Lincoln National (LNC) Q1 2018 Results - Earnings Call Transcript

Lincoln National Corp. (NYSE:LNC) Q1 2018 Earnings Call May 3, 2018 10:00 AM ET

Executives

Christopher A. Giovanni - Lincoln National Corp.

Dennis R. Glass - Lincoln National Corp.

Randal J. Freitag - Lincoln National Corp.

Analysts

Jamminder Singh Bhullar - JPMorgan Securities LLC

Ryan Krueger - Keefe, Bruyette & Woods, Inc.

Suneet Kamath - Citigroup Global Markets, Inc.

Randy Binner - B. Riley FBR, Inc.

Humphrey Hung Fai Lee - Dowling & Partners Securities LLC

Joshua D. Shanker - Deutsche Bank Securities, Inc.

Robert Glasspiegel - Janney Montgomery Scott LLC

Andrew Kligerman - Credit Suisse Securities (USA) LLC

John M. Nadel - UBS

Operator

Good morning and thank you for joining Lincoln Financial Group's first quarter 2018 earnings conference call. At this time all lines are in listen-only mode. Later we will announce the opportunity for questions and instructions will be given at that time.

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

Christopher A. Giovanni - Lincoln National Corp.

Thank you, Crystal. Good morning and welcome to Lincoln Financial's first quarter earnings call. Before we begin, I have an important reminder. Any comments made during the call regarding future expectations, trends and market conditions, including comments about sales and 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 are described in the cautionary statement disclosures in our earnings release issued yesterday and our reports on Forms 8-K and 10-Q filed with the SEC. 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 a full reconciliation of the non-GAAP measures used in the call, including adjusted income from operations and adjusted return on equity to their 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 remarks, we will move to the question-and-answer portion of the call.

I would now like to turn things over to Dennis.

Dennis R. Glass - Lincoln National Corp.

Thank you, Chris, and good morning, everyone. Following record financial results last year, we start 2018 by reporting record first-quarter adjusted operating earnings per share. Organic growth drivers in capital management over the previous 12 months contributed to high quality results, as pre-tax earnings increased 6% and shares outstanding decreased 3%. When combined with the benefits from tax reform, EPS excluding notable items increased 14%.

This quarter's strong earnings were broad-based and highlight profitable growth actions and the power of our retail franchise, which brings together a comprehensive and expanding product portfolio with distribution breadth. Notably, every business generated revenue growth, and our Life Insurance group and RPS segments all reported double-digit increases in after-tax operating earnings. Excluding notable items, Annuities also reported double-digit growth. Other key shareholder metrics were also solid with book value per share up 18% and ROE of 13%.

As we announced Tuesday, we completed the acquisition of Liberty's Group Benefits business. We are excited about the increased potential for our Group business, and I will speak to this shortly.

Our balance sheet remains strong and we ended the quarter with statutory capital at an all-time high. We have said, and it remains the case, that we will resume share repurchases no later than the third quarter. We temporarily paused buybacks, as you know, to help fund a portion of the Liberty acquisition.

Industry RBC ratios may be affected by tax reform, C1 factors, and possibly the VA reserve and capital review. We are aware of the range of these outcomes relative to Lincoln, and the final outcomes are not expected to affect our capital adequacy and announced capital management plans. More importantly, capital adequacy starts with management's view of what capital cushion is necessary for stress situations, and we are comfortable, as I have just said.

Rating agency requirements are important, and their views may change over time for any number of reasons. However, we just had all of our ratings affirmed when we announced Liberty, which occurred after tax reform was implemented. Its credit ratings were also done understanding our capital programs. Bottom line, we do not see the need to delay or reduce buybacks.

Turning to interest rates, higher rates are helping new business returns and enabling us to take some product actions to improve our competitive position and drive profitable growth. We also expect that with rates at current levels, the 2% to 3% annual headwind to EPS growth from spread compression will abate sooner than we indicated at our last Investor Day.

Now turning to our business segments, starting with Annuities. An 8% increase in average account values resulted in double digit earnings growth, again excluding one-time favorable tax adjustments in the prior year quarter. Total annuity sales were strong in the first quarter, up 25% to more than $2.5 billion as our strategy of expanding the product portfolio and leveraging distribution strength is gaining traction. I would note that 20% of sales in the quarter are from new products.

Let me briefly touch on some other specific product results from the quarter. Variable annuity sales increased 40% compared to the prior-year quarter. The quarter sales strength was broad based with all distribution channels up more than 20%, both qualified and non-qualified markets increasing more than 30%, and double digit growth in nearly every product category. We also generated sales growth in variable annuities with and without living benefits. Fixed annuity sales did decrease 12%, primarily due to a decline in SPIA sales and slower sales in the bank channel. Importantly, sales have bounced back recently as we are expanding shelf space and adding new distribution partners.

In addition to stronger sales, new business returns also improved sequentially, a combination that will reward shareholders. I remain confident in our ability to further increase sales and return to positive flows. Our sales growth continued in April, and the improved regulatory environment is also a modest helper. Adding to this momentum are management actions, including the launch of an index variable annuity in the second quarter. This is a new product category for Lincoln. However, it is a $9-billion market, growing quickly, and market share is highly concentrated. We see an opportunity to participate in this growth and take more market share. Other key drivers include a couple of new and meaningful distribution opportunities later this year. These are the type of things we're doing that are making a difference and why I am confident sales will accelerate.

