Lincoln National Corp

NYSE:LNC

Good morning, and thank you for joining Lincoln Financial's 2024 Fourth Quarter and Full Year Earnings Conference Call. [Operator Instructions]. Now I would like to turn the call over to Senior Vice President and Head of Investor Relations, Tina Madon. Please go ahead.

Thank you. Good morning, everyone, and welcome to our fourth quarter and full year earnings call. We appreciate your interest in Lincoln. Our quarterly earnings press release, earnings supplement and statistical supplement can all be found on the Investor Relations page of our website, www.lincolnfinancial.com. These documents include reconciliations of the non-GAAP measures used on today's call including adjusted income from operations or adjusted operating income, adjusted income from operations available to common stockholders and free cash flow to their most comparable GAAP measures.

Before we begin, I want to remind you that any statements made during today's call regarding expectations, future actions, trends in our business, prospective services or products, future performance or financial results including those relating to deposits, expenses, income from operations, share repurchases, 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 our actual results to differ materially from our current expectations.

These risks and uncertainties include those described in the cautionary statement disclosures in our earnings release issued earlier this morning as well as those detailed in our 2023 annual report on Form 10-K most recent quarterly reports on Form 10-Q and from time to time in our other filings with the SEC. These forward-looking statements are made only as of today, and we undertake no obligation to update or revise any of them to reflect events or circumstances that occur after today.

Presenting this morning are Ellen Cooper, Chairman, President and CEO; and Chris Neczypor, Chief Financial Officer. After their prepared remarks, we'll address your questions. Let me now turn the call over to Ellen. Ellen?

Thank you, Tina, and good morning, everyone. Thank you for joining our call today. I want to start by taking a moment to reflect on our significant progress in 2024 to further position Lincoln for sustained long-term value creation. We delivered strong results with full year adjusted operating income increasing to its highest level in 3 years. We outperformed relative to the financial objectives we established last year and built substantial momentum across our businesses, further increasing our confidence in our longer-term outlook. We also successfully advanced our strategy, which is anchored upon three objectives: building strong capital foundation to ensure enterprise stability across market cycles and support investment for future growth, optimize our operating model to advance a scalable framework to maximize our resources and deliver profitable growth to improve free cash flow and expand the franchise.

Last year, we communicated our goal to build and maintain an RBC ratio of 420%, a 20-point buffer over our 400% RBC target as we continue to take the necessary steps to strengthen our capital base. We closed on the sale of our wealth management business in the second quarter and increased our capital position throughout the year, ending 2024 with an estimated RBC ratio of over 430%. This is an important milestone and provides us with added financial flexibility as we continue repositioning our business for future growth and profitability. We also made meaningful headway in optimizing our operating model. We took targeted actions to reduce expenses across the enterprise while investing in the operations, technology and talent needed to build the infrastructure for growth and elevate the customer experience in each of our businesses.

We further enhanced our investment strategy and launched a Bermuda-based reinsurance subsidiary to support our financial objectives and increase our free cash flow over time. Lastly, we advanced on our objective of delivering profitable growth. We grew our group business across products and market segments while prioritizing profitability over top line growth evolved our annuity business to a more balanced mix with a higher proportion of spread-based products repositioned our life business by optimizing our product portfolio and realigning our distribution model and build upon the products and capabilities of our retirement business.

Since embarking on our multiyear journey to transform Lincoln, we have demonstrated substantial progress as we evolve into an organization characterized by businesses, market segments and products with more stable cash flows and higher risk-adjusted returns.

Now turning to our fourth quarter and full year results, which reflected strong execution of our strategic priorities. Key highlights at the segment level included our Group Protection business delivering a record fourth quarter with earnings more than doubling year-over-year and a margin of 8.4% and a record year for sales, earnings and margin. Annuities also delivered excellent results, generating robust earnings growth for the quarter and full year and its highest full year sales in 5 years.

Retirement Plan Services increased quarterly earnings by 13% year-over-year and generated full year deposit growth of 25%, driving its tenth consecutive year of positive flows. While our life insurance sales were essentially unchanged sequentially, we continue to expand our presence in the addressable markets for accumulation and protection products with more risk sharing.

Now turning to our business results, starting with Retail Solutions, which includes annuities and life insurance. We continue to strengthen our annuities business, positioning it for additional growth by emphasizing a more diversified product mix. We are a leader in this market and offer a broad set of products in both fixed and variable annuities. This is a key competitive strength enabling us to be a holistic solutions provider that can adapt to customer preferences in various market environments. Total annuity sales of $3.7 billion in the fourth quarter capped a strong year in which full year sales increased 7% compared to the prior year. And as I mentioned earlier, reached the highest level since 2019. Our diversified product mix supported this result with approximately 2/3 of full year sales attributable to spread-based products.

