Randy Freitag here from Lincoln Financial. Randy is the CFO. He runs the life business. You've been a lifer from the Jeff Pilot days to today.
Yeah.
We're just going right into some questions here. I hope that people won't be shy and they'll ask questions too. I'll leave it up to the audience. It does seem like there's some feedback on the mic. I don't know. That's better, I guess, maybe. Thank you. Randy, general question about thinking about the American population right now and saving. Where are 40- and 50-year-olds positioned right now in their lifetime savings compared to where the baby boomers were 20 years ago? I don't think the governments are going to come in and rescue everybody. What's the opportunity? What's the mentality around investors today, and how do we motivate them to make changes in their lives?
Josh, thanks for having me. Thanks to everybody for attending. Looks like we have a big enough room for the crowd we attracted, by the way.
You know.
I'm going to answer that question in the context of what Lincoln is. Lincoln, four businesses. Two of those businesses, the annuity and life business, really are going to be focused at the age 50+. Two of those businesses, the retirement and the group business, are going to be focused at the under 50, more of the millennial, Gen X-er generations. When you go inside of each of those businesses, you'll see, I think, the answer ultimately to your question. If you start with the annuity business, you're talking about a business that, for the most part, is targeted at what I would describe as the mass affluent people, the boomers, people with some investable assets, not the very affluent. There's some slice of that business looking for additional tax-deferred accumulation that's target the affluent.
By and large, I think you're talking about the mass affluent, $75,000 to $3 million of investable assets, looking to turn some piece of those retirement savings into a guaranteed stream of income. If you move over to the life business, you've probably stepped up in level to the upper end of the mass affluent. I think the big opportunity for us in the life business is to move down into those under 50s. You've seen some of that at Lincoln. We've expanded the automated side of our business. It's called TermAccel, Lincoln Express, a much more automated way to buy insurance to lower face amounts, to be fair. We sell large insurance policies at Lincoln. We have a process where you can buy up to half a million of term insurance through a very automated process called TermAccel.
Everything's electronic, et cetera, attracted at that lower consumer base. I think in the retirement business, you're going to see more of the answer to your question because there you're talking about people who are in the accumulation phase, more of the 40-50. I think you're seeing an understanding in those generations of our population that they do need to be more proactive in funding their retirement. We're seeing that in our behavior. We are seeing contribution rates, for instance, tick up in our retirement business. I think we've moved from, for instance, the average individuals in the lower 7s to the upper 7s now from a contribution standpoint. When you couple that with some employer contributions, you're starting to get up to the levels you need to fund a retirement.
Our rule of thumb on that, by the way, is a total of about 16% of your compensation over a lifetime would allow you to accumulate the funds you need. You're starting to see changes in behavior reflecting that. Once again, on the group side, to finish out, focused at the younger folks. The big opportunity in the group space is really focused on the growing needs of individuals to fill gaps that are being created by the changing benefit patterns that companies are offering. Really, those voluntary products which are really designed at filling gaps.
In terms of you seeing it tick up, to what extent has a rising stock market combined with lower yields inhibited people from using products that you sell to accumulate retirement wealth as opposed to saying, "You know what? The market goes up all the time and there's no risk. It just goes up. Why don't I just go buy an ETF for 10 basis points and call it a day?
Yeah. That thought process definitely had an impact on the annuity business. The value prop in the annuity business, which is a guaranteed income stream with some upside potential as you invest your dollars. I think seven, eight years of constant growth in the equity markets has caused a little bit of behavior change in consumers in valuing that. That's been enhanced by the fact that benefits have had to come down, especially in a lower interest rate environment. I think more recently, as you've seen rates come up a little bit, you've seen the ability to make modest improvements in benefits. For instance, at Lincoln, payout rates have gone up about 25 basis points. We've been able to open back up investment flexibility, albeit at a little lower payout rate. I think you're seeing the benefit-to-price ratio become much more attractive to consumers.
I think we're seeing that. You know, we've seen a lot of momentum in our annuity business. We were at about $2.5 billion of sales in the first quarter. That was up 25% or so over the previous year. We can see continued momentum in the second quarter, both on the benefit side, but also you're seeing us expand our distribution footprint, and you're also seeing us expand our product portfolio to hit areas of the market where we hadn't hit before.