In Retirement Plan Services, earnings increased 16% over the prior year quarter, driven by consistent growth in deposits, net flows and assets as our strategy and franchise continue to drive positive results. Deposits in the quarter of $2.4 billion were up 5% from a year ago. First-year sales of $800 million matched last year's very strong results. Recurring deposits increased 7% to a record $1.6 billion. Contributing to these gains is our high-touch model and digital functionality, which are leading to higher employee contribution rates and increases in participation.

For the quarter, net flows totaled $463 million, more than 3 times last year's first quarter. This marks our 9th consecutive quarter of positive net flows. Bottom line, we remain confident in growth opportunities for the RPS business. Recent results highlight the strength of our business model, which is positioned to effectively compete in our target markets, again, driving top and bottom line growth.

Turning to Life Insurance, earnings increased 11% from the prior year. Individual life sales were $163 million, with strong growth in VUL, resulting in total sales increasing 3%. MoneyGuard sales also remained solid following a record 2017. In aggregate, expected new business recurrence for the quarter were well above our target levels.

As we noted last quarter, a more favorable macro backdrop is allowing us to improve our competitive position in UL and IUL. As a result, we expect these product enhancements will help with sales diversification and growth in core life products, while still enabling us to achieve targeted returns.

The Life business got off to a great start this year and our outlook remains strong. We expect growth to continue, driven by further product diversification and our position as a market leader, combined with the depth and breadth of distribution.

Turning to Group Protection, in what is typically our lowest earnings quarter due to higher seasonal DAC amortization, earnings increased significantly over the prior year period as loss ratios remained favorable. Premiums increased 3%, driven by improving persistency and last year's strong sales growth.

In the first quarter, total block persistency rates increased 3 percentage points, with improvements across all product lines and nearly all case sizes. Sales decreased 4% from the same period last year. I would note that the first quarter represents the smallest contribution to full year sales and we are encouraged by a solid level of quote activity.

Importantly, industry pricing remains disciplined. We have not seen any disruption from our announced acquisition of Liberty and we expect sales trends to be decidedly positive. The Liberty acquisition immediately increases our scale, further broadens the customer base and distribution channels, and expands capabilities. Liberty's Group Benefits financial performance in the first quarter was consistent with our expectations, setting us up well to deliver on planned financial targets.

In summary, we are pleased with the positive business fundamentals. Looking forward, we expect Lincoln's existing business to generate solid premium growth. And when we combine it with Liberty's block, premiums will increase substantially. The incremental earnings from Liberty should grow over the course of the year as expense synergies take hold.

Shifting to investment results, we invested new money at an average yield of 4.1% in the quarter, 20 basis points higher than the fourth quarter as we benefited from higher treasury rates. Our fixed income portfolio yield decreased 2 basis points, consistent with expectations. As I noted earlier, with interest rates at current levels, spread compression will abate more quickly.

The alternatives investment portfolio had a solid quarter, with both private equity and hedge funds contributing to an 11% pre-tax annualized return, and we grew the portfolio to more than $1.5 billion. Overall, the investment portfolio remains in great shape, high-quality, and broadly diversified, with investment-grade assets representing nearly 96% of our fixed income portfolio.

In closing, I am pleased with the start to the year, which includes, as I mentioned, record earnings per share. We have a lot of positive momentum in the underlying earnings drivers. Notably, annuity sales growth continues to be robust and we expect sales accelerate over the course of the year, driven by further product introductions and meaningful distribution expansion. RPS net flows have consistently been positive for more than two years and are helping counteract spread compression.

In Life Insurance, new business returns are strong and upcoming product enhancements will further help sales diversification and profitable growth. Group premiums and margins are benefiting from management actions, while the Liberty acquisition and the favorable economic backdrop serves as tailwinds.

Bottom line, I'm confident that our key strategic objectives and initiatives will enable our track record of financial success to continue. And I will now turn the call over to Randy.

Randal J. Freitag - Lincoln National Corp.

Thank you, Dennis. Last night, we reported adjusted income from operations of $441 million or $1.97 per share for the first quarter compared to $1.92 per share in the prior year. Excluding notable items, EPS increased 14% year-over-year, as nearly every business delivered double-digit earnings growth.

Touching on performance of key financial metrics in the quarter. Adjusted operating return on equity was strong at 13%. Book value per share, excluding AOCI, grew 8%. Positive consolidated net flows and equity market strength led to a 10% increase in average account values. When combined with solid sales results over the past year, operating revenues were up in all four businesses. Expense discipline continues to be a good story as G&A expenses increased 3% even as we make significant strategic investments. G&A expenses decreased 11% sequentially, largely reflecting seasonality.

Finally, our balance sheet and capital position continued to be strong with an estimated RBC ratio of 510%. Net income totaled $367 million in the quarter. The hedge program performed exceptionally well with $20 million of net losses during a period of heightened market volatility. A couple other items worth noting: an early tender for some debt resulted in a $19 million loss, while credit losses remain benign.

Now, I will turn to segment results, starting with Annuities. Earnings for the quarter were $267 million, compared to $240 million, excluding favorable one-time tax adjustments in the prior year quarter. Earnings growth was driven by higher fee income from an 8% increase in average account values due to equity market strength of the past year more than offsetting negative net flows. Return metrics remain strong, with ROA at 77 basis points and an ROE of 22%.

