The Bank of America US Insurance conference. Lincoln Financial is the next presenters on deck. To remind you, this is going to be a little bit of fun because we have Lincoln here, but we have both Dennis Glass, CEO of Lincoln Financial, and Ellen Cooper, the CEO-elect. We're getting the best of both worlds. It's an exciting time at Lincoln. We're going to get to some of the excitement. I want to understand exactly what's going on in the transition right now. Where are we? What portfolios, Dennis, have you given-
Well, we're so delighted to be invited to the conference. This is one of the outstanding of its type during a year. We've been regular attendees, we appreciate it very much and look forward to closing out 2021, all the areas and issues in around closing out a year with the board and things like that for her. It's been a terrific transition. Ellen, do you want to talk a little bit more about what's on your mind for the coming year?
Absolutely. Good morning, Josh. We are working extremely closely together, as it relates to 2022, all things related to strategy, execution, being fully prepared to sit with the senior team. There are a couple of areas in particular. The first one, Josh, you alluded to this in your question, is around a new Chief Investment Officer, and I look forward to all of you getting to know him at some point, an internal candidate, Jayson Bronchetti. That relates to leadership structure is we also announced a new role that is a direct report of mine, and that is the Chief Strategy Officer. That individual will really be thinking about building the business of tomorrow, and that will be a primary focus of the role of the Chief Strategy Officer.
The second area is this long-term planning, longer term planning, to me, has really been around building and developing the relationships, and that includes with all of you, with our investor analyst community, distribution, significant amount of mend. It's been a really smooth and seamless transition, exactly as we had expected.
Well, I know the Chief Strategy Officer, he's really good. I know that you're all the changes. Changes is really what's going on. Operation Spark or the Spark Initiative is a huge part of what's going on here. It's had an interesting sort of experience with the pandemic, people retiring early, and some call it the Great Resignation. Lincoln has started the Spark Initiative during that period of time, retiring during the Great Resignation. That Spark as an opportunity to find other employees who want that option. How is it proceeding? How is the news being taken by your employee?
Operational activities. The first one is Spark. Just on Spark, it's very much a cost initiative, as we've discovered are in our financial plans. There's a name behind each one of these numbers, and we have a long history of good execution. With respect to corporate culture, I really would put that into the category of having what we call the long-term, our manufacturing operations and in distribution. To your point with the Great Resignation and people looking for more flexible work arrangements, percent people full-time home, 65% full-time in the office. The new model, which we'll be testing and learning from as we implement, 5% permanently in the office, mailmen and people like that. The middle group, 65% are in what the category. The long-term employee model is in response to the experiences that we've had in COVID.
Candidly, across America, I'd also like to say that we have done a similar in-depth study of our distribution activities and big picture, in the past in-person activities. Of the mix between in-person and virtual was probably 70/30, big picture. Moving forward, probably 40% in-person, 60% virtual. With that comes a lot of economics. You can just imagine wholesalers who used to get in a car, factoring side, as well as distribution, something that is going to set us on a very strong path. Our culture is strong already. We get very high engagement with McKinsey on understanding the way we work as an organization. We get some of the highest marks in America. Actually, Ellen was the co-lead on the development of that strategy.
Ellen, maybe you could just give us a couple of more points on beyond cost saves, what Spark is going to do for-
The Spark Initiative, first of all, is really so much more than an expense save program. We worked for the better part of a year across the entire organization before we concluded the overall financial savings that we committed to. The way that we really focused on this, we're really asking ourselves questions. By the way, we had about 1,000 people across the organization that were involved in this. It was widely communicated, and it was very much while we were working remote, our organization was aware, again, so many were part of it. What we really looked for were ways that we could improve the way that we work that included the modernization of technology, thinking about ways to improve the overall customer experience. From there, what we did was we really captured a number of initiatives and ideas.
We ran them through a very robust cost-benefit analysis. This was all Lincoln-led. It was supported by McKinsey in a very tight framework, then through a resource prioritization methodology and sequencing to really ensure that we could deliver on what we were committing to. From there, as Dennis mentioned, we incorporated this all into our financial plan. We spent about a year in that process. We're now about six months into the implementation. We have high confidence that we will deliver on the numbers that we communicated to all of you. Again, really significant parts of this are around continuing to accelerate our digital, our overall automation and improvement of processes. Also there are some significant opportunities in here in terms of talent development and way we work as well.
As we think about, in particular, Spark and just the question around headcount, we really expect to be managing the bulk of this through just normal turnover, which is typically what we've done with these. A significant amount of energy across the organization, a lot of buy-in, and as you know, we're also making a pretty sizable investment here to be able to deliver on some of these improvements and enhancements.