Additionally, all product categories supported our profitable growth goals by meeting or exceeding the risk-adjusted return and capital efficiency objectives. Our RILA sales increased for both the quarter and the full year as we maintained a strong competitive position in this market and our second-generation RILA product resonated with customers. While our fixed annuity sales in the quarter were lower than the record prior year quarter, we are pleased with our full year sales level of $4.2 billion. We plan to continue leveraging the capabilities we've built to sustain a consistent competitive presence in the fixed marketplace including investment strategy optimization and distribution expansion. We also expect to bolster our fixed products by utilizing our new Bermuda reinsurance affiliate.

Finally, our traditional variable annuity sales nearly doubled year-over-year as our product offerings, coupled with a favorable market environment, supported sales growth in variable products with and without guaranteed living benefits. Variable annuities remain integral to our overall product suite, producing strong risk-adjusted returns while delivering a compelling customer value proposition.

In summary, annuities delivered robust results in 2024 for the quarter and the year, and we continue to diversify the product mix. Looking ahead, our strategic focus on further optimizing our investment strategy, leveraging capital-efficient reinsurance solutions to accelerate spread-based product growth and driving greater expense efficiencies positions this business for continued strength and success.

Now turning to Life Insurance. Last year was one of substantial transition for our life business. As I previously mentioned, we are refocusing this business to deliver accumulation and protection products with more risk sharing. We are currently in these markets today and have been building out additional product features to expand our solution set and position us for future profitable growth. Additionally, we realigned our life distribution team to optimize our wholesaler footprint which will support the acceleration of our product shift over time. While we made solid progress in 2024, the impact of our actions will take time to be fully reflected in our results. We are confident that leveraging our product, distribution and underwriting strengths while investing in our customer-centric service model and optimizing our expense efficiency will increase our competitive differentiation and drive higher earnings growth over time.

Next, turning to Workplace Solutions, which includes our Group Protection and Retirement Plan Services businesses. Group had another excellent quarter, more than doubling its earnings and margin over the prior year quarter. For the full year, the earnings and margin of this business were well ahead of our expectations with earnings increasing by more than 50% and the margin by 280 basis points when excluding the impact of the annual assumption review.

Over the past year, we have substantially advanced this business. We executed our strategy to grow profitably with a targeted segment strategy to rebuild our local market presence and sustain our leadership in the national and regional markets. We also made meaningful investments in our operations, technology and talent to enhance our customer experience and begin to see the benefits of those investments in the results of the business. In what is typically group's highest sales quarter of the year, sales increased 17% year-over-year, achieving a new fourth quarter record. And for the full year, sales were up 24%. These results reflected disciplined execution of our objective to produce a well proportioned mix among our products and target segments, supported by an increase in lines of coverage sold. We also delivered additional growth in supplemental health with annual sales increasing 35% year-over-year and contributing to a more balanced and diversified book of business.

Premium growth was up 3% for the full year, driven by the execution of our pricing strategies for new business and renewals to support our margin expansion efforts. As we reflect on our success in our group business in 2024, we also continued to benefit from our industry-leading position in disability as our solutions-oriented approach and strong customer value proposition in leave management differentiate us competitively in this space.

We also made substantial progress over the last year to tailor our strategy to each segment and delivered margin improvement in all three market segments. In our local market segment, we invested in transforming our operating model and product portfolio to support customer expectations for ease and access. In our Regional segment, we expanded our technology and service capabilities to support our partnerships with strategic broker relationships. In our National segment, where we are a market leader, we leveraged our disability and leave expertise continue to enhance our voluntary products such as supplemental health and provided customer engagement tools and processes to further differentiate our value proposition and generate profitable growth.

In summary, group's performance this year exceeded our expectations driven by broad-based execution to deliver profitable growth and supported by an ongoing favorable macro backdrop. As we continue executing our targeted segment and product strategies, we expect our group business to become a larger and more profitable contributor to our overall earnings mix over time.

Now turning to Retirement Plan Services or RPS. RPS had a solid quarter with earnings growth of 13% year-over-year and continued new business momentum, driving a 46% increase in first year sales. For the full year, first year sales grew by nearly 70% and total deposits were up 25%. As mentioned in last quarter's remarks, several known planned terminations impacted fourth quarter flows. However, RPS delivered a tenth consecutive year of positive net flows.

