dennis R. Glass
President, Chief Executive Officer & Director
A
Y eah.
................................................................................................................................................................................................................................
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Mike E. Kovac
Corrected Transcript
09-Dec-2015
Q
Goldman Sachs & Co.
Do y ou feel like we're sort of there today from products y ou'd like piv ot into or are there future opportunities?
................................................................................................................................................................................................................................
Dennis R. Glass
President, Chief Executive Officer & Director
A
Two y ears ago, I set a challenge for the company to drop the V A living benefit sales from 90% to 7 0% of total sales.
And that wasn't just a number that I pulled out of the air, that was a n umber that was predicated on potential
earnings growth, balance sheet risk of the annuity business return on equity. And so, all of those things, and
7 0/30 turned out to be about the right amount of guaranteed versus non -guaranteed V A business.
At that time, we knew that we could do two things: one, we could just shift incentives of our distribution force and
make some progress. But we also knew that we need to introduce a new product that was more asset accumulation
focused and liv ing benefit focused. A bout the same time, a reinsurer got into the business and offered to partner
with us. It nev er happened before, at least since the crisis. But a v ery reputable organization wanted to partner
with us on a reinsurance basis and they took all of the risk of t he liv ing benefit feature. And that helped us get
from – v ery quickly get from the 90% down, actually below 7 0% of the sales being, at least from Lincoln's
perspective, without a v ariable – without a guaranteed living benefit risk.
Right now, we'v e increased the size about a couple of times. But I'm really not – I don't think we need any more of
that, Mike. There's not a big market for it in the first place. But I alway s wanted to get to the right risk profile in
the V A business based on organic sales, not having to rely on a reinsurance opportunity. In part, and of course we
use reinsurance a lot across the organization, but in the V A business this particular opportunity, it's not a deep
reinsurance market. So y ou can't build the business plan around there being one reinsurer of liv ing benefits in
America. So we really don't need that reinsurance any more. We might do a little bit more if we needed to.
................................................................................................................................................................................................................................
Mike E. Kovac
Q
Goldman Sachs & Co.
Makes sense. Shifting gears to Life Insurance side of it. Results ha v e been v olatile, not just for Lincoln, but for the
industry over the course of the y ear. And we saw some elevated mortality trends in the first quarter and second
quarter, and then maybe more normalized levels in the back half of the y ear. Can y ou discuss the current
dy namics that y ou see there? Do y ou feel like pricing is adequate today or are there trends that make y ou a little
more concerned today?
................................................................................................................................................................................................................................
Dennis R. Glass
President, Chief Executive Officer & Director
A
Y eah. Let's go back to 1 992 and let me just use an ex ample, these numbers are just pulled out of the air. But let's
say , y ou're selling a block of Life business and y ou ex pected the claims to be $10 or let's say $100 a y ear. At that
point in time, the reinsurers were coming in and ex pecting cla ims to be, let's say , $80 a y ear. And again I'm – this
is directional, this is not precise.
So what the industry did and what Lincoln did was to lock that profit in by reinsurance, reinsuring quite a bit of
what we were selling in those day s. But importantly, on the business that wasn't reinsured, we weren't using the
$80, the $80 ex pectation. We are using the $1 00 expectation because that's what we thought it would be.
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Corrected Transcript
09-Dec-2015
So when y ou look at ex perience in the industry and y ou separate it out from th e primary writers and the
reinsurers, y ou've got that $80 that they were thinking, but we always thought it was going to be $1 00. So the Life
industry itself – the primary writers, I don't think hav e had quite as bad an ex perience as the reinsurers have ha d.
Hav ing said that, y ou're right, in the first quarter of this y ear, across the industry the incidence increased. So there
was more claims than y ou would have expected. Severity, I guess was, in line the second quarter, but y ou had
higher than ex pected mortality results. In the second quarter, what we refer to as a one -in-1 00-year experience
where incidence returned back to normal levels. But we hav e one, two, three or four large cases that related to
homicides and some other events sort of outside the no rmal expectation. And then in the third quarter, we got
back to normal.
So, my v iew is – and we'v e turned these analyses inside out and upside down. We look at issue y ear, we look at
age, we look at sex , we look at preferred, we look at non-preferred and all of our analy sis suggest that our
ex pectations and our experience will continue to be on our ex pectations.
................................................................................................................................................................................................................................
Mike E. Kovac
Q
Goldman Sachs & Co.
And then using – building on the Life Insurance product here. You use reserve financing transactions in the past
to free capital out of the Life Insurance business. Do y ou see future opportunities for that into the end of the y ear,
may be in 201 6 and beyond?