Let's shift focus to the production side of things. Ellen, can you talk a little about the VA market? For the past half decade, a lot of competitors have been pulling out of the market. We've just had in the past few months the first material increase in interest rates in a very long time. What does a higher interest rate environment mean for your competitors who exited the market for various reasons? Is there any frictional cost to them changing their mind and getting back in? How do you view the next five years, I suppose, of VA sales and Lincoln's role in it?
Great question, Josh. I want to start by just taking a step back and saying that we have communicated with all of you, and we are very much committed as it relates to our overall annuity portfolio and really across all of our product portfolios around broad product portfolio diversification. In annuity, that is particularly focused on guaranteed living benefits. We shared with you that in the fourth quarter, the one more value, just to give you a sense of that diversification, the account value associated with guaranteed living benefit is now less than half, less than 50% of the overall account value. When we look at sales in annuities in 2021, guaranteed living benefits represented about 25%, which gets to broad overall diversification. Competitors have exited and entered in and out of the market.
One of the things, and you all know that I've been responsible also for running the annuity business. As I've talked to producers, one of the things that they value with us is around our consistency of really staying in the market. Additionally, when we look at our overall living benefit portfolio and we go a decade, we go even longer, we have always priced appropriately. We have always had strong risk management. We have always had strong ROEs. We've always had significant cash flow generation that comes from this business. We have never had a surprise as it relates to policyholder behavior or any kind of unlocking assumptions. We feel really good about this business.
As a matter of fact, when we think about our VA business, we actually think about the fact that the majority of our revenue is associated with fee, which really suggests to us that we should think about our VA revenue stream effectively like an asset manager. We recognize that the business isn't valued that way, but that is the way that we think about it. Yes, interest rates are up from where they were before, and we think that that creates an opportunity here because the customer value props in. We will continue to achieve really solid returns on the business, mid-teens, or even a little bit higher. Continue to focus on this theme of diversity, and we are really expecting to be targeting our guaranteed sales at about the level that you saw in 2021. Carriers that exit the market and reenter.
One of the things as we talk to our distribution partners, we know that distribution firms have really become a much bigger deal and a much bigger deal in terms of product offerings, and much of that has to do with the changing regulatory environment. Reentering and exiting the market and back on the shelf is a difficult thing to do. It's not that it can't be done, but again, it just gets to the point that we've heard over and over again that we're a market leader and that we get significant distribution partners around the consistency and staying in the market. Josh, on the question about 5-plus years from now, it's really hard to say what this market is going to look like 5-plus years from now.
As I reflect on the question, part of what I've thought about is, well, what would we have said five years ago? We are extremely close to our distribution partners. We have all kinds of focus groups with advisors, with our overall wholesale distribution network, and we're constantly understanding and getting feedback around the customer value proposition and ensuring that we are developing solutions from a product manufacturing perspective that meet the needs of consumers. Five years ago, we didn't envision the IBA market, as an example, the buffered annuity, and that is now a substantial part of our overall business, and we think that that's going to continue to grow. That's an example of something where principal protection with some level of downside, while also having some ability to participate on equity market upside, has really resonated with customers and also a younger age demographic.
It's really expanded the annuity playing field in terms of customer. We're going to continue to stay in front of that and look for those opportunities as we think about annuities in the future and build the business for tomorrow.
Let me just underscore a couple of key points that Ellen made, Josh, and that is, one, we've been in the VA business with living benefits for a long time. We have one of the best risk-adjusted portfolios because we've been in the market consistently. As Ellen said, there's been no explosions. We've managed the hedge program well. This guarantee living benefit liability has all the characteristics of the type of products that should drive high valuations, high cash flow conversion, high ROEs, good growth. It's a good business, but to Ellen's point, it's a good business to about 25% of new sales. Right now, the market is affording us returns on the living benefit business in the mid-twenties, and we're not trying to build more volume. We're taking advantage of the opportunity of the competitive environment. Just added that.
Staying with annuities a little bit. During, if we go back 12, 18 months ago, a lot of your more well-regarded competitors like you pulled back from the fixed annuity markets. We did see a lot of activity in multi-year guarantees and fixed indexed annuities by lower-rated carriers who were filling the void with returns that I think might be called by some hard to generate given where the interest rate environment is. To what extent is that a persistent problem that as they'll always be offering rates that a company like Lincoln just will refuse to participate in?