Throughout 2024, we executed our strategy to generate profitable sales growth by further differentiating RPS in the retirement marketplace. We are focused on solving the needs of all our customers, whether they are employers, participants or our intermediary partners. We've enhanced our service offerings, expanded the breadth of our product solutions with recent innovations and partnered to broaden our financial wellness suite to meet the needs of our customers. We also increased our efficiency by optimizing our operating model, allowing us to accelerate sales growth while supporting earnings growth.

In closing, we achieved strong results in 2024 that were ahead of our expectations. We demonstrated our continued momentum to build a solid capital foundation, increase operational efficiency and deliver profitable growth positioning Lincoln for long-term value creation. Our success to date increases our confidence in achieving our longer-term financial and strategic objectives, as you will hear from Chris shortly. The strength of our broad-based execution sets the stage for future advancement in positioning Lincoln for sustained profitable growth.

We will continue to leverage our competitive advantages, including our powerful franchise, distribution leadership, broad product portfolio and trusted brand to serve our customers and build for the future. We look forward to updating you on our continued progress. With that, I will hand the call over to Chris.

Thank you, Ellen, and good morning, everyone. Our fourth quarter results reflected another quarter of solid progress across our businesses, concluding a year of strong financial performance and disciplined execution of the strategic objectives we introduced last year. We have built substantial momentum across the enterprise and are well positioned to continue delivering on our strategic and financial priorities. I'm going to focus on three areas this morning.

First, I'll review our fourth quarter results including our segment level financial performance. Second, I'll touch on our investment portfolio. And third, I'll provide an update on capital, free cash flow and our execution against our multiyear outlook. So let's start with a review of the quarter.

This morning, we reported fourth quarter adjusted operating income available to common stockholders of $332 million or $1.91 per share. There were no significant items in the quarter. Our alternative investments portfolio delivered over an 11% annualized return in the quarter were $105 million. On an after-tax basis, this amount was $8 million above our return target or $0.05 per share. Excluding the impacts of our annual assumption review in each year, full year 2024 adjusted income from operations was over $1.2 billion, a 16% improvement compared to 2023 as earnings growth in our group and Annuities businesses more than offset the headwinds in our Life business.

Turning to GAAP net income for the quarter. We reported net income available to common stockholders of $1.7 billion or $9.63 per diluted share. The difference between the net income and adjusted operating income was predominantly driven by two factors. First, there was a favorable impact of $1.2 billion within nonoperating income, primarily driven by a net positive movement in market risk benefits resulting from higher interest rates in the fourth quarter. Our hedge program continues to perform in line with expectations.

And second, there was a $587 million gain primarily driven by the change in fair value of the GAAP embedded derivatives related to the Fortitude reinsurance transaction we completed in the fourth quarter of last year. This change was primarily driven by the impact of higher interest rates on available-for-sale securities in the funds withheld portfolio backing the Fortitude agreement with the corresponding offset flowing through accumulated other comprehensive income or AOCI.

Now turning to our segment results. Let's start with group, which had a record fourth quarter. Group reported operating income of $107 million and a margin of 8.4% more than doubling from $52 million and a margin of 4.1% in the prior year quarter. The dynamics that drove our results throughout the first 3 quarters of 2024 were also drivers in the fourth quarter further supporting its year-over-year earnings improvement. First, strong execution of our strategic priorities, including disciplined pricing actions on new business and renewals, diversification into higher-margin market segments and products and strong operational performance was the primary driver of our earnings growth this quarter and throughout the year.

Second, the favorable macroeconomic conditions, which remain supportive throughout the year, continue to be reflected in our fourth quarter LTD incidence rate, further supporting the strength of our disability results. And lastly, while mortality results can vary, this quarter, they were favorable relative to our expectations leading to our lowest life loss ratio in over 2 years.

Now turning to group product line results for the quarter. The disability loss ratio was 75%, improving by over 8 percentage points year-over-year. The loss ratio remained favorable relative to our expectations as incidence rates remained low and when coupled with strong LTV recoveries, enabled positive return to work outcomes for our claimants. The group life loss ratio was 65%, a 2 percentage point improvement versus the prior year quarter as lower incidents more than offset slightly elevated severity.

As a reminder, mortality results are seasonally higher in the first quarter of each year, which we anticipate will drive a sequential increase in the life loss ratio. Now briefly touching on full year results. Group reported operating income of $426 million and a margin of 8.3% compared to $275 million and a margin of 5.5% in the prior year excluding the impact of the assumption review in both periods. Given the strategic emphasis we've placed on growth, diversification and improving the profitability of the group business, I want to provide a few updates on its trajectory heading into 2025. As I noted in my comments on group's fourth quarter results, strong strategic execution was the primary driver of its earnings growth in 2024 and will continue to support earnings next year. However, as I discussed last quarter, the favorable macro tailwinds, which contributed roughly 100 basis points of the margin expansion group delivered in 2024 are unlikely to persist indefinitely. And as a result, we anticipate some moderation of the record low disability incidents we experienced during this period to occur in 2025.