The current quarter did include some anomalies that reduced earnings by approximately $10 million. It is also worth noting that the first quarter has the fewest number of days to collect fee income, and we would expect the additional day of fees to help offset the impact from lower end of period account values. Our strategy of consistency in selling at our terms, paired with industry leading risk management, has produced differentiated results and a high quality book of business. Net amount at risk sits at less than six-tenths of 1% of account value, well below most peers. And our hedge program continues to deliver exceptional performance, as I noted in my opening remarks.

In Retirement Plan Services, we reported earnings of $43 million compared to $37 million in the prior year. The earnings increase is attributable to growth in fee income and the benefits of tax reform, partially offset by lower spread income. Positive net flows of $1.8 billion over the trailing 12 months, combined with favorable equity markets drove average account values to $68 billion, up 15%.

Revenue increased 4%, while G&A expenses net of amounts capitalized increased just 1%. Base spreads, excluding variable investment income, compressed six basis points versus the prior year quarter, while ROA was 25 basis points. So, a good start to the year for the Retirement business, highlighted by robust net flows and asset growth, which helped drive a double digit increase in earnings.

Turning to our Life Insurance segment. Earnings of $144 million increased from $130 million in the prior year quarter. Primarily attributable to in-force growth and the benefits of tax reform. Partially offset by lower variable investment income. Mortality was slightly favorable relative to typical seasonality. Earnings drivers remain solid for the quarter, with average account balances up 7%, and Life Insurance in-force up 4%. Base spreads, excluding variable investment income, compressed 11 basis points from the prior year quarter, and we expect full year results to be within the 5 to 10 basis point range we have discussed.

So, a great start to the year for the Life business. We are particularly encouraged, because the first quarter is typically our weakest earnings quarter due to seasonally high mortality.

Group Protection reported $29 million in earnings compared to $7 million in the prior year quarter, with both periods impacted by accelerated DAC amortization. As a reminder, with the first quarter representing our heaviest renewal period, the amortization impact is greatest in this period, but decreases in subsequent quarters. This reduced earnings by $11 million when compared to a typical quarterly run rate.

Overall, business momentum remains solid, which resulted in an after-tax margin of 5.7%. The non-medical loss ratio was 64.3% in the quarter, a 670-basis point improvement from the prior year. Better loss experienced in long-term disability from lower incidence and a lower average claim size in Group, Life were the primary drivers.

Premium growth is also aiding the Group business, as premiums increased 3% from the prior year quarter, with leading indicators such as quote activity and persistency trending in a positive direction. While there can always be volatility quarter to quarter, our claims management and pricing discipline, combined with the current economic environment, particularly related to labor trends, should support solid bottom line results.

Turning to capital and capital management. Statutory surplus stands at $9.4 billion, and our RBC ratio ended the quarter at 510%, up nicely from year end RBC of 489%. Holding company cash exceeded $1 billion and will remain above our $450-million target after down-streaming $500 million for Liberty acquisition financing.

As you are aware, the NAIC has recently been reviewing impacts to required capital related to tax reform and investments or C1 risk factors. Most of the proposals are still preliminary, but we are aware of the potential range of outcomes and are extremely comfortable with our capital position, and will deploy capital consistent with our free cash flow guidance.

We have dealt with regulatory uncertainty in the past and it is important to know, Lincoln takes leading roles on important industry issues, which this is one. This has helped us accurately assess regulatory outcomes and impacts time and time again. Bottom line, our capital position is robust, and as Dennis noted, is focused on stress testing and maintaining our ratings. The rating agencies reaffirmed our financial strength ratings post the Liberty announcement, and we plan to be back in the market repurchasing our shares no later than the third quarter. In total, we expect to allocate more than $2 billion towards buybacks, dividends, and M&A this year.

So wrapping things up, an excellent quarter for Lincoln. We reported strong operating EPS in a quarter that is historically one of our lowest. Looking forward, seasonal improvements in mortality, lower group DAC amortization, and more fee days leave us well positioned. Underwriting results in Group Protection and Life Insurance were solid, while Annuities and RPS benefited from account value growth.

Earnings quality was high, with pre-tax earnings up 6%, and after tax earnings further aided by tax reform. Key shareholder metrics were solid as book value per share increased 8% while ROE came in at 13%. And finally, we look forward to successfully integrating Liberty's Group Benefits business and reinstating our buyback program to further create shareholder value.

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

Christopher A. Giovanni - Lincoln National Corp.

Thank you, Dennis and Randy. We will now begin the question and answer portion of the call. As a reminder, we ask that you please limit yourself to one question and only one follow-up, and then re-queue with additional questions. Crystal, please open up the Q&A lines.

Question-and-Answer Session

Operator

Thank you. And our first question will come from Jimmy Bhullar from JPMorgan. Your line is open.

Jamminder Singh Bhullar - JPMorgan Securities LLC

Hi. Good morning. First, I just have a question on the timing of buybacks. You reiterated your previous view that you'd start no later than in 3Q. The stocks folded back significantly recently and given your whole liquidity position, to what extent would you be opportunistic in maybe starting a little bit earlier to take advantage of the lower stock price?