Thinking about your producers, when they see these options of getting a better return for a very plain vanilla fixed annuity product with a lower-rated carrier, what's the conversation they have with their customer in trying to say, "Look, you really want to take a low-rated carrier when you could be with Lincoln?" How does that sort of conversation work?
Yeah. Josh, we've been in the fixed annuity business for a long time, and we have strong conviction over the fact that we have disciplined risk management. For us, that means we don't take excess credit risk. We are diligent around our asset liability management, around our liquidity stress testing, and all of that is the basis of the crediting rates that we ultimately provide. We also feel strongly about maintaining our financial strength as well. Our focus in the fixed annuity business has really been primarily in the brokerage channel, and there it's really much less about price sensitivity, and it's more about providing a proprietary product, customized index options, those are really the places that we have focused.
Our producers are not necessarily coming into play with some of the times where we're seeing more aggressive peers that are out there because those aren't the same distribution channels that we are playing in. We do think that overall, the fact that we know that our industry is highly regulated, we know that all are subject to the same capital rules, etc , that even though there's some level of additional credit risk that we might be seeing from some of the players, if they're holding the appropriate capital, doing all the appropriate testing, et cetera, that's important in terms of recognizing that potentially there's a reasonable approach to risk for them as well.
Okay. Thank you. I want to just point out to everyone, they probably know, but you can always ask me questions to ask. You just type into the Veracast and shoot me a question. Let's move on to credit a little bit. I think that over the past decade, we're having some credit scares here and there, but it does seem to me that you can never pick which is the next area to be of concern in credit, and you learn from your mistakes, and you plug up those holes. What is Lincoln doing right now to prepare itself for the next credit scare, whatever that may be? What have we learned from the past and how to best prepare for that which you don't know what's coming?
Yes. As it relates to credit risk, we have a very deliberate, diligent credit risk management process. The first thing is that we have a unique model here at Lincoln, and the investment team is construction and defining the investment strategy. That is subject to understanding our liabilities, our liability profiles, the amount of credit risk that we are comfortable with, etc . Risk managers and managers are responsible for selecting the individual securities subject to all of our risk limits, et cetera. What we find with that process is that in addition to manager-selected securities, managers also partner with us to do all types of individual credit scenario analysis to really look at potentially an investment could deteriorate and either be downgraded, so therefore we'd have to pull more capital or even potentially default. When we see that, we start to de-risk.
As all of you that over a period of the last five years, we have de-risked more than about $6 billion of the portfolio. In particular, in the beginning of COVID, we did very focused individual de-risking analysis that was really around the most directly impacted sectors. From there, we did an additional about $1 billion-plus de-risking. We had shared all of that with you. As we look at the portfolio today, we don't know when the next credit risk event will be. What we know is that the broad diversification and the discipline that we have around our stress testing and credit risk analysis is very important. The overall credit quality stands at 97% investment grade. That's the highest that I believe it's ever been historically, we're just going to continue to remain diligent in any type of-
Okay. I guess I'm going to send this to Dennis. Let's talk about COVID and endemic COVID and the mortality. Now there's a lot of talk that the population who survived COVID is healthier than the population who obviously, unfortunately, has passed in the past couple of years. What does that mean and for the profitability of the life book business at Lincoln, pricing, how should we think about all those things in terms of a post-COVID or an endemic COVID reality?
Great question, Joshua, let's hope that we're seeing the end of this pandemic. It's caused so much heartbreak for so many families. It would be great if it's behind us. Let me divide your question into the individual life business and then the Group Protection business in terms of the ongoing related to those two businesses. In individual life, what we've been saying is that we think the significant incremental claims that we've experienced over the last 24 months related to COVID was really a pull forward of mortality events that would have happened over the next 20- 30 years our annual estimates of aggregate mortality claims in the life business because of that, but essentially it's a pull forward. We don't think that we have to do anything specific with respect to pricing of our individual life business because we think it's going away.
On the individual life, it's the pricing changes specifically related to COVID, again, because we think it's going to fade away, hopefully. A little bit of a different story in Group Protection. Everybody remembers that by we're 60, 70 and older, and the working age cohorts sort of missed the first wave of this. Unfortunately, the second wave cohorts. In our group life business, we saw increases in our loss ratios, both on the life and on the group disability. From a pricing perspective, because we expect, even though we expect COVID to lessen over the next several years, we think it will form a little bit of ongoing COVID losses in the group business. A little bit of pricing, but again, from the company's perspective, hopefully this is behind us by the end of 2022.
