Everyone, I'm Tracy Dolin-Benguigui, Bank Insurance Analyst at Barclays. I'm pleased to host this fireside chat with Lincoln National, with our speaker, Ellen Cooper, President, CEO. Maybe just we could kick things off, Ellen, you could describe some big picture thoughts on the current macro environment for Lincoln. Absolutely. I think first of all, we all were reminded yesterday about the volatility that we continue to experience in the market. I'll just spend a moment talking about the fact that we all know that we have continued to see, in particular, persistent inflation, that has driven a lot of market volatility and a fair amount of uncertainty in terms of the overall economic landscape. What it has meant for Lincoln this year in particular is that through the second quarter, we had seen a significant amount of market volatility that really had affected, first of all, our risk-based capital. We have seen some impact just from equity markets being down. They were down year to date about 20% through the second quarter. We see that show up in terms of impact as it relates to our fees on assets under management. As a reminder, in terms of our overall source of earnings mix, about 50% of our overall source of earnings comes from fees on assets under management. We saw that as an overall negative impact. The third area is that we have some reserves in particular that are more sensitive to lower equity levels and also some level of market volatility. We saw some pressure from that as well. Having said that, we also, as we look at the broad economy, there continues to be really a lot of support. We continue to see strong labor markets, as you all know. We continue to see strong wage inflation, also interest rates are higher. These are all positive that we also think create a lot of opportunity as it relates to overall customer value proposition of product with those overall higher rates. Wage inflation puts more dollars in the pockets of consumers, we're seeing that translate in our retirement business. Also just in terms of when we see this overall market volatility, we tend to see shifts away from some of the more traditional variable-based products. Because of the broad product diversification that we offer, we're able to see shifting sales in terms of customer preferences more into products like stable value on the retirement side, fixed indexed annuity. Clearly there are pressures underway, but also some opportunities as we continue to work through this market landscape. Given the current macro backdrop, what is your confidence level in achieving your 8%-10% annual EPS growth, and what could be some of the main drivers? Great. I continue, even at the end of the second quarter, with equity markets down 20% year to date, I continue to have strong confidence that over the next couple of years, we expect to produce an 8%-10% EPS growth. A couple of components here as it relates to why and how we will do that. The first is that a portion of that growth comes from pure organic growth. We've talked to all of you over the years about our product strategy, reprice, shift, and add new. We're seeing sales acceleration across all four of our businesses, and we expect that to continue. The second area that we have talked to all of you about is our Spark initiative. Here, an enterprise-wide expense initiative we expect with a 2024 run rate, and we'll be incrementally working on this over time. That will be taking out about $260 million-$300 million of annual expense per year. That's about 15% of the overall G&A expense. We're making significant investments now to be able to take those expenses out later, but that's another place in terms of how we will achieve that. The third area that we've talked to you about is sustaining, really restoring our group protection margins. You saw in the second quarter, granted, typically a good seasonality quarter in the second quarter for group protection. Our margin being really close to the upper end of that range. We need to support sustaining it. That's the other place overall. Additionally, we have had over the past headwinds that have come from spread compression from lower interest rates over time. Even though, although we saw equity markets down and that definitely put some pressure on EPS growth, with interest rates being higher, we actually believe that over the near term that we'll start to move into spread expansion and that will also be another tailwind now finally, to be able to support EPS growth and give us further confidence in how we will get to the 8%-10%. Great. You talked about some opportunities from higher interest rates like spread expansion, if you have anything else to add there, and if you could also balance that with any challenges like liquidity or disintermediation risk. I'm just thinking about liabilities that might be runnable. Absolutely. Higher interest rates are good for our customers, they're good for Lincoln, they're good for the industry. When we have interest rates at the levels that we have them now, they're still, if you look historically, they're higher certainly than they were. They're still low historically. However, a couple of things. We are able to really improve the value proposition to our customers of the products that we overall offer. We're able to think about the reduction and elimination, which we expect this year if rates continue at this level of spread compression, and really move to spread expansion. Then some of the reserves that we set also have some sensitivity to rates, and higher rates would support a lower reserve. Those are really some of the positive things. Some of the things that we manage just in terms of being an overall insurance company, we're always managing to various different stress scenarios that should occur. If we were to see some type of a stagflation scenario, a rapidly accelerating, high hyperinflationary environment, we could be exposed to some level of disintermediation on some portion of our product portfolio, not significant. We spend a lot of time, first of all, thinking about product features in those businesses that have the potential to be intermediated against. We also have some macro hedges in place for very rapidly high rising rates that