Do you expect that those products that people are buying today that are newer will persist in a higher interest rate environment? Are they substitutes for products that people might be buying in a different type of macro situation?
I think where we are in the annuity business now is we're much more positioned with a broader portfolio to respond to whatever environment comes along. It's similar to how we're positioned in the life business. In the life business, we have a very diversified portfolio, and over time you've seen products go up and down as the environment has changed. I think that's where we are in the annuity business today. We're really offering a portfolio along the full spectrum of consumer needs from the indexed annuity space, which is sort of a CD plus, but with a guarantee of your premium, all the way up to the variable annuity space, where you have no guarantee on your account value. You have more risk, but you have a higher expected return.
We filled in the middle of that just recently with what's called an index variable annuity, which gives you a little less upside potential, but you have less downside risk. I think we're positioned along the full spectrum of products now, and I think you'll see consumers move along that spectrum of products, depending on what the environment is saying to them.
You spoke a little about automated distributions.
These are very complicated products. I know in my personal purchasing of insurance, I don't know if I could've known how to buy the products that I wanted to buy online if I wanted to. To what extent is investor or, I guess, policyholder education available, and to what extent should we expect that this distribution model will be successful directly over time?
I think that, my opinion, the model we have today, which is an advisor-driven model, is going to be the primary model for the midterm future. I think if you try to go out longer than that, 10-20 years, there undoubtedly will be more of a direct consumer aspect to our business as folks who are much more comfortable in a technology-driven environment, as tools continue to improve, become available. I still think for what we do, which is about planning, you're still going to see the bulk of our sales come out of an advisor-driven environment. That advisor may be more of an automated or technology-driven advisor, but it's still going to be telling you what your optimal approach is and where you should be filling in pieces of the puzzle.
I wanted to open up the questioning to the audience if there's people who want to ask questions. I have more questions that I can ask, you can raise your hand. Everybody at once. Okay. Don't be shy later. I'll look again. All right. Can we talk a little about the competitive environment in life insurance right now?
It's interesting, you have been very successful in your sales. The one product that you don't have is a whole life product.
When I look at the top sellers, I assume that those companies are leading with their whole life product. I imagine, if we took whole life out of the equation, you would be the dominant seller of non-whole life insurance. I don't know if that's true. A, how are you maintaining that position? B, is there a moat around your success?
I would say yes. I think our moat is driven by our diversified product portfolio and our unparalleled distribution capability, driven through LFD. We're the number 3 seller of life insurance. Number 1 and number 2, they flop back and forth, New York Life and Northwestern Mutual. They sell participating whole life. Historically, if you go back 7, 8 years, we sold a product that competed well against that product. It was guaranteed universal life. As interest rates came down, we needed to reprice guaranteed universal life, reflecting the interest rate environment that existed, very low interest rates. That caused the prices of guaranteed universal life to go up, which caused the sales of that product to go down. That product, which was once 60% of our sales, is down to probably 5% of our sales.
The benefit and our moat at Lincoln is that we have a broad product portfolio, and we have a distribution force who has the skill set to pivot from product to product. Believe me, that is a skill set to retrain a wholesaler force to sell a completely different product. You've seen a shift, for instance, from a strong focus on guaranteed universal life to a shift into products like variable universal life. You've seen the growth in a product like MoneyGuard, which is this multiple benefit product. You've seen our mix of business change, but we've largely maintained our market position over time, and we would expect that to continue.
We have all the tools you need to operate in what, at the end of the day, is a pretty complex business, which is the sale of products to retail consumers that really need an advisor to complete the sale for the bulk of our sales. There's a lot of moving parts to operate in the life insurance business. We have them at scale, and I would expect that to continue.
Is MoneyGuard put in place for a customer who doesn't really know what they need, and therefore they want to try and knock off several, check several of the boxes in one purchase? How is that product sold? Is it an easy sell?
It's an advisor-driven sale. I don't think it's easy, none of it's online or anything like that.
What I'm saying is convincing them this is the right product. What does that customer look like? When they hear about MoneyGuard, is that like, "Oh, that's obviously what I need because I don't know what I want.