When adjusting for the normalization of macro tailwinds, we expect year-over-year margin expansion driven by the benefits of our strategic actions and ongoing improvement in mortality. These actions should help us to sustain a similar level of earnings in 2025 compared to 2024. As we look toward 2026, we expect continued premium growth alongside underlying earnings improvement to be supportive of a margin at or above 8%.

Group's 2024 results reflect strong progress in our strategy to expand this business into a larger and more profitable part of the enterprise. Now turning to annuities. Annuities reported fourth quarter operating income of $303 million compared to $279 million in the prior year quarter, which included the favorable impact of $14 million from a model refinement. Excluding this item, Annuities earnings increased 14% year-over-year. The year-over-year growth was driven by higher account balances and increased spread income, partially offset by higher expenses.

Turning to account balances. Average account balances were up 12% versus the prior year quarter and 2% sequentially as market growth offset net outflows in variable annuities. Touching briefly on expenses. As I noted in my third quarter remarks this year, we anticipated elevated expenses in the fourth quarter. This increase was driven by a reduced benefit from external reinsurance expense reimbursements a result of this year's fourth quarter sales moderating compared to last fourth quarter record levels.

Turning to spreads. The increase in spread income continued to be driven by the growth of our RILA account balances, which now represent 21% of total account balances and are up 25% compared to the prior year quarter. As we work towards shifting our business mix to increase the proportion of spread-based products as a percentage of our overall account balances, we are pleased to announce that we received approval for our first internal flow agreement with our Bermuda-based affiliated reinsurer line, focused on fixed annuities. With an internal flow agreement now in place with Alpine, optimizing our internal and external reinsurance mix is a key focus for 2025 with the net benefit being the growth of spread-based account balances and earnings over time, all while maintaining our required product returns.

Annuities delivered strong results in 2024, reinforcing its importance as a key driver of earnings and free cash flow for the company. While ending account balances were down $2 billion sequentially, which when combined with two fewer fee days will result in lower earnings in the first quarter relative to the fourth quarter, we believe the momentum in our Annuities business will support continued success in 2025.

Now turning to Retirement Plan Services, which reported fourth quarter operating income of $43 million compared to $38 million in the prior year quarter, a 13% increase. Similar to the third quarter, the improvement was driven by lower net G&A expenses and higher equity markets, partially offset by elevated participant driven stable value outflows over the last 12 months, resulting from the higher interest rate environment. Our base spread for the quarter was 101 basis points, 8 basis points lower year-over-year. We expect the base spread to stabilize at current levels throughout the first half of 2025 followed by modest expansion in the second half of the year.

Net outflows for the quarter were $732 million, and as I noted in my third quarter remarks, this was driven by the impact from several known plan terminations, partially offset by continued sales strength. Net flows for the year were favorable representing RPS' tenth consecutive year of positive net flows. However, as we look ahead, we expect flows in 2025 to be pressured from a known large plan termination in the first quarter.

Now turning to account balances. Average account balances for the quarter increased 18% year-over-year and end-of-period account balances were nearly $113 billion, up 11% versus the prior year quarter. Overall, RPS had a solid year despite pressure from stable value outflows and spread compression. As we look towards 2025, moderating spread compression, higher account balances and continued expense discipline will support modest earnings growth in this business.

Lastly, turning to life insurance. Life reported a fourth quarter operating loss of $15 million compared to an operating loss of $6 million in the prior year quarter. Elevated severity and the run rate impacts of the Fortitude retransaction were partially offset by above-target alternative investment income and lower net G&A expenses. As a reminder, year-over-year comparisons will no longer be impacted by the Fortitude retransaction starting in 2025.

Turning to mortality. This quarter, we experienced elevated mortality driven by large claims, leading to an outsized impact from severity. While volatility like this can occur from time to time, this was an unusual quarter, and we would not expect this level of severity on a go-forward basis. Net G&A expenses were down $14 million or 10% versus the prior year quarter, reflecting the effect of the targeted actions we took throughout 2024. We expect this trend to continue into 2025 and be a key contributor to year-over-year earnings growth. While Life's operating income remained pressured in 2024, the actions we took throughout the year to rightsize the expense base and target growth in products with more risk sharing have strengthened the underlying fundamentals of the business. When coupled with normalized mortality trends and continued spread expansion, these actions reinforce our confidence in achieving and sustaining positive earnings for this business that will grow over time.