could support if we were to see a situation like that, and a number of different product features to support. Clearly something that we look for in terms of overall stress scenario analysis, not something that we're expecting in the near term. If there was, we have a number of risk management mitigations that are in place. Great. Ellen, you previously shared your vision of improving Lincoln's free cash flow conversion. One of the points I've heard you make is that maximizing your present value of distributable earnings from your in-force, including potentially a future transaction. Looking at your back book, which piece do you think is the most transactable? Which part would you love to offload but cannot reach the appropriate bid-ask spread? Okay. We started to talk in our last quarter analyst call about our longer term strategy, and I mentioned a couple of things there. One was that in addition to our longstanding focus on EPS growth and on strong ROEs, that we also would be increasing our emphasis on free cash flow. I talked about a couple of contributors to that. First of all, we are looking at ways that we can accelerate growth and enhance shareholder value. As part of that, there are really three areas that we will be spending more time focusing on and emphasizing and communicating with all of you as we think about what is the question around our long-term optimized business mix. The three areas are increased focus on free cash flow, reducing the capital volatility from capital markets, and the third area is further diversifying our sources of earnings and revenue. I have put a person in charge, a chief strategy officer, that is quarterbacking the long-term strategy for Lincoln. Over time, we'll be able to communicate more of that to all of you. We're looking at actions that we can take that will meet these three objectives that I've just talked about. If there is an opportunity to transact with no time commitments at the appropriate price, that would meet some of those objectives, that could improve overall free cash flow, that could reduce capital volatility, we would do it. We have a team that is fully staffed up now that is working 24/7. We've never had a fully dedicated team that this was their role, but they're looking at whether or not there could be opportunities here. Presumably to answer your question in terms of mix, presumably we would look at a subset across the organization because we have $300 billion of in-force. We really would be looking at perhaps a portion across various different types of product as we consider a potential block transaction. More as we continue to move through all of this. If, by the way, we're not able to transact in an appropriate time at a price that meets our needs, the end objective here is to really maximize the value of our in-force. Are there other levers that we could pull around maximizing the value of the in-force? We think that there are. One tool could be transaction, but other tools could be looking at potential structures, potential investment strategy, et cetera. More to come. Okay. Interesting. Maybe turning to capital management, your RBC. Can you just discuss the factors that led Lincoln's buffer to be depleted in the second quarter? I think your RBC now is at the 400% level, which is your target. Yes. First of all, as it relates to our target, importantly, we ended the quarter at 400 RBC. About a year ago, we had the C1 factor RBC change. For us, although there was no impact to our overall credit risk, to our overall view of the investment portfolio, it was a 20-point impact for us. We really view that the 400 that we had at the end of the quarter was effectively 420 a year ago. We believe that we still have Some room in terms of our overall target is the first thing. The second thing is that we did experience 30 points of RBC impact in the first half of the year, exactly to your point. About two-thirds of that came from the equity market decline and the impact that it had in terms of some of our businesses and additional reserve requirements aligned with that lower equity market move. About a third of it came from some deferred tax assets that basically there's a limitation in terms of the amount of overall deferred tax assets, and that will reverse itself over time. Those are the primary drivers. Again, getting back to one of the objectives that we're going to be further focused on is really reducing that capital volatility to capital markets over time. Maybe I'm oversimplifying, but can I think then 380 is your new 400? Effectively, yeah. Yeah. We do really believe that there's also variability in terms of our RBC. As we've looked at this further, we believe that when equity markets are high and we're seeing a lot of equity market growth and low volatility, and credit market's benign, we would see a buildup in RBC, and you saw us do that actually earlier in the year. Then when we're seeing more pressure, more equity market volatility, that there would be room to go a little bit lower. We believe that there's a range with which we would be comfortable in terms of our target RBC level. Okay. Can you just put a little bit more context over the range and as well as discuss how important it is to Lincoln to have an RBC buffer? As I mentioned, we would be comfortable with the 400, which in our eyes was a 420, and going to the 380. Then we also do a lot of stress testing and stress scenario analysis to ensure that the target level has to be correlated and connected to being able to withstand a severe stress and maintaining lower RBC levels, but lower RBC levels that support potential significant credit risk, additional equity market decline, et cetera, with an objective of not reducing shareholder dividends, with not needing to do any kind of capital or equity raise of any sort, and being able to continue to operate sales as we typically would. Also maintaining, of course, strong financial strength ratings. If we're able to maintain all of that from a severe stress perspective, we also are comfortable in terms of our overall targets. Okay, great. Maybe shifting gears to mortality risk. What are your latest thoughts on non-COVID mortality risk? Is the pandemic a pull forward? Are you worried