Randal J. Freitag - Lincoln National Corp.

Jimmy, thanks for the question. Let me take your question and broaden it out a little bit, because as you may have been able to tell by both Dennis and my comments, there has been some information, I think, out in the marketplace which I think has both been confusing for investors and at odds with what we've been saying. So I want to dig in a little bit on this whole capital question.

So let me make a few points. First, let's talk about RBC ratios. RBC ratios, as we've said for years now, are reasonable relative measures of strength, but they are not what defines capital adequacy. What defines capital adequacy is the amount of capital you have on your balance sheet, combined with the stresses that a company can face in a stressed environment. Stresses like deep recession scenarios, deep drops in equity markets, very low interest rates, big credit losses. Or stress like you may face in a stagflation environment like very high interest rates, credit losses, lower equity markets. That's what defines capital adequacy.

So let's turn to Lincoln. Over the past seven or eight years, we've been growing our capital. $9.4 billion at the end of the first quarter, $9.2 billion at the end of the year, up from $6 billion or so if you go back six or seven years. So as we've grown, as the risks in our balance sheet have grown, we've grown the amount of capital we have. And along the way, especially over the past three to four years, there's been a consistent message from us, and that is that we have, on our balance sheet, up to $750 million of extra capital to be used in the case of M&A. And that's exactly what we do. So we told you that, and we delivered exactly on that with the Liberty acquisition, where we put $600 million of capital to work.

Let's talk about the other items that are going on. First let's talk about C1 work that's going on. We're obviously very involved with that. It's very important to us that the factors that the NAIC ends up both make sense and that there's consistency across asset classes. But let's be clear about C1 factors. It doesn't matter if they go up, down, or sideways. The credit losses that we experience in a stressed environment do not change one single dollar.

Let's talk about the second item, the change in factors after tax reform. It's a logical change. During a stress scenario, we are going to experience higher after-tax losses, just like we're going to experience higher after-tax gains in a normal environment. When we gave you the most recent guidance that we had up to $750 million, we did that in full sight of these lower tax rates.

The stress scenarios we ran, they included the lower offset from the lower tax rate. When the rating agencies affirmed our ratings, they did it in full sight of the lower tax rates. So, yeah, let me once again affirm our capital plan and the fact that we will be in the market no later than the third quarter.

Now to your question. We have owned Liberty – we're the proud owners of Liberty for all of two days now. We've had information, but now we actually own it. And I agree with you, our stock is tremendously undervalued right now and we are going to do everything we can to fully understand Liberty and try to get into the market as early as possible. No later than third quarter, but believe me, we are going to do everything we can to try to get in as early as possible. Thanks for the question, Jimmy.

Jamminder Singh Bhullar - JPMorgan Securities LLC

Okay. That's helpful. And just one more, in terms of competitive trends in your major markets, have you seen any evidence of competitors sort of reducing prices in response to the lower tax rates in any of the key markets that you compete in?

Dennis R. Glass - Lincoln National Corp.

I think it's really too early, Jimmy, to make definitive statements about your question. The specific answer to your question is we haven't seen any effect in pricing, to our knowledge, related to the reduced tax rates.

Jamminder Singh Bhullar - JPMorgan Securities LLC

Okay. Thanks.

Operator

Thank you. And our next question comes from Ryan Krueger from KBW. Your line is open.

Please check that your line is not on mute.

Ryan Krueger - Keefe, Bruyette & Woods, Inc.

Hi. Can you hear me?

Christopher A. Giovanni - Lincoln National Corp.

We can, Ryan.

Ryan Krueger - Keefe, Bruyette & Woods, Inc.

Okay. Thanks. I had a question about...

Randal J. Freitag - Lincoln National Corp.

We lost you again, Ryan.

Christopher A. Giovanni - Lincoln National Corp.

Sorry.

Operator

Pardon me, sir. Please make sure your line is not on mute.

Christopher A. Giovanni - Lincoln National Corp.

Sorry, Crystal, can we go to the next question, and then queue Ryan back in?

Operator

Yes, sir. And our next question will come from Suneet Kamath from Citi. Your line is open.

Suneet Kamath - Citigroup Global Markets, Inc.

Thanks. Good morning. I wanted to ask a question about your distribution partners. Obviously, there's been a lot of change just in the recent period here with the DOL rule being vacated and then the SEC rolling out their version – at least preliminary version of a standard. How are your distribution partners kind of feeling about the current regulatory environment? Is there a portion of the channel that's still sort of wait and see, or are we kind of back to full distribution of your product?

Dennis R. Glass - Lincoln National Corp.

I think everybody is sort of cautious right now. As we know, the Fifth Circuit sort of vacated the DOL's fiduciary rule just yesterday. They didn't permit an appeal. Now, that may go to the Supreme Court. So that's – people are still watching the legal side of this.

Importantly, in general, the SEC, who we always thought should lead this and that the DOL and the state should harmonize with the SEC's best interest standard, has come forward. And their standard has many of the provisions that we thought were important. So, for example, investor choice as to products and no bias towards fees or commissions as a form of compensation. So that's all very good.

And most importantly, and sort of back to your question, to the extent that distribution partners started differentiating between qualified and non-qualified products, had to do primarily with this enforcement by the plaintiff's bar that was contained in the DOL fiduciary rule. That does not show up at all in the SEC rule. And in fact, happily, enforcements turned over to FINRA.