Moving to investments. Overall performance remained solid in the fourth quarter, a reflection of our high-quality and well-diversified portfolio and our ongoing emphasis on optimizing our investment strategy. Throughout 2024, we focused on capturing opportunities in less liquid and structured asset classes. We also improved the overall quality of portfolio assets year-over-year through our high-quality purchase strategy and solid credit performance with upgrades outpacing downgrades throughout the year. The portfolio remained at 97% investment grade, demonstrating our ability to balance yield diversification and quality.

Our general account optimization efforts, where we are leveraging our multi-manager platform to deliver increased value to the organization, continue to drive additional incremental yield -- through a targeted shift in our asset mix toward investment-grade private assets and high-quality structured products. New money in 2024 was invested at a 6.4% yield approximately 140 basis points above the yield on comparably rated public bonds, 50 basis points higher than our yield pickup last year. The prevailing interest rate environment will continue to influence our new money yield. But as we look ahead, we see incremental opportunity to take advantage of higher-yielding assets within our overall risk appetite.

Touching briefly on our commercial mortgage loan portfolio. The portfolio remains high quality, is well diversified and continues to deliver stable results within our expectations. We recognize office is still in a longer-term transition, and we continue to monitor our portfolio closely. However, we feel good about our high-quality mortgage loan portfolio and the positioning of the office portfolio. Additional information can be found in our quarterly earnings supplement.

Lastly, our alternative investments generated another strong quarterly return of 2.8% in the fourth quarter, above our expectation of 2.5%. For the full year, our annualized return was 8.9%. Overall, the performance of our alternative investments in the quarter and throughout 2024 benefited from our diversified investment approach with positive contributions from all underlying asset categories. Lastly, I'd like to provide an update on our financial outlook, focusing on capital, free cash flow conversion and expected growth.

I'll address this across three key time frames. First, the progress we made in 2024. Second, how we are positioned heading into 2025 and lastly, an update on our expectations for 2026 and beyond. As we look back on 2024, we made significant progress toward the strategic priorities we outlined a year ago. At the heart of our efforts to restore long-term value was a commitment to building a strong capital foundation optimizing our operating model and a strategic shift towards products and market segments that will deliver profitable growth and improve our free cash flow. Throughout the course of 2024, we invested in our group business and executed on our growth strategy, resulting in nearly 300 basis points of margin expansion on a full year basis when excluding the impacts of the assumption reviews.

We took action on expenses both from a total company perspective as well as targeted actions in our life business, increasing our operational efficiency. We also executed on large strategic initiatives, such as the sale of our wealth management business, and the launch of our Bermuda reinsurance affiliate. The net result of these actions allowed us to end the year with RBC above 430% grow adjusted operating earnings to its highest level in 3 years despite a loss of $100 million in life earnings from the Fortitude transaction and increase our free cash flow conversion from 35% in 2023 to 39% in 2024.

As we look to 2025, we expect another year of investment, helping to drive continued momentum in the business. This year, we'll continue to be a combination of growing our franchise, increasing the profitability of our businesses and optimizing legacy blocks to grow earnings and free cash flow. Some examples include launching and beginning to scale our FABN program, recalibrating the optimal mix of internal and external flow reinsurance, continued targeted expense actions, optimizing certain hedge programs and continuing our efforts to optimize our general account new money strategies. Some of these initiatives are a continuation or acceleration of the progress we made last year, some are new initiatives and some will be a multiyear effort.

As we look out to 2026, we have increased confidence in the outlook laid out this time last year. As you can see on Slide 4 in our investor deck, we made two changes to our 2026 outlook. The first being a widening of the upper bound of expectations for free cash flow conversion from 45% to 55% in last year's outlook at 45% to 60% and the second being an improvement in expected leverage, down from a range of 25% to 28% in last year's outlook to 25% to 26.5% in this year's outlook. There are risks to our outlook, as always, given the assumption for a relatively constructive economic backdrop as well as a reliance on our ability to continue to execute on our strategic initiatives, particularly within group protection and retail life. But given the success we've been able to demonstrate over the last 2 years and the continued underlying momentum we see today, we feel confident in achieving our goals. We thank everyone for listening.

And with that, I'll turn it back to Tina.

Thank you, Chris. Let me now turn the call over to the operator to begin the Q&A. Operator?

[Operator Instructions]

Your first question comes from the line of Ryan Krueger from KBW.

My first question was just going back to the -- raising the top end of the free cash flow outlook for 2026. Can you give a little bit more color on what led to that? And I guess any kind of sense of kind of how to think about free cash flow in '25 as you move towards that '26 target?