about late medical treatment, diagnosis of care? Just recognizing that we've seen some favorable non-COVID Yeah mortality experience lately. When we think about non-COVID, I think sometimes it's hard to separate, first of all, non-COVID from COVID. One of the reasons that I say that is that some of the pull forward of mortality that we have seen, in particular in the individual business, which affected a lot of older age individuals, is that there was a lot of comorbidity there. It's hard to know while somebody may on a death statement, it might have said that they died from COVID, it might not have. It's really a little bit unclear. We do think, having said that in our individual business where we saw a lot of older age claims that were either directly COVID or we believe COVID related, we do believe that there was a pull forward there. We also have a group protection business, as you all know, and there the story is a little bit different. Particularly during, you probably all remember the Delta COVID, and that for whatever reason, seemed to afflict more working age population than some of the other strains that we've seen of COVID. We had an elevated working age COVID mortality, in particular during the whole Delta situation. That we don't think is a pull forward. We think it's an unfortunate circumstance of COVID. Having said that, because the group book more or less prices again and renews about every 3 years, we've talked about the fact that we've been able to reflect in our pricing increases, and we've had strong new sales, and we've also had strong retention there. Persistency that we've been able to have some level of the pricing of those COVID claims back into the overall group protection business. As it relates to non-COVID in particular, we also know, and we are watching the fact that we definitely know that during the early days of COVID that people were delaying doctor's visits. In general, we've seen some evidence of a little bit of elevated non-COVID mortality coming from people finding later stage cancers or whatever it might be. It's just hard to know at this point. As you all know, mortality and really thinking about trends takes a long period of time to really study and understand. We're only about 2 years into COVID, and we really firmly believe that it's shifting now from pandemic to endemic. We're going to have to really watch this and see what implications it has longer term before we can actually really come out with any clear trends in terms of what it could mean for long-term expectations. Great. Could you provide an outlook on pricing competition in the U.S. life and retirement space? First of all, as it relates to, I talked about higher interest rates, as it relates to higher interest rates and just in general, in terms of pricing and competition, we, the entire industry, can offer a stronger consumer value proposition with rates being at these levels certainly than we could 2 years ago when the 10-year was below 1%. In general, when we think about overall competition, where we have some level of crediting rate inside of the pricing, we are seeing really the entire industry, while competitive, has also remained very disciplined. We continue to have strong market share, and we ourselves, when we're pricing, we ensure that we are meeting or exceeding our target returns. By the way, when we are pricing new product, we are using the forward curve. We're not grading into any kind of long-term expectations. We use the forward curve when we price. On the life insurance side, I want to also add that in the working through of COVID, we really have seen an increase in terms of demand in general across the industry of life insurance and protection products. Not a surprise. We saw a real uptick of that in 2021. Still elevated in 2022, although not quite as strong. We expect that that will continue. Then I talked earlier about the fact that when we see market volatility and equity markets down in particular, we tend to see a pullback from some of the traditional variable-based product and more into more, call it safer, guaranteed product. We have seen that in terms of in our retirement business, on the stable value side, we've seen more of a shift into, on the annuity side, into fixed indexed annuity away from VA traditional product. Those are some of the things that we're seeing out there. Again, the fact that we've got the broad product diversification is supporting us to be able to meet our customers in terms of their overall preferences. Great. For group life insurance, do you feel like you have enough scale there, and enough product offerings? Are there any capabilities you wish you had that you don't currently have? I'm just wondering if you could share views of your ultimate growth potential. Yeah. The group business is a very important business to us. Back in 2018, we did an M&A transaction that really doubled the size of that business. In addition to doubling the size of the business, part of what it did is that Lincoln had traditionally been in the small and mid case sizes, but it really enabled us to expand into the large and even the mega overall case sizes. It gave us broad scale, and it gave us more broad diversification. We have significant market shares, and we feel very comfortable in terms of where we are in the overall life space, in disability, in leave. We've got very strong market share there. We also feel very good about the split between our employer and our employee paid, and we continue to see really good focus there. We think that with the scale that we have, and it really gets back to our ability to execute on our goal of getting to sustained 5% to 7% margin. We think that with the scale of the business that we have, we have every opportunity now to really maximize our operational efficiencies, to maximize our claims effectiveness. We've got strong distribution. Using that strategically in terms of improving the overall organic growth around sales, but also strong persistency, which we've been seeing, and getting those premium increases. We've been seeing really positive around all of that. The other thing that I want to add is that we've also talked about the fact that we would like to, in terms of where to