So I think we're seeing very positive signs at a better regulatory best interest rule. And the removal of the plaintiff's bar from the enforcement side of it, I think will – again, on many of our partners that – not discriminated, but differentiated between qualified and non-qualified plans, I think that will go away. So we're very encouraged. We're very encouraged with the SEC proposal, and we think over time that'll be good for the industry and good for the customers.

Suneet Kamath - Citigroup Global Markets, Inc.

Okay. Thanks. And then just on your new indexed VA product. Is there – can you just talk a little bit about how you expect to roll that out over the coming quarters? And then, is there anything unique about what you are offering versus what is currently available in the market in terms of that specific product?

Dennis R. Glass - Lincoln National Corp.

Yeah, we'll begin rolling it out in June and we'll be allocating a portion of our wholesaling force to the product, focusing on that product. There are some advantages to our product versus the competition, and we expect that to both help us take market share and expand the size of the market with our presence and wholesaling capability.

Suneet Kamath - Citigroup Global Markets, Inc.

And does that change your outlook for flows? I know over the past couple of quarters, we've talked about a return to VA flows at some point, but has your outlook there changed at all?

Dennis R. Glass - Lincoln National Corp.

As I said in my opening remarks, we think the sales momentum is encouraging with respect to reaching positive net flows. This product could be a potential significant help to that. Also, as I mentioned in my remarks, we're adding additional shelf space later in the year and significant shelf space. That will also help. And then, you just have a better overall market for all of the products, as you've seen with the increases in each of the product categories.

Suneet Kamath - Citigroup Global Markets, Inc.

Okay. Thanks, Dennis.

Operator

Thank you. And our next question comes from Ryan Krueger, KBW. Your line's open.

Ryan Krueger - Keefe, Bruyette & Woods, Inc.

Hi. Thanks. Can you hear me this time?

Randal J. Freitag - Lincoln National Corp.

We can.

Ryan Krueger - Keefe, Bruyette & Woods, Inc.

All right. Sorry about that. I had a question on Liberty Group Benefits. You mentioned that it was consistent with your expectations in the first quarter. Just hoping you could provide some additional detail maybe on the progress they're making when it comes to margins after repricing.

Randal J. Freitag - Lincoln National Corp.

Yeah, as we said, I mean, the results that we have seen have been very consistent. We've been very excited and pleased by the high quality of work that we've seen from the Liberty team in starting the whole process of repricing the book. And point out that we went through this, and you're seeing the powerful results that can come from repricing the book, and they can come pretty quick.

I think when you layer in that little bit of repricing work that still needs to be done with the $100 million expense synergies that we've talked about, you can understand why we're so excited about this opportunity. And, very excited that our margins will be right where we would expect them to be in not too long.

Dennis R. Glass - Lincoln National Corp.

And early on, I think we said that a third of the benefits from the cost savings is attributable to overhead allocations that go away in part when you move a company into Lincoln. And so that sort of is early benefit for the results that we expect in 2018.

Ryan Krueger - Keefe, Bruyette & Woods, Inc.

Thanks. And then just one quick one. Can you comment on what your new money rate was in the quarter?

Dennis R. Glass - Lincoln National Corp.

I think it was 4.10.

Ryan Krueger - Keefe, Bruyette & Woods, Inc.

Got it. Thank you.

Operator

Thank you. And our next one question comes from Randy Binner from B. Riley FBR. Your line is open.

Randy Binner - B. Riley FBR, Inc.

Hey, good morning. Thank you. I just wanted to actually pick up where Suneet left off on a couple of details around annuity sales. I guess on adding shelf space in the bank channel, Dennis, what exactly does that mean? Is that expanded distribution relationships in geographies? Is it a new product on the index side? I'd be interested to hear how you're adding space there.

Dennis R. Glass - Lincoln National Corp.

The specific comment about adding additional shelf space relates to adding new banks where we haven't been before. In banks where we are expanding the product offerings, some incremental increase in the number of wholesalers in the bank channel. So all of these things.

We also have another exciting distribution expansion discussion going on, which we think will come to fruition, which actually is an entirely different distribution channel than we've been in before for our products. And that could be meaningful if it gets done. And we're hopeful it is.

So as you've seen us over the last couple of – actually for quite some time, years and years and years, it's this ability to pivot with distribution and with product as markets change, as consumer preferences change, as capital markets change. We continue to do that across our product lines. And that strength of product and strength of distribution and the flexibility is what helps drive our top line and bottom line results.

Randy Binner - B. Riley FBR, Inc.

Is that new distribution channel you're talking about, would that be an e-commerce solution?

Dennis R. Glass - Lincoln National Corp.

No, it would not.

Randy Binner - B. Riley FBR, Inc.

Okay, and then, so I guess more to come there. And then just back on SEC, do you have any sense of timing on the preliminary rule coming out, and when we might get more details on how that could be implemented?

Dennis R. Glass - Lincoln National Corp.

It's a pretty complex rule, and people are – and there's a comment period that has started. So I think it will take a few months or more. But we don't know the exact answer to your question.

Randy Binner - B. Riley FBR, Inc.

All right. Thank you.

Operator

Thank you. And our next question comes from Humphrey Lee from Dowling & Partners. Your line is open.