Sure. Ryan, it's Chris. Good question. So let me step back and just highlight a couple of key points around our free cash flow and it maybe reiterate some of the things that I just said on the call at a high level. So as you look back at 2024 in really 2023 as well. We've made a lot of progress on the strategic priorities that we've talked about, right? And at the heart of it has really been this commitment to building a strong capital foundation, optimizing the operating model and a strategic shift towards products and market segments that are going to produce profitable growth and improve our free cash flow, right? And you're seeing that come through in 2024.

So as we've talked about, we invested in our group business and executed on the growth strategy there, resulting in, call it, 300 basis points of margin expansion, we took action on expenses, as we've talked about. We sold LFN, we launched Bermuda. So when you look at 2024, the net result of these actions, we were able to end the year with RBC in excess of 430% operating earnings continue to grow and the free cash flow conversion year-over-year expanded as well. Now there's a lot of puts and takes underneath the surface, as you would expect. But when you look towards 2025, as I said, I think this is going to be another year of investment, along with continued momentum, so we launched our FABN program in January. That went really well. We would expect to scale that. Bermuda is up and running. As I mentioned, we have our first flow deal there focused on fixed annuities. And then we think that there's more to do on the expense side and as it relates to some of the hedging programs that we've talked about looking to optimize, we think we'll see some progress there. We've talked about the expensive hedge that we had to put in place relative to the variable life block in 2022.

And then lastly, to reiterate, we do think that there's continued upside as we think about optimizing our new money strategies on the investment side. So then when you look out to 2026 as you mentioned in the investor deck, we expanded the upper end of the range, right? And so 45% to 55% move to 45% to 60%. And I think of it really is coming from three buckets. So the first is just this ongoing mix shift, right? So as you grow group protection as an example, that has the highest free cash flow conversion rate that's going to help company-wide free cash flow conversions. You've seen that this year.

Second is really thinking about optimizing the capital efficiency of new sales while continuing to grow earnings. And here, again, Bermuda will help. And while we have the fixed deal in place, and that will continue to grow throughout the next 2 years. We think that there's other things to do there as well. And so we're studying opportunities, for example, on the retail life side. And then third, as we talked about in the legacy blocks, we think there are actions that we can take in projects that are in flight that will help to accelerate that free cash flow conversion. I mentioned hedging and expenses. There's things you can look at with captives. There's better investment yields if you think about the in-force book. And then just over time, there's a natural improvement given the reserve pattern. So as I mentioned, we have a 2-year pattern of proving we can execute on our priorities. Obviously, there's risks to our outlook. But we do see momentum, and we're confident in seeing the goals that we laid out.

Great. And then the, I guess, related questions, just the leverage ratio being lower. Is that more a function of just higher equity growth? Or does that contemplate reducing the dollar amount of leverage? And then I guess somewhat related to how are you thinking about uses of capital above and beyond your RBC target over the next couple of years?

Yes. So I think when we talked about our leverage ratio, last year, we had some conservative conservatism in there just as we wanted to see how some of the actions that we were embarking on would progress, as I mentioned, 2024 came in better than expectations on most of the key metrics and projects that we were working on -- so now as we roll the clock forward and look at the plan, we just feel more confident that the numerator will continue to grow and just bringing that down over time in a little bit of a quicker way. There is some contemplation as we think about the different options that we have available to us as it relates to delevering. The good and bad news is that as we've been able to execute on our plan, our spreads have come in. And so the opportunistic repurchasing is less attractive than it was a year ago, but it's still something that we think we could do. As you grow your equity, that's going to bring that down -- and then we'll obviously continue to look at different ways to be thoughtful about the leverage.

And then on the question as it relates to deploying of excess capital, I would say a couple of things. One, as we talked about before, the idea of returning to share repurchases at some point is important to us. The constraints that we've talked about are growing free cash flow to a level that is sustainable. And so I would think about the conversation we just had as it relates to free cash flow in 2025 and 2026. We're certainly getting back to a level by 2026 that feels more reflective of our underlying earnings power. And then leverage, we've talked about wanting that to come back down to the 25% level. So we are continuing to outperform relative to our expectations, which is good. We think we have another year of investment and hard work to do, but we see momentum and things are things feel good at the moment.

Your next question comes from the line of Suneet Kamath from Jefferies.

Just wanted to circle back on Alpine. Should we think about Alpine as primarily helping with new sales strain? Or are you considering opportunities to take some of your in-force business and potentially internally reinsured to Alpine?