It's largely sold through an advisor who is sitting down with a client looking at their overall financial planning needs. They're hitting some need for guaranteed income, maybe with a variable annuity. They're positioning some money in accumulation vehicles like ETF. They're looking at a way to get multiple needs filled with a product like MoneyGuard, which is a product where you can either get your premium back, you can get some level of death claim, and you can get as a way to pre-fund a portion of your eventual or possible LTC needs, along with some additional extension of LTC benefits. You can fit multiple needs with this single product. It's not for everybody. It's a product that is really going to be focused at the mass affluent. If you're affluent, you don't really have any need to get this sort of protection.
You can fund your own.
You can fund your own. If you're in that mass affluent category, you have some money in the bank, say $50,000, $75,000 that you don't mind putting to a need like that to pre-fund some sort of need like that, it's a great product.
I guess if we look over the last eight months, the market's kind of flat.
Interest rates are up. You said your flows were looking good. Is that responding to a change in the view of the macroeconomic market or is it unrelated? How long will it take for sort of a change in perspective on the potential buyers to change their habits on what products they need for the going forward period?
Yeah, I think we're primarily talking about the annuity business here. Flows have improved, but they're not where they need to be yet. At its peak, we were creating organic growth in our annuity business, 2%-4%. As a number of items came in place, we talked about the value prop slipping a little bit for guaranteed income. You had a headwind from DOL and other regulatory items come into place. You saw annuity sales come down, and you saw Lincoln sales come down. We went from 2%-4% positive organic growth to 2%-4% negative organic growth. We've been very focused on getting back into that positive organic growth position. We've come about halfway over the last year, and we expect to complete that over the next few quarters.
We'd expect to be back to positive flows really as we sit in 2019 and beyond. That's been our focus. It's been a process of some of those items easing up, some of the DOL headwind has gone away. This DOL headwind was interesting. That was more about the compliance departments inside of the big wirehouses really just making it difficult for advisors to get a product through. Those advisors are basically saying, "Look, I don't have two weeks to try to shove this through my compliance department. I'm just going to go somewhere else." That's really the headwind you've seen. Compliance departments aren't as reticent about recommending the products, both because of education work we've done, but also because of some of the Department of Labor headwind going away. You've had that. You've had benefit improvements, as I mentioned, modest benefit improvements.
The other thing we've done is you've seen us expand our distribution footprint. We recently announced entrance into some places we hadn't been before, I think PNC Bank, for example, moving into some of the annuity marketing organizations. Also an expansion of our product portfolio. As I mentioned, we just recently rolled out that middle product, that index variable annuity. We expect really good things from that product.
Interest rates have been moving up every day, but I guess yesterday. Long term on annuities, maybe some other businesses, in my mind, I feel like that the U.S. life insurers have a long-term view of a tenure at about maybe four and a quarter, four and a half. I don't know if that sounds reasonable to you as a long-term view. Some investors are skeptical that life insurance is a good business to invest in as long as interest rates are below that number. They are coming up. I'm wondering how high do interest rates have to go to be capital positive for Lincoln? It's a headwind, I suppose.
I've never thought about interest rates. Well, I've thought about it, but the reality is that lower interest rates have never been a capital event for Lincoln. I don't think they've been a huge capital event for the industry. Our view on long-term interest rates right now is a 10-year of about 375. I think you're right that is a little below the average industry participant. On the other side, I tend to think you're going to get there a little quicker than the industry. Our ultimate assumption is 10-year 375. Then we'll get there over six to seven years. I think the industry is a little higher than 375, they happen to take a little longer to get there. Half a dozen to one, six of the other.
Ultimately, at the end of the day, we, as an industry, believe that long-term rates are going to be lower than they have been historically. If you go back a decade, that 10-year assumption at Lincoln would've been more like five and a quarter. We've come down 150 basis points. What we haven't seen with low rates is any sort of capital event. I don't expect any sort of capital event going forward. We've brought that assumption down from, like I said, five and a quarter to 375. That's caused us to take a couple of $125 million GAAP impacts. They're not statutory impacts. We make about $1.8 billion a year, so relatively modest impacts, I think, in the overall context of what Lincoln is.
I think one of the learnings for investors has been the resiliency of insurers' balance sheets in the face of low interest rates. We believe rates will be lower over time, even though we do expect them to continue to trend up modestly as you move into the future.
In the past, interest rates are up year-to-date.