In terms of endemic COVID, we talk about hope it's behind us. Do we think that there is a, if the flu is 50,000 American lives perspective, COVID is an additional factor on that that stays with us?
Yeah. Joshua, none of us, and I know that you know this, endemic versus pandemic, we've unfortunately been surprised on the negative. Hopefully, we'll be surprised on the positive. Most importantly, in the group area where we for the expectation there will be lingering COVID impact on that business, we're doing that. Again, on the individual life side, we haven't changed pricing for COVID.
Let's shift to Group Retirement. Look, there's been a lot of transaction activity in Group Retirement. Certainly, there's a sense that it's an economies of scale business, and some of your competitors are scaling up in a very big way. Do you think that this is a business that's dominated by very few competitors in a five or 10-year timeline? When we think about Lincoln in the Group Retirement business, what makes Lincoln the right owner, staying power, and competitive edge?
Yeah. Josh, in our overall strategic thinking across our businesses, we pick the markets that we want to participate in, where we can have scale both with respect to our manufacturing operations as well as distribution. In our case, we concentrate on the following fastest-growing markets: small and mid-case 401(k), healthcare, government, and not-for-profit. We have very good success in those segments. We don't try to go be in those segments. We'll get some business, but we have pretty good market position in each of those segments of the overall retirement business. With respect to its owner, we're very good at managing cost. Our average cost per participant competes very well with the larger retirement companies that are all things to all segments. We're not at a disadvantage from a cost perspective.
In the small and mid-case 401(k) distribution channel, because of our significant participation in channels where these plans are sold, because we do a lot of cross-selling. At Merrill Lynch, our annuity wholesalers are cross-selling with our RPS wholesalers. Not only is that good for Lincoln, but it's good for Merrill, the presence that we have overall. We choose our markets. We've had excellent results. We have a very competitive compared to people who want to be across all businesses. We think we're a great owner of this business, and it's been one of our best performing consecutive years positive net flows. Everything about the business is positive, and we expect it to continue to grow and be a big part of Lincoln's story.
Here's a little, this is an off-the-wall question, it's a question I talk about a lot. I think that the life insurance sector is very well prepared for inflation and higher rates, should it occur. I think that the higher rates problem sort of people tend to understand, when I try and find someone smarter than me to explain what inflation might be doing to a balance sheet of a strong life insurance company, I can't find a lot of takers who want to support my hypothesis, which is made with my half-baked knowledge of macroeconomics. Ellen might have a view on inflation and what it means for Lincoln should that be a persistent reality.
Well, Josh, my response is that higher inflation, in fact, can be beneficial for insurance companies. Of course, it depends on the level of inflation and the persistency of that inflation and what else is going on. Here we are right now in terms of, yes, we're having higher inflation, yes, there's also a view that some of that inflation is still temporary and will work its way through the system. We can look at some of the benefits that we really expect to be able to see as it relates to our opportunity set. The first one is that obviously We know an expectation of rate hikes on the shorter end, and those expectations, coupled with higher inflation expectations, are leading to higher rates on the long end of the curve. That means a couple of things for us.
One is that the spread compression that we have talked about in the past, where we know it's been about a -2% to -3% headwind for our earnings call, that we would have an update shortly. With rates at these levels, you can expect that that headwind will reduce to about a -1% to -2% headwind. That's an improvement just from the rate move that we have seen and what we expect going forward. The second thing is that with rates at these levels, when embarked on our product strategy that we've talked about around Reprice, Shift, and Add New, there were a number of our traditional product or long-duration product that just don't work well from a customer value proposition perspective in that interest rate environment.
With rates at these levels, a number of those products will work well and also hit our target return. That's another advantage. The other thing that we also are seeing, we expect to see more of, is that we know that there's some level of wage inflation right now. That means that there are more dollars in the customer's pocket, and we're already seeing evidence of higher deposits in our RPS business. Higher dollars in people's pockets also mean coupled, by the way, with the fact that we are still, unfortunately, living through COVID, and there's a real need for more financial protection and security. More dollars in people's pockets may lead to more opportunities in terms of sales and people recognizing that they need financial protection from a life insurance company.
We actually think that there is a fair amount of opportunity out there for us, and we plan to capture on that.
Well, I have more questions, but I don't have more time. That's going to be it. I really appreciate you two spending time with me today. I hope you have a good day talking to investors, and all the best. We'll be in touch. Everybody online, stay tuned. We got Willis Towers Watson, WTW, coming up next. Dennis, Ellen, thank you very much.
Josh, thanks very much.
Thank you, Josh.
Bye-bye.