Humphrey Hung Fai Lee - Dowling & Partners Securities LLC

Good morning, and thank you for taking my question. I have a clarifying question. So I think, Randy, in your prepared remarks you talked about you are committed to deploy $2 billion this year for buyback, acquisitions and dividends. I guess in terms of the M&A piece, are you including the $425 million of required capital that you would inject into the business, or just referring to the purchase price piece of $1 billion?

Randal J. Freitag - Lincoln National Corp.

Let's be clear, Humphrey. I think I said at least $2 billion.

Humphrey Hung Fai Lee - Dowling & Partners Securities LLC

Okay.

Randal J. Freitag - Lincoln National Corp.

So that includes about $1.45 billion from the acquisition, and we're on track to pay-out $280 million to $290 million of dividend this year. And when you include buybacks, we will be at least $2 billion.

Humphrey Hung Fai Lee - Dowling & Partners Securities LLC

Got it. And then in terms of – I guess you talked about the Liberty Mutual's Group Benefit consistent with your expectation. I guess between now and when you announced the transaction, any changes to your current expectation in terms of how the cost synergies and the earnings would emerge over time?

Randal J. Freitag - Lincoln National Corp.

No. I think the planning is going great. The team is very excited. We closed the acquisition on Tuesday morning. But I think the actual plans are coming in pretty much how we thought they would come in.

Dennis R. Glass - Lincoln National Corp.

I will just repeat a couple of things to add on to what Randy said. One, as I mentioned in my remarks, the first quarter results from Liberty were consistent with our expectations, so that's a positive. The planning for the integration, I think has been exceptional. And so I'm quite comfortable that we were prepared yesterday, which we've been referring to as day one, to move forward all of our plans, both the integration plans as well as the other things that were talked about, which are benefits from the combination of the new transactions. So we're very excited about realizing the outcomes that we've shared with you in terms of integration savings and the other benefits from the acquisition.

Humphrey Hung Fai Lee - Dowling & Partners Securities LLC

I guess what I'm trying to get at is in terms – I think at the time of the announcement, you talked about the after-tax margin would be 3% at closing based on the pre-tax reform. Is that still the case that based on what you looked at the Liberty Mutual's book in the first quarter, or are we potentially could be looking at a little bit better performance?

Randal J. Freitag - Lincoln National Corp.

Humphrey, I don't remember getting that specific to say 3%. But let's think about where we are. So Lincoln today is – we just posted 5.7% in the first quarter. Liberty, last year, posted about 1%. If you just average those two numbers, you get a little over 3%. It'd be 3.5% to be specific. The Liberty book is improving with the pricing actions that have been taken. As Dennis mentioned, a third of these expense savings which are corporate overhead start to roll in pretty quickly.

So once again I think if you go back to the one page from the deck we went over when we announced the acquisition, I think we get back into that 5%, 7% range on margins pretty quick. And once again, we expect this transaction to be accretive in 2019. So yeah. Humphrey, everything is going as planned. We're super excited. Every Lincoln employee and every Liberty employee that are now – all now part of the Lincoln family are ready to go.

Humphrey Hung Fai Lee - Dowling & Partners Securities LLC

Got it. Thank you.

Operator

Thank you. And our next question comes from Josh Shanker from Deutsche Bank. Your line is open.

Joshua D. Shanker - Deutsche Bank Securities, Inc.

Hi. Thank you. Obviously over the past couple of months, long-term care has been in the news and you don't have exposure, but it hasn't really affected your stock performance in a beneficial way. I'm wondering what the industry is thinking and whether you can comment on if there were a Penn Treaty type liquidation of a long-term care carrier, how it would affect Lincoln?

Randal J. Freitag - Lincoln National Corp.

Josh, I don't think there's a specific answer to that question. We as a participant in the state guarantee fund pools have been participating in liquidation resolutions for a long, long time. I think specifically the Penn Treaty one, we accrued what that was going to cost us, Josh, four or five years ago.

My recollection is – I know some companies did it last year, but we did that a number of years ago. And if there are any liquidations going forward, we'll contribute our appropriate share, and I wouldn't expect anything that would appear to have one single impact on what we may or may not do from a capital standpoint or anything like that.

So Josh, we'll participate. We're part of this great industry. Don't expect liquidations or bankruptcies, but they do occur from time to time, and in this great industry, the industry steps up and participates in helping out the impacted policyholders. And we'll do that again.

Joshua D. Shanker - Deutsche Bank Securities, Inc.

And on an unrelated topic, with the launch of buffered annuities, are there inducements to convince the agents to give you some scale on this? Is there any initial sort of sales inducements or whatnot coming on as you launch the product?

Dennis R. Glass - Lincoln National Corp.

No.

Joshua D. Shanker - Deutsche Bank Securities, Inc.

Okay. Thank you.

Operator

Thank you. And our next question comes from Tom Gallagher from Evercore. Your line is open.

Randal J. Freitag - Lincoln National Corp.

Tom, this is Randy. Thanks for the question. I think that comparing MoneyGuard to traditional LTC is like comparing apples and oranges, or apples and tangerines, or any other two things you can think of that are very, very different.

So, let's talk about MoneyGuard and the differentiators that we see in that product. The first one I'd point out is just product design. MoneyGuard is a limited benefit product, where a policyholder can get typically up to about six years of benefit. And inside of that benefit, the first two years or so are going to come from their own funds.