................................................................................................................................................................................................................................
Dennis R. Glass
President, Chief Executive Officer & Director
A
Y eah. I think, Randy said that we would probably do a $200 million in 201 6. But y ou have some really positive
dy namics in the Life Insurance industry of – that will reduce the need for captive financings. One of them is
principle-based reserving that in the regulatory environment y ou have to have 7 2% or 7 5% of premiums – the
states that represents 7 5% of the premiums agree to the new regulation and we think we'll hit that and the states
think we'll hit that in June of nex t y ear, so that starting in 2017, principle-based reserving will be in place. Huge,
huge result in terms of PBR, particularly on term insurance almost eliminates the difference between economic
reserves and the statutory reserves. There is still a thin lay er of cushion above economics, but that's a big deal.
And so, that should be in place in the first part of the y ear.
Principle-based reserving doesn't do quite as much for guaranteed universal life, but back specifically to Lincoln,
because we're not selling as much as we used to, we won't need to do as many captive financi ngs. So I think on the
regulatory front from the state perspective, I'v e had a couple of conversations about that this morning with
inv estors, it's really been a v ery positive outcome.
And now we're working – we hav e one more big issue from a captive standpoint, and that's the V A captives. And I
think that could turn out very, v ery good for the industry and for the regulators. And let me just v ery quickly say,
the way the regulations stand right now, the companies have to make a choice. You either hedge fo r the – to build
assets to pay future claims or y ou hedge to avoid temporary capital calls because of statutory accounting. These
temporary statutory calls occur in periods – tail risk ty pe periods.
We hav e – and I believ e the regulators agree that it's kind of goofy to have to have a regulated company choose
between two risks. And this all comes down to very simply economics is roughly market v alue and statutory is
book v alue. So I think we can come together on that issue and eliminate sort of this choice of hav ing to do one or
the other, but leaving yourself exposed. So that could be a good development. I don't think we'll get all the way
there, but I think we'll get pretty far.
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Corrected Transcript
09-Dec-2015
Mike E. Kovac
Q
Goldman Sachs & Co.
Y eah, so how do y ou think that plays out in terms of places, in terms of how Lincoln would manage its business
and if the rules sort of pass as the conv ersations are going from a V A standpoint?
................................................................................................................................................................................................................................
Dennis R. Glass
A
President, Chief Executive Officer & Director
It takes a risk off the balance sheet that we now hav e with this problem of tail risk and statutory calls. And so, that
would go away , but it really wouldn't fundamentally change the risk management and the diversity of the
indiv idual annuity business in a material way . It just takes a r isk off the balance sheet. Did I say something wrong?
................................................................................................................................................................................................................................
A
[Inaudible] (24:03)
................................................................................................................................................................................................................................
Dennis R. Glass
A
President, Chief Executive Officer & Director
We did a reserve financing.
................................................................................................................................................................................................................................
A
[Inaudible] (24:08)
................................................................................................................................................................................................................................
Dennis R. Glass
A
President, Chief Executive Officer & Director
201 5. That's right, I'm getting my y ears mixed up, 2015, it's 201 4 now. Okay . I'm sorry, so we'll do reserve
financing first quarter of nex t year.
................................................................................................................................................................................................................................
A
[Inaudible] (24:20)
................................................................................................................................................................................................................................
Mike E. Kovac
Q
Goldman Sachs & Co.
Fourth quarter.
................................................................................................................................................................................................................................
Dennis R. Glass
President, Chief Executive Officer & Director
A
Fourth quarter of this y ear, okay.
................................................................................................................................................................................................................................
Mike E. Kovac
Q
Goldman Sachs & Co.
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Corrected Transcript
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Goldman Sachs U.S. Financial Services Conference
09-Dec-2015
So just sort of closing the loop on that, would there be necessarily – would y ou change your use of captives, is that
how y ou're imaging the V A would play itself out? In that sense, y ou wouldn't necessarily need to use captives in
that scenario, would there still be a role for captives?
................................................................................................................................................................................................................................
Dennis R. Glass
A
President, Chief Executive Officer & Director
Y eah. The V A cap is a v ery different animal than the life insurance captive.
................................................................................................................................................................................................................................
Mike E. Kovac
Q
Goldman Sachs & Co.
Right.
................................................................................................................................................................................................................................
Dennis R. Glass
President, Chief Executive Officer & Director
A
Because the life insurance captive goes liv e on the day y ou move the business. And so there i s actually a shifting of
the risk from the company to the captive assets and ev erything else. So that actually happens.