Market's probably about flattish given yesterday's performance. Lincoln stock has not been doing well, perhaps tainted by a lot of long-term care issues going on among some of your peers. There are some other annuity-heavy companies in the market. Brighthouse has its own unique situations. Equitable just had an IPO. In terms of thinking about Lincoln, you have capital flexibility. You guys have a track record. You just did the Liberty Life acquisition, you don't have as much capital flexibility as you once did. Is there any thoughts on being more aggressive on a opportunistic basis on using your balance sheet to make a statement in the market right now that you think your shares are undervalued? What kind of flexibility do you have to make such an opportunity now?
Yeah, absolutely. There are a number of potential questions inside of there.
More that you have more flexibility than your peers do, I think.
Let me start with the performance thing. I think that different people have different opinions, but I think when you look at our share price performance year-to-date over the last year, pretty much in line with the industry. Is there a little bit of noise from something like MoneyGuard in there? Possibly, but I don't think in a material way. It's interesting. There's something else that hasn't fully been identified that has caused the industry to really gap out from the underlying fundamentals here, really, in 2018. Chris tracks these things over time, and you can plot actual share price to implied share price using the main capital markets inputs and get a very tight correlation until-
the beginning of this year pretty much. When you see this as a sort of an alligator jaw opening up, where the actual price is about $20-$25 below the implied price right now for Lincoln, the whole industry is like that. I'll leave it to others to try to figure out why that is. I'm not sure. I think it definitely, to me, implies that our share price is undervalued, as is the industry, to be fair. Obviously, we have had a long-term focus on returning capital to shareholders, a lot of it through buybacks. Four and a half billion dollars of buybacks over the last six or seven years, we've been very aggressive. We've been pretty steady. What we've said looking forward, $850 million-$950 million of deployable capital on an annual basis.
That implies $150 million-$200 million a quarter of buybacks, which has sort of been our philosophy of steadily doing that. This year, and we had talked about this for some time, we did have a fair amount of additional firepower to be used in the context of M&A. What we had said was $500 million-$750 million of capital on our balance sheet, some additional debt capacity of about $500 million. That's what we actually have done with the Liberty acquisition. We used $600 million of capital off our balance sheet. We used $500 million of debt capacity, and then we used $350 million of waived buybacks to fund the rest of a $1.45 billion acquisition. Agree with you completely that the share price presents good value.
We've said we'll be back in the market no later than the third quarter and continue to stick by that view of the world. As we have done over the years, this is an area where we steadily like to underpromise and overdeliver, and that's been our philosophy over the years, and that's what we'll continue to try to do. We have a very strong balance sheet, and we'll do everything we can.
Just want to take a survey for questions before I ask more. We do have a question. Thanks. Could you elaborate on your comments on the Fiduciary Rule? What do you think has permanently changed? What's the outlook for what might come down from the SEC? Would annuity sales, do you think, get back to where they were before we started talking about fiduciary standards?
I think the big thing and the big benefit of the SEC really taking this over for the industry is the fact that the SEC contains a body to handle issues, right? That's what the Department of Labor didn't have, and so it had outsourced that to the bar, right? The private right of action. That was, I think, at the end of the day, the issue that the industry had with that ruling. With the SEC, you have FINRA, as a way to easily regulate any issues that come up. I think it is a huge advantage for the SEC to take this over. The other thing you get with the SEC is you get a rule that can cover all sales, not just qualified sales. I think we're very positive about the SEC taking the mantle on this and really driving the rules.
We'll be actively involved, but I think we've always believed in doing the right things for our consumers. I think at the end of the day, whatever the SEC comes with, that isn't going to change. One of the things that hopefully will disappear from the landscape is the view that any commission-based product is bad. That's just economically ridiculous. I can tell you, if you are going to buy a variable annuity with a lifetime income, which has an annual lapse rate of 3%, the crossover point for we're paying a 4% commission versus paying a 1% annual fee is pretty early. Lincoln did a lot of work. We ultimately got some aspects of the DOL rule to reflect that.
Still, there was this perception that existed out there that commissions were bad, and that's just mathematically not the case for many product sales. Hopefully with an SEC-driven rule, you'll have that perception washed away from the landscape.
Can we talk about the Liberty acquisition a little bit?
Sure.
Where in timeline for both GAAP and adjusted earnings break even on the transaction. Are they faster, slower, in line with expectation? Is the technology better that you've got than you thought, that you're integrating? What's working? What maybe is something that's not working? How can we sort of parse various points on that wheel?