grow, we would like to be doing more in the supplemental health space. In order to do that, we had historically had two sup-health products. We had accidental death and we had Critical Illness. Last year, we rolled out hospital indemnity. That was important because many brokers and employers really feel that in order to be credible in the sup-health space, you have to have three legs to the stool, and we were missing one. The fact that we now have hospital indemnity puts us in the mix and the flow. As you all know, the margins are very healthy on that business. We believe that we have opportunity to grow and do more there. The final point is that we've just brought in a fantastic new leader to run those businesses. The head of our Workplace Solutions, that's Group Protection and Retirement Plan Services, James Reid who has just come to us with deep experience in the Group Protection business. We will be looking at all ways to really continue to grow the business over time. As we continue to work through that, we'll be able to communicate more. Got it. One of the tools you're aiming to optimize your business mix is to increase your mortality, morbidity source of earnings to 30%. Can you walk us through how you like to accomplish that? Absolutely. When we think about our overall source of earnings mix, we had communicated some time ago that our goal was to get to a 30% mortality, morbidity in terms of the overall earnings mix. The acquisition of the Liberty group protection business that I just mentioned enabled us to get there. Unfortunately, soon after we acquired that business, we entered into a pandemic, we have been struggling through the pressures of working through that pandemic. When we look, for example, at the source of earnings ex the pandemic, what we can see is that, for example, in 2021, that mortality morbidity was in the mid-20% range. In the second quarter, where we produced a strong margin for the group protection business, we were closer to that 30% area. We believe that with sustained margin, that we will be able to, over the near term, achieve that 30% mortality, morbidity. We have about 50% of the overall source of earnings, as I mentioned up front, that's really fees on assets under management. The remainder is predominantly coming from spread in interest rates. When we think about the overall optimization of the business mix going forward, I talked about the factors that we're going to be looking at around improving cash generation, reducing capital volatility, and diversified sources of earnings and revenue. We will be asking ourselves the question around what that long-term mix ultimately should look like to really further enhance shareholder value. More to come on that as we continue to work through it. Okay, great. Maybe we could touch on Retirement Plan Services. Can you discuss trends in this business, including sales growth, net flows, margins, and earnings? Absolutely. Our Retirement Plan Services business, we are really very proud of it. It's performed very well. We've talked to all of you during analyst calls about the fact that our sales have been good and strong and have continued to accelerate. We've talked about the fact that for 7 straight years, we've had positive net flows in the business. A big contributor to that is also our deposits. Deposits, although they were a bit lighter in the 2Q than they had been over the last two quarters, we generally have seen strong overall recurring deposits, and we think that there are a number of factors that are contributing to that. One is I talked about increased wage inflation, and we think that that is getting everybody's salaries up, and therefore, they are putting more money to work in terms of long-term retirement savings. The second thing is that employers are actually increasing contributions to try to just improve their overall retention of employees. The third thing is that we're continuing to see some rollover into the business as employees are being hired away from one employer and coming into our new plan. That's all very much supportive. We also feel really good about the fact that although our retirement business relative to a number of our competitors is fairly small, it's about $100 billion of assets under management, we're really able to compete. Our ROA are right in line with the largest of the overall competitors, and we think that one of the reasons here is that the RPS business gets to leverage the rest of the organization for expense efficiencies, as an example, for IT. It's one of the reasons why we hear over and over again, one of the reasons why we think our retention is so strong is that the customers that work with us really like the value proposition of high touch, high tech. It's really that combination of knowing that they have a person that they can work with to support Retirement Plan Services, and also they have all of the technology capability as well. The earnings, I should also add, we expect that, and we've talked about the fact that this business is starting to move into spread expansion, we think that we can see even further earnings acceleration coming from the retirement business in the future. Excellent. I've come to appreciate that your Spark program is not just about cost savings. Can you discuss the innovation agility piece that may dovetail into revenue synergies? Yes. I was actually, for 18 months before we rolled out the Spark program and talked about the expense saves with all of you, I was one of the co-sponsors of the enterprise-wide initiative. This is a very exciting internally at Lincoln overall project that we are working on. We've never done something at this scale. A big part of what we did, first of all, is we had about 1,000 people inside of the organization that were focused on idea generation around where there were opportunities to be more efficient, to innovate, to think about new strategies to support modernization of technology, et cetera. Out of those 1,000 people came 150 initiatives that were all prioritized and aligned to the business strategy. A big portion of what we are doing, we've talked about the cost saves, is we're making a substantial direct investment in the business. Some of the goals are really