In the V A, it just sort of sits around waiting for this tail risk to occur and y ou don't really do much with it at all. It
just lies dormant. Y ou have to hav e it in place, but for us, it may not be true for ev erybody else, it just lies dormant
and y ou only need it in the case of this tail risk and let me hasten to say , to my recollection, we'v e never used it for
V A risk. Y eah.
................................................................................................................................................................................................................................
Mike E. Kovac
Q
Goldman Sachs & Co.
Shifting to the retirement business, and y ou mentioned this a little bit in some of the opening remarks. How does
Lincoln see its role within the retirement space today? Is this a core business for y ou going forward? I mean y o u
were in the asset management business at points in time with Delaware. Out of that business today, do y ou
continue to expect retirement to be a core business for Lincoln?
................................................................................................................................................................................................................................
Dennis R. Glass
President, Chief Executive Officer & Director
A
Mike, we don't hav e any hobbies.
................................................................................................................................................................................................................................
Mike E. Kovac
Q
Goldman Sachs & Co.
Y eah.
................................................................................................................................................................................................................................
Dennis R. Glass
President, Chief Executive Officer & Director
A
The businesses that we're in, we're in and we're inv esting in and we ex pect to grow them and that's the case with
the retirement business. I'll say that one of the challenges we hav e in that business that we don't hav e in any of our
other businesses is that we're competing against non-life insurance companies. So we're competing against the
asset managers. It makes it a little bit more difficult. Then again, when I say that we're in a business, we're not in a
business all the time across the spectrum of opportunities. We pick the v ery spot or segment of the larger
opportunity that fits with our capabilities and giv es us an edge.
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So, again, we don't hav e hobbies. We'v e had four businesses. We'v e been in that business for a long time. I will say
and say this all the time, our job is max imizing shareholder value. And so, if something comes along different, not
particularly in the RPS business, but in any of our businesses, where our organic game plan can, over the long
term, be enhanced by doing something slightly different than we're doing right now, we'd do it.
................................................................................................................................................................................................................................
Mike E. Kovac
Q
Goldman Sachs & Co.
Makes sense. We talked a little bit about changes in regulatory environment. One big one that comes up across the
asset management and life spectrum is the Department of Labor update to fiduciary standards. Any updated
thoughts there in terms of conversations that y ou'v e been having either with regulators, with industry participants
or ev en on the distribution side in terms of how people are preparing?
................................................................................................................................................................................................................................
Dennis R. Glass
President, Chief Executive Officer & Director
A
So what Lincoln's path has been on the whole fiduciary – DOL fiduciary program, which is 800 pages of
regulation, is to focus on that piece which affects us most significantly, and that piece happens to be the ability to
easily pay commissions on living benefit v ariable annuities that go into IRAs. So Lincoln has pu t 1 00% of its effort
– 98% of its effort on that single issue. I'd put a coalition of other variable annuity companies, just about every
major v ariable annuity company in America is in our coalition.
And so what are we try ing to achieve? First, there is no argument and none of us could be in business – life
insurance companies – Lincoln is 1 1 0 y ears old, I think New Y ork Life is 1 50 years old, Northwestern Mutual is
may be 1 60 years old. We don't hav e that kind of longev ity unless every day y ou're doing wha t's in the best interest
of y our customer. So who argues with the overall agenda and objective that the DOL has, no one would, because
that's what we all do on a daily basis.
Now, then y ou get into the details of the 800 pages and the way it's written rig ht now, it's v ery difficult, if not
impossible, for distribution organizations to permit the sale of V As on a commission basis into IRAs. And so we'v e
worked directly with Secretary Perez in meetings, we've worked directly with his staff in meetings. And w e'v e
proposed to them our number one solution would be to put the V A product back into 84 -24, where all the other
insurance products are. I think the likelihood of that is small, but we're as happy to get inside of the best interest
contract exemption and insurance focused BIC, we call it the [ph] IBIC (29:43).
And I think there is – I think that we're cautiously optimistic that would happen and if that does happen there'll
be some disruption but not significant disruption. So that's what we're doing on th e DOL front and our efforts.
The issue – the second issue is an important question which is because the DOL affects mostly the distribution
companies, not the manufacturers in this particular instance. We'v e seen a couple of ex amples where one or two
small – smaller distribution partners of ours hav e sort of thrown in the towel on thinking that any thing good is
going to come out of this nex t iteration of DOL, which I don't agree with, by the way, and hav e suggested to their
financial adv isors that they shift their business from commission to fee-based. So there's a little bit of that, but
there's not any ov erwhelming rush that way at this point.