The second thing I'd point out about MoneyGuard is the risk profile of a linked benefit product, a product with multiple benefits. In the case of MoneyGuard, that's with an LTC – a limited LTC benefit and mortality benefit. Now, those two benefits work together to create a very stable risk profile, so that product returns are impacted only modestly by increases in either mortality or morbidity incidents. I think that's another key differentiator.

The other thing I'd point out about MoneyGuard is the pricing environment that that product was priced in. So, the pricing for MoneyGuard, especially over the last 5 to 10 years, when we sold the bulk of our book, benefited from having significantly more experienced data at its disposal. It really allowed us to develop a set of assumptions around lapsation, morbidity incidents, those sorts of things that really reflected all of the bad experience that the traditional LTC players are having to reflect in their models today.

The other thing I'd point out is, additionally, the bulk of MoneyGuard was priced in a low rate environment. The environment that's existed over the past decade. And lastly, Tom, I would just point out that our experience on this book, whether it's mortality, morbidity incidence, whether it's lapsation, has been very consistent with the expectations that we had when we priced the product.

So, no. I don't see these products as being similar at all. MoneyGuard is part of an overall financial planning process that allows a policyholder to fill part of a need, multiple needs that they may have. It's a great product, and it's why you have seen sales of this sort of product grow dramatically. It's why you're seeing other entrants come into the space.

Randal J. Freitag - Lincoln National Corp.

I think I have got a standard response when we third quarter, but no, I'm not worried about this product. As I said, everything is running right in line with our expectations

Randal J. Freitag - Lincoln National Corp.

No, Tom. Just a few things I'd point out on annuity spreads. First, I mentioned in my script that there was roughly $10 million or so of negative items that impacted the quarter and they were spread all around the income statement. But some of those were in both investment income and interest credit. So, I think that had a modest impact.

I think the other thing that you see in that business is that credited rate actions aren't perfectly aligned with declines in the portfolio yield, but they do catch up. As a reminder, over 60% of that book of business has room to move credit rates on. So, you may not get perfect alignment quarter-to-quarter, but we have a lot of room on that book.

And the third item I'd point out, and it's a much smaller impact on a particular quarter, but when you think about book trend, the business we sell today goes on at a lower spread. And the business we sell today, $130 million, something like that from a expected spread standpoint. So over time, you would expect to see some trend in that direction. So, I don't see anything other than what you see, which is the spread came down, but there were a number of reasons for that that make the change quite understandable.

Randal J. Freitag - Lincoln National Corp.

You bet.

Operator

Thank you. And our next question comes from Bob Glasspiegel from Janney. Your line is open.

Robert Glasspiegel - Janney Montgomery Scott LLC

Good morning. And following up on Tom's question. Just how many of your MoneyGuard customers have the long-term care rider? And we're probably too early to see whether there's been any people that have activated that feature, but any further details on that would be appreciated.

Randal J. Freitag - Lincoln National Corp.

Well, Bob, everybody who has a MoneyGuard product has that rider. That's what the product is.

Robert Glasspiegel - Janney Montgomery Scott LLC

Right. Understood.

Randal J. Freitag - Lincoln National Corp.

MoneyGuard is a joint benefit product. We've been in the business for about 20 years, so we do have some experience on older business. But I'd say the majority of our – the bulk of our business, as I mentioned, has been sold over the last decade. Experience, as I said, is coming in right in line with our expectations. We really did benefit from having full view of a fair amount of experience in the industry that existed when we were pricing.

So, let me reiterate, Bob. Experience is coming in right as we'd expect. We're very, very comfortable with that product. It is a great product. It's why that product has grown, not just at Lincoln but across the industry. And as I mentioned, it's why you see a number of companies moving this way because it is a tremendous way to fill a need in a overall financial plan with acceptable risks and quality returns.

Dennis R. Glass - Lincoln National Corp.

And, Bob, just to put a fine point on your question. The utilization of the benefits is exactly – well, not exactly, but it's very consistent with what we priced for. So there's no concern on that specific point at this time.

Robert Glasspiegel - Janney Montgomery Scott LLC

I would think very few have utilized it. So, I understand you're comfortable, and it certainly makes sense that you are and it's good that the experience is as you thought.

Randal J. Freitag - Lincoln National Corp.

Once again, Bob, and let me reiterate sort of the way those benefits work together. Obviously, if you pass away, you don't use your LTC benefit. But if you do engage your LTC benefit, you're using up your death benefit. So, once again, these benefits work together, creating this very stable risk profile.

Robert Glasspiegel - Janney Montgomery Scott LLC

Thank you, Randy, Dennis.

Randal J. Freitag - Lincoln National Corp.

Thanks Bob.

Dennis R. Glass - Lincoln National Corp.

Thanks, Bob.

Operator

Thank you. Our next question comes from Andrew Kligerman from Credit Suisse. Your line is open.

Andrew Kligerman - Credit Suisse Securities (USA) LLC

Hey, good morning. Just question about M&A. You seem very pleased about the Liberty acquisition. And I know you've said you kind of felt like you'd filled out the company, Dennis, with that deal. But does this kind of encourage you maybe to look at some other Group deals, or maybe Retirement Plan Services deals? And if so, what's the pipeline like?