to modernize technology. There is inside of these initiatives, we are really completely strategically revamping the overall strategic operational efficiency of our technology organization. There are a number of Employee experience opportunities here as well. An example of that is that we just launched a firm-wide recognition program that we call ShoutOut, where employees, when they have accomplished something and they've done well, they have a reward. They have opportunities to go to leadership development boot camps, mobility opportunities. All of that has a lot of excitement and momentum inside of the organization. Most importantly, one of the things that I've said is that I really think that Spark, at the end of the day, it provides a framework for us to be able to execute more quickly. It is making us, it's building a muscle for us so that we can develop product faster, so that we can think about optimizing the in-force in a quicker way because the systems are able to ultimately respond faster. We've got more automated processes. We have people that have been trained with skill sets that we need for the future as well. Couldn't be more excited about that. I spent the day yesterday with our technology leaders, they really are right at the center of this and focused also on the long-term opportunities as it relates to innovation. Excellent. Maybe it's a good time to pause and see if there are any questions in the room. We do have some mic runners. If anyone has a question, please raise your hand. Hello. Alex Gismert from Millennium. It's good to hear you reiterate your EPS growth target. You mentioned some of the drivers, but I also think capital return is an element of that. On the last quarter call, there was some concern around an assumption review that you're doing this quarter. If you could just provide some insight into the potential impact of that and what it could do for capital return next year, or if you are confident in that guide that there is not going to be some drag or impact from the assumption review. If you could talk about that. Sure I think it'd be helpful. You all know that, and you've heard us talk about this, that we cannot speak to third quarter or third quarter unlocking intra-quarter. What I can share with you is that just like we do every year, we're in the middle of our overall assumption review process. It's a process internally that starts with our actuaries. Part of what our actuaries are doing is they are reviewing our own experience. They also will look at any industry experience as well that could potentially be additive to that. You have heard and you know that we did participate in the industry study that was cited on one of our competitors in terms of that negatively impacting their overall results. That would simply be an input for us, as would many other factors as we look at overall experience. We're looking at a broad range of, as we do every year, of our policyholder behavior. That's our mortality, our morbidity, our lapse assumptions, our capital market assumptions. We will look at that and determine whether or not, based on a best estimate, there's a need to make any changes to the overall assumptions and whether or not that would impact us on the GAAP side. In particular, the place where we know that a competitor took a write-down in the second quarter because they do second quarter unlocking, and they talked about the fact that when they look from GAAP to stat that they were expecting from a capital perspective to see a one-for-one impact. For us, first of all, when we translate assumptions from GAAP to stat, the assumption said if we believe that lapses and the experience go forward for lapses should change, it would be consistent. The assumption change in and of itself would be consistent from GAAP to stat. GAAP reserves and the GAAP process is set based on best estimate. Statutory reserve process is different. On stat, first of all, there are base reserves, and those base reserves are basically set, and they would not at all be altered by any kind of assumption-setting process. Additionally, there are a couple of tests that need to occur on the statutory side on an annual basis. One is asset adequacy testing, that's cash flow testing. That's an aggregate test. There are also specific tests for portions of the GUL business, and that's an 8C and an 8D test. For us, these particular subtests, 8C and 8D, which would utilize assumptions and be projection based, last year when we looked at those tests, we had a cushion there. With interest rates being higher than they were a year ago, we would expect that there would be even more of a cushion as a result of higher capital market environment. I want to give that to you as a backdrop, and then our expectation of what we believe at this point in terms of the overall capital return as it relates to that overall EPS growth. We'll be able to share more of that with you as well in our third quarter call. We do have assumptions, of course, that are inside of that EPS growth that are getting us to that 8%-10%. Okay. It doesn't look like there's any other questions in the room, I thought this might be a good time to pull up our audience response system. We're going to pull up some questions. The first question is, if you don't currently own shares of Lincoln, what will cause you to change your mind? Would it be higher interest rates, steeper yield curve, greater diversification, sources of earnings, higher/more consistent free cash flow generation, reinsurance transaction, or a lower valuation? Okay, overwhelmingly, it is the third bucket, higher or more consistent free cash flow generation. Good. We know we're focused on the right thing. Maybe we'll go on to the next question. My confidence that Lincoln's operating ROE ex-AOCI will be 10% or higher in 2023. Medium. Maybe the last question. My confidence in Lincoln's ability to graduate from spread compression to spread expansion is High. Great. Good. I guess with that, we should thank Ellen for this fireside chat. If everyone could give a round of applause. Thank you. Thank you to all of you, and more to come from Lincoln over time. It's great to be in front of all of you today. Really appreciate it. Thank you, Tracy.