We are basically confirming, as we get deeper into the process, what we thought going into the transaction, which is that this is a deal that will be accretive in year two. When I think about accretive, that isn't accretive to comparing capital just sitting there at a very low opportunity cost. That's compared to if we had put that capital into something like buybacks. I want to be clear when I talk about accretive. Everything we're seeing continues to confirm that view of this transaction. One of the underlying pieces of the transaction was that there was some expense savings. About $100 million was our expectation. That was going to come from a third of that from overhead, a third of that from rationalizing technology, and another third of that from pure synergies. The overhead, that's a layup.
We've really been digging into the technology now that the deal's closed. I think that makes sense. The synergies are still there. We're very much on board with savings in line with our expectations coming into the deal. We think that will ultimately drive margins when you move out a few years that are very much in line with our 5%-7% expectation for this business. Feel great about the acquisition, great about the progress. Up to close, it was really about planning and establishing the first few levels of management. We were down to level 3 by the time it closed. After the close, which was on May 1st, it's been about confirming those plans, and we've done that. A lot of those confirmations have been around the technology side. Then we went on an additional level from a management standpoint.
We're down to naming the top 4 levels of management, which is roughly 200 employees.
Customer size is different between the two businesses. I'm sure there's some overlap. In general, kind of two different customer bases.
Yep.
Is there one technology solution that can handle both sets of businesses? Will it look seamless, or will you be operating in two systems?
I think you definitely have a little bit different technology platform for the large case. It's much more customized at the upper end of the market. You're absolutely right that one of the great things about this, we've been looking at group acquisitions for a while, every time, for some particular reason, there was a significant amount of dissynergy. Either there was too much overlap with what we were selling, or we felt there was dissynergy in the model. In this case, you're talking about Old Lincoln, we had 37,000 employers making up $2 billion of annual premium Old Liberty, you had 1,200 employers making up $2 billion of premium. Very different models with very little overlap in the middle. I think both companies had an admin platform focused at the lower end, and I think we'll rationalize those down to one.
I think you will always have some separate technology to serve that more jumbo case market.
In terms of branding, is there one brand, I guess, that they will go under, or is the reputation on the Liberty side that obviously don't want to call them Liberty anymore? I don't know.
We're pretty good. We did it when old Jefferson-Pilot and old Lincoln came together, and now we're new Lincoln. You'll always have a little bit of that old Liberty for a period of time and old Lincoln, but we're now new Lincoln, and it will be sold as Lincoln in the marketplace. It obviously takes a little while to get all the trademarks and these things transitioned over, but this will be sold as Lincoln in the marketplace. We have a leader of this business in Dick Mucci, who has a lot of experience running large case. He did it at The Hartford for a while. Obviously we're picking up 2,000 employees who have a lot of talent in operating in this market space.
Yeah, we feel very good about our ability to continue to operate successfully in this market, which is new to Lincoln, but which is old hat for the old Liberty team.
Do you see the vultures at all coming in trying to pick you off a little bit during the transition? Is there anything competitive behavior?
That always happens, right? You're going to have people come in and say that, "That Lincoln doesn't know what they're doing in the jumbo market." That's sort of standard par for the course. I think we can fight through that. We did put inside of the economics of pricing the deal, we did assume 10% shock lapses for the first couple of years. Our goal will be to overperform, outperform those assumptions. You have some of that that occurs. Believe it, I can guarantee it's going on in the marketplace, that people are whispering in ears, but once again, we're pretty good at this business. Liberty has a very talented team that's coming over to us. We'll do a good job of defending our turf.
All right, two more questions. I believe you know, if I get so many flash things on the screen all the time, makes me crazy. There was a shelf just filed, I believe, yes?
A shelf just filed for?
I think it was a mixed shelf.
Did we refile our, I don't.
No. Okay. Right now, the share reauthorization level is, where's it at?
We typically reload in billion-dollar increments, so we have plenty of room to get started here as we guided earlier.
Just a matter of third quarter at the earliest, could come sooner, and there's no restrictions on starting tomorrow if you felt like you had the cash and burning a hole in it.
None whatsoever. We typically reload when we get down to a couple of hundred million, take it back up to a billion.
Well, we look forward to news on that front. You might even be the bid in the stock, you never know. I think we're good, I appreciate and thank you all for being here, we will move on to the next session.
With 20 seconds to spare. Thanks everybody for coming.
Thank you.
Appreciate you.