And when the rules are published, hopefully, there will be a clearing off and all distribution organizations wil l
hav e the same reaction, but we'll hav e to see. And let me – I'v e said this a couple of times, but our distribution
strength, our product development capability, even in the worst case will permit us to get important products into
the hands of customers who need them on a cost effective basis and with a decent return on equity.
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Corrected Transcript
09-Dec-2015
It may take, if the rules came out the way they are today, it may take a couple of y ears to do that and our sales
could drop off. If that worst case happened, the capital that we wouldn't be putting into new sales would be put
into share buy backs and ov er a three-year period, the earnings per share impact of that sales disruption would be
de minimis, because we'd just use that capital and buy our shares back.
And I'v e done that before, we've done that before in 2013 when interest rates dropped, or 2009 when interest
rates dropped, our guaranteed universal life business was – went from a return on capital of 1 2% to 8%. We cut
back by 20% or 30%, generated hundreds of millions dollar s of capital and bought our stock back when it was $25
and so it worked out quite well for us.
So we're good at capital management. Let me also hasten to say, we're running out of time here. There is only so
much contraction y ou can do in a business befor e the fundamentals of the franchise start to break apart. So y ou
can't take a program of $600 million of sales in the Life Insurance business and take it to zero, y ou'd lose y our
underwriters, y ou'd lose all y our value propositions, but at the margin, particularly in the V A business, we can do
what it takes.
................................................................................................................................................................................................................................
Mike E. Kovac
Q
Goldman Sachs & Co.
Any questions from the audience? We'll mov e – shifting gears here in the little time that we hav e left, I want to
focus a little bit on capital management, which has been the strong part of the Lincoln story for the past several
y ears really. And you've demonstrated a preference for buybacks over dividends, though I'd note that y ou did
increase your dividend most recently in the third quarter by 25% y ear -over-year. How do y ou think about uses of
ex cess capital in terms of buy backs, increasing the dividend, or potentially looking to M&A transactions in terms
of what businesses y ou'd be interested in?
................................................................................................................................................................................................................................
Dennis R. Glass
President, Chief Executive Officer & Director
A
Let me start with the third one first, because it's an easy answer. If returns on buying add -on businesses were
reasonable, our first choice would be the group business, but they're not high enough. So people are buying group
businesses at 8% or 9% IRRs and when we can sell business between 1 2% and 1 4%, it would be silly to allocate any
significant amount of capital to M&A right now. That'll change, but right now we're not actively in the market
try ing to do a deal, because people are buying these products, buying these properties at such low returns. And the
Japanese hav e had an influence on that because they've come in with their lower cost of capital and bought three
insurance companies.
So I think the M&A market for add-on deals for Lincoln is not a high priority right now. Now that could change
tomorrow, if the dy namics in the business return on inv estment changed and if it did change, then group would be
our biggest business. We'v e said for a couple of y ears now, we have too many – we'd like to mov e our source of
earnings from mortality and morbidity, which now are around 23%. We'd like to mov e it up to 30%. It'd be v ery
hard to do it organically, so we'd like to do a deal.
So that leav es us with the question of our choice between share buybacks and div idends. We're not quite at the
div idend level sort of on a pay out ratio where I would say that our increases would be consistent with growth in
earnings. And so we may have above average increases may. Let me hasten to say, this is not my decision, it has to
be approved by the board and so I'm not suggesting anything. But the div idend payout ratio, when y ou look across
our industry, we're [ph] little (35:20) on the lower side. But we hav e v ery strict metrics around the amount of free
cash flow that's generated at the holding – into the holding company and covered ratios on div idends. So we hav e
a v ery mathematically-oriented decision point and we won't drift away from that.
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Lincoln National Corp.
(LNC)
Goldman Sachs U.S. Financial Services Conference
Corrected Transcript
09-Dec-2015
So I would guess that on a go -forward basis, we'd continue to proportionally have mo re share buybacks with our
free cash flow than div idends. And again, I'm not predicting any thing about dividend increases next y ear or the
y ear after. I can't make that decision, the board can make it.
................................................................................................................................................................................................................................
Mike E. Kovac
Goldman Sachs & Co.
Great. Looks like we are right out of time here. Please joining me in thanking Dennis and Lincoln.
................................................................................................................................................................................................................................
Dennis R. Glass
President, Chief Executive Officer & Director
Thank y ou.
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