So I think for '25 and beyond, Suneet, it's really about thinking around maximizing the capital efficiency of new business we would look at incremental in-force deals. But the goal really is to make sure that we are deploying all the tools in the toolkit as it relates to being competitive in the key markets that we're operating in, where an economic capital framework is table stakes. So I think of it as fixed annuities like we talked about I think there are some big opportunities on the retail life side of things. We're going to study that over the course of the year. And longer term, we'll see. But at the moment, as we've talked about, we really think of Bermuda as being a key input into growing our spread-based earnings and being more capital efficient as a company.

Okay. Got it. And then on the expenses, obviously, noting that the expenses were down year-over-year. But if I look at that expense ratio on Slide 12 of your supplement, it looks kind of flattish for most of the quarters in 2024. Do you have a target or where should we expect that to kind of glide to over the next year or so?

So Suneet, I would say a couple of things. I think you'll see the actions that we took this year start to flow through more so in 2025, right? Because in first or second quarter, we had the company-wide action and then in the fourth quarter and starting in the third quarter, there were some of the more targeted actions. And so if you just think about the way the expenses flow through in terms of the reduction when you have actions like that, there's a lingering cost that doesn't come through in one quarter. So you'll continue to see that benefit on the net G&A side. flow through in 2025.

And then I think depending on the business, as we've talked about -- depending on the business segment, as we've talked about, where we're able to find savings if we think there's opportunity to invest for growth and increase margins and group is a great example, you're going to see that. And so what I would say is if you think about the group operating margin just -- or a G&A margin, just use that as the example, you should continue to see improvement there over time, but it may not necessarily translate to lower net G&A expenses, which is fine because what you're doing is you're growing the overall margin and you're investing in the business.

Your next question comes from the line of Dan Bergman from TD Cowen.

I guess to start, obviously, it's a very strong quarter overall for Group Protection, but it looked like the premium growth was a little bit subdued in that line at around 2%, which is I think a little lower they've been running. Any update to what you're seeing in terms of the competitive pricing environment there? And any thoughts on what level of top line growth we should expect over the coming year?

Sure, Dan. So first of all, we are incredibly pleased with our overall results and progress that we've made in the Group Protection business and broadly speaking, across the enterprise. When you look at our quarterly premium growth, you are correct that you see 2% premium growth. However, if you look full year, and we think the full year is important, what you'll see is that the annual premium growth is more around the 3% range. Now if you think about some of what we have continued to talk about a message as it relates to our overall strategy. We are positioning to grow profitably, and we are prioritizing that over top line growth. So we are less focused on the overall premium growth, although we are very pleased with 3% and more focused on ensuring that the business that goes on to our books is achieving the appropriate margins to be able to sustain some of the results that we have talked about around our longer-term objectives.

So when you look at that 3% premium growth, a couple of things. One is that the new business that we put on the books, which is priced at appropriate margins is part of that. Secondly, what you'll see is that a piece of that is around renewal pricing that has higher margins than what we've had in the past. And importantly, what you will also observe is that we have also shared that we continue to experience expected levels of persistency that are simply lower because we have business that is rolling off and not renewing with us as we continue to put the price increases through. And then just a couple of other comments here. So you will continue to see, as we continue to invest in this business that we expect to win more than our fair share. And a piece of this is around, of course, having appropriate pricing and having the margins, but also all the investments that we're doing in the business to be able to have all of the infrastructure, all of the technology, all of the capabilities to be able to meet our customers where they want to be met in our targeted segments with the appropriate products, technology, operations, et cetera.

Got it. That's super helpful. And then maybe shifting gears a little bit. You saw a big increase in variable annuity sales this quarter, particularly those with living benefits. And I know you touched on it some in the prepared remarks, but I was just hoping you could give a little bit more color on what you saw in the quarter and how should we should be thinking about the outlook for VA sales going forward? And given, I guess, some others have seemingly deemphasized these products? Any color on kind of competition would be great.

Absolutely. So as you all know, we have been a leader in the annuity market for -- really for decades. And -- we view our annuity business as a real competitive strength. And when we think about annuities for us, we've spent a lot of time really building out the broad product categories. So we have always been a strong variable annuity with guaranteed living benefit rider -- we also offer variable annuities without any kind of guaranteed living benefit. And then, of course, in 2018, we went into the RILA business. And then we also talked about that about a year ago we built the capabilities to be able to have a consistent competitive presence in the fixed annuity space.

So when you look across all of those, we are very intentionally offering a holistic range of product solutions for our clients. And this really enables us to be able to adapt to customer preferences in various market environments and you align that, of course, with the strength of our distribution organization. So we are nothing has changed in our strategic focus on growing our presence in spread-based products and we consider that again to be fixed annuities and RILA. We also, at the same time, we continue to be a leader in VA, and that's both with and without product guarantees. And we are pleased and as we mentioned in our remarks, we're pleased with the overall level of sales and importantly, the mix for 2024.