Dennis R. Glass - Lincoln National Corp.

Yeah, Andrew, I think that as – although we haven't done an acquisition for a while, we used to do quite a few acquisitions. And generally, when you do something of this magnitude, the first order of business is to make sure the integration is successful. So with respect to the Group business, I would say 100% of our attention in terms of M&A is on the integration of this business. I'd also say that – and you may have seen our – well, you've seen our reports on this. I mean, we are pretty comprehensively covered now in the market; small employers, large employers, asset management, dental, all of the products. So, I don't see a need to non-organically add to that business at this point.

In terms of RPS, we're very satisfied with the progress in that business. We see opportunities there down the road to expand it. It fits very well with our overall strategy in the context of our wholesale distribution organization and the ability to sell in the small markets, which has a meaningful impact on the overall top line. So RPS is doing very well. And again, we're not, at this point, anxious to do any additional bolt-on acquisitions until we produce what we said we would with respect to the Group business.

Now, in the M&A environment, as we all know and have watched over the last couple of decades, things can change. I do think you'll see a little pick-up in M&A overall, but where that happens, I can't be sure of. But we're happy with where we are right now.

Andrew Kligerman - Credit Suisse Securities (USA) LLC

Great. And then just with regard to RPS, you had another excellent quarter with net flows at $463 million. Where are you seeing the strength there? Is it in the K-12 area? Is it in 401(k)? Where is the strength coming from? And can it continue?

Dennis R. Glass - Lincoln National Corp.

Yeah, it can continue. We're dominant in the education – not dominant, we have significant market share in the education market, and in the healthcare market, and so that's where we're seeing a lot of the sales come from. But we are broad based, as you just mentioned. We're in the small case 401(k), and larger case 401(k) as well. But our sales are focused on those areas that I've mentioned, and particularly the small market which covers a lot of industries.

Andrew Kligerman - Credit Suisse Securities (USA) LLC

So anything changed? Is that why it's so strong? Or it's just...

Dennis R. Glass - Lincoln National Corp.

Yeah, I think the management team that we have in place has narrowed the focus of specific marketplaces, and we've added tremendous talent over the last couple of years that's beginning to pay off. So I think it's a combination of talent and focus. And then I'd quickly add, this is a marketplace where digital is sort of a baseline competitive consideration, and that our digital activities that we've talked about, Click-to-Contribute, Click-to-Chat, and services like that, are very competitive and very strong.

Then also, in the mid to large case market, I think we're the only manufacturer that actually has personalized advice at the work site. That's what we refer to as part of our high touch model.

Our customers pay for that, or otherwise it's included in our pricing. So in the right markets, with the right value proposition, and inside of Lincoln, taking advantage of, particularly, our distribution strength and size.

Andrew Kligerman - Credit Suisse Securities (USA) LLC

Thanks, Dennis.

Operator

Thank you. And we will take our last question from John Nadel from UBS. Your line is open.

John M. Nadel - UBS

Thanks for sneaking me in before we switch gears yet again. But I just have one question. I'm looking at the Life Insurance segment results, and I guess I'm curious. There was a pretty significant increase in the equity allocated to the segment. You jumped from about $6.8 billion to $7.8 billion. And I'm trying to understand why it's such a significant increase. Maybe we just keyed it wrong, but nothing underlying that segment looks like it's growing at that pace. So is there some other driver of why the equity is moving up so fast?

Operator

Ladies and gentlemen, please standby. Your conference call will resume momentarily.

[Technical Difficulty] (01:01:18-01:03:05)

Operator

And speakers, please proceed.

Dennis R. Glass - Lincoln National Corp.

We apologize. We had an issue here with power. Randy, please go. John, are you still on the line?

John M. Nadel - UBS

I'm still here. I'm just not sure if you can hear me anymore.

Randal J. Freitag - Lincoln National Corp.

I can hear you, John...

John M. Nadel - UBS

Okay.

Randal J. Freitag - Lincoln National Corp.

...and I'll answer your question --

John M. Nadel - UBS

I thought it was -I thought I just got far too detailed, and you just decided enough is enough.

Randal J. Freitag - Lincoln National Corp.

I would say that your question was so compelling that you knocked the power out in Radnor, Pennsylvania.

John M. Nadel - UBS

I have that effect all over the world, Randy.

Randal J. Freitag - Lincoln National Corp.

If you go back to your-end, we talked about the fact that we had $1.3 billion impact from tax reform, and that roughly $1 billion of it was associated with the Life Insurance business. So, when we did our year-end financials, we wanted to make sure everything was comparable to previous quarters. So we put all of that impact in terms of what we put in the Other Operations segment. And then immediately after so on January 1, we re-classed all of the numbers out to the appropriate segment. So you would have seen the Life Insurance equity in the first quarter go up by that billion dollars associated with tax reform.

John M. Nadel - UBS

Got it. Thank you.

Randal J. Freitag - Lincoln National Corp.

You bet.

Operator

Thank you. And I would now like to turn the conference back over to Chris Giovanni for any closing remarks.

Christopher A. Giovanni - Lincoln National Corp.

Thank you all for joining us this morning. As always, if you have any follow-up questions, we will be around. You can reach us at 800-237-2920, or via e-mail at [e-mail]. Thank you all and have a great day.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a wonderful day, and speakers please standby.