So we had total sales for the year of $13.7 billion. That's the highest that we've had in 5 years from an overall level perspective, that's up 7% versus where we were a year ago. And then importantly, to your question, the mix, spread-based products, RILA and fixed -- they represented 2/3 of the sales for the year and VA with guaranteed living benefits represented less than 25%. So and then importantly, of course, all products are achieving a risk-adjusted returns. And then I'll just add that with our fixed annuity sales being lower, that we just did broadly see that industry data was suggesting a decline in fixed annuity across the board. So we recognize that this is not unique to Lincoln.

As we go forward, just a couple of comments. You will see us continue to focus on growth in our overall annuity business. And you will also see us continue to strategically focus on our spread-based businesses going forward while also recognizing that VA is and has always been an important part of our overall products and also offering holistic product solutions for clients.

Our next question comes from the line of [ Nick Anido ] from Wells Fargo.

I just wanted to touch back on the FA point and appreciate tends to be volatile quarter-over-quarter. But any outlook or commentary that you could provide on the use of flow, I guess, kind of how we should be thinking about sales going forward, the flow agreement with Bermuda?

So good question, Nick. I think what I would say is that if you think about the use of Bermuda over time, and combined with having a more optimized investment strategy on the new money side. We continue to see strength in fixed annuities from a sales perspective as we look out over the next 2 or 3 years, the way that we're thinking about power plan. And obviously, industry dynamics will play a role. And so we'll see what happens. But at the end of the day, as you think about Bermuda, -- the other key component is to just think about what we said on the call, which is that there's also the ability for us to optimize the mix between internal and external flow reinsurance -- so sales are going to ebb and flow. We think there's upward trajectory relative to where we were in 2024. We're taking action to continue to improve our competitiveness in the market.

But at the same time, as we've talked about what Bermuda allows us to do is be more capital efficient and ultimately to be able to retain more earnings as we decrease our reliance on the external quota share. Now there's an optimal mix between those two things. We think that the external reinsurance flow deals are very attractive and can help overall returns but finding that right optimal mix is really the goal in Bermuda allows us to do that.

And just as a reminder, when we built the capabilities for our fixed annuities, there were three things that we focused on. The first was really expanding our distribution presence to be able to have fixed annuities on shelves. The second was the flow agreement and the third was to begin the optimization of our investment strategy. As we look forward to Chris' earlier point, we now have the opportunity to be able to optimize that reinsurance between the flow agreement and also our Bermuda affiliate. And so we do expect that, that will support all of our objectives going forward.

That's really helpful. And then I guess just switching towards group. I think it seems like the guide is basically 8% or above going forward. So just wanted to see if there was anything like structural changing in the business that you're seeing or it's just more a matter of Lincoln internal actions?

So Nick, just to clarify, if you look at what we said in the call, when we talked about 8%, that was specific to 2026, right? What we said about the margin expectations reflecting on 2024. And actually, if you just step back, I mean, keep in mind, this was a business that in 2022, I think, had a 1% margin, '23 was 5.5% margin, and this year is coming in at 8.3%, right? So those have been significant execution on that team's part to really redefine the strategy, grow earnings and focus on improving earnings margins. And so what we said about 2024 was that when you think about the 8.3% margin that we did we think about 100 basis points of that is due to a very favorable backdrop, right? So if you dial the clock back, what we said last year was we were at 5.5%, and we expected 50 to 100 basis points of improvement in 2024. So that would put you at about 6.5%. So we came in at 8.3%, and we're saying 100 basis points of that was due to the favorable backdrop which tells you that the other 100 basis points, plus or minus, are just due to us being able to execute better than we had envisioned at the time.

So when you look at 2025 the point that we made in the prepared comments was that we would expect earnings to be relatively flat relative to '24. Given the expectation that, that 100 basis points uplift from the favorable backdrop may not persist, right? So we'll just have to see how it goes. But at the end of the day, our disability loss ratios are lower than what we would expect over time, and we think that there is a role that's being played by the economic backdrop. I think you've heard this from some of our peers. But underneath the surface, the point is we continue to execute on our priorities. We continue to reprice the business. We continue to add more products for our customers, and we continue to be more efficient on the expense side. So when you roll forward to 2026 you can see that margin getting above 8%. So I hope that helps, but I wanted to clarify just the comments that we made on the call.

There are no further questions at this time. I will now turn the call back over to Tina Madon for closing remarks.

So thank you for joining us this morning. We're happy to address any follow-up questions you have. Please e-mail us at investorrelations@lfg.com.

This concludes today's conference call. Thank you for your participation. You may now disconnect.