Q2 2023 Lincoln National Corp Earnings Call

Participants

Al Copersino; VP & Head of IR; Lincoln National Corporation

Christopher Michael Neczypor; Executive VP & CFO; Lincoln National Corporation

Ellen Gail Cooper; Chairman, President & CEO; Lincoln National Corporation

Elyse Beth Greenspan; Director & Senior Analyst; Wells Fargo Securities, LLC, Research Division

Erik James Bass; Senior Analyst of US Life Insurance; Autonomous Research US LP

Jamminder Singh Bhullar; Senior Analyst; JPMorgan Chase & Co, Research Division

John Bakewell Barnidge; MD & Senior Research Analyst; Piper Sandler & Co., Research Division

Ryan Joel Krueger; MD of Equity Research; Keefe, Bruyette, & Woods, Inc., Research Division

Taylor Alexander Scott; Equity Analyst; Goldman Sachs Group, Inc., Research Division

Thomas George Gallagher; Senior MD; Evercore ISI Institutional Equities, Research Division

Presentation

Operator

Good morning. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lincoln Financial Group Second Quarter 2023 Earnings Webcast Conference Call. (Operator Instructions)
Mr. Al Copersino, you may begin your conference.

Al Copersino

Thank you. Good morning, and welcome to Lincoln Financial's second quarter earnings call. Before we begin, I have an important reminder. Any comments made during the call regarding future expectations, including those regarding deposits, expenses, income from operations, share repurchases and liquidity and capital resources are forward-looking statements under the Private Securities Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from current expectations. These risks and uncertainties include those described in the cautionary statement disclosures in our earnings release issued yesterday as well as those detailed in our 2022 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 this date. We appreciate your participation today and invite you to visit Lincoln's website, www.lincolnfinancial.com, where you can find our press release and statistical supplement, which include full reconciliations of the non-GAAP measures used on the call including adjusted income from operations or adjusted operating income and adjusted income from operations available to common stockholders to the most comparable GAAP measures.
Presenting on today's call are Ellen Cooper, Chairman, President and CEO; and Chris Neczypor, Chief Financial Officer. After their prepared remarks, we will move to the question-and-answer portion of the call.
I would now like to turn the call over to Ellen.

Ellen Gail Cooper

Thank you, Al, and good morning, everyone. We entered 2023 with a clear focus on actions to support the rebuild of capital and to deliver long-term profitable growth by building on our solid foundation. We have a powerful franchise with a trusted brand, deep relationships and a strong culture.
Our distribution leadership and broad diversified set of product solutions across our 4 businesses and differentiated customer experience position us well to execute against our strategy, expeditiously and successfully. Coupling these foundational tenants with a leadership team charged with steadfast execution gives us confidence as we reposition the company for sustainable growth, enhancing value for our customers and our shareholders.
Over the past 3 quarters, we have demonstrated swift execution that is manifesting in our results. This quarter's results benefited from the continued excellent contribution from our group protection business as well as company-wide alternative investment income, in line with our long-term target turns. Chris will take you through the quarter's results in detail.
Before moving to our business unit highlights, I will spend some time discussing our progress in executing our strategy to rebuild capital and advancing our strategic objectives to improve our long-term free cash flow profile, lower our capital sensitivity to market volatility and further diversify our earnings mix. Let me expand on this.
We are continuing to make headway with 3 of our 4 businesses: Annuities, Retirement and Group generating solid free cash flow for the company. It is worth noting here again, the Group business standout quarter driven by margin expansion efforts as well as a favorable industry environment. We continue to expect the group business to grow while sustaining margins over the longer term in the 7% range and become a larger part of our overall mix over time. And the fourth business, our Life business, which continues to pressure our financial results, will generate improved cash flows following the close of the Fortitude Re block reinsurance transaction we announced in May.
This transaction is another important step in rebuilding capital and improving ongoing free cash flow as well as lowering our balance sheet risk. We have previously stated that we expect the transaction to improve our RBC ratio by 15 points at closing and increased ongoing free cash flow by over $100 million per year. We are awaiting regulatory approval and fully expect the deal to close in due course.
Another contributor to improving our ongoing free cash flow is our Spark initiative, our enterprise-wide expense program to enhance our business and drive efficiencies. We are on track with the implementation of Spark, and we expect current expense headwinds to lessen somewhat when the level of investment declines in 2024 and increased run rate savings take hold. Chris will provide further comments on our expenses more broadly.
Our new business approach is also taking hold as we shift to a product mix with more capital efficiency and enhanced value creation. As we execute this strategic pivot towards an improved long-term cash flow profile, we continue to expect to deliver robust sales for the full year with a variety of product enhancements and targeted distribution efforts.
Our repositioned VA hedge program with an explicit capital hedge is supporting our objective of reducing capital sensitivity to market volatility. And lastly, we are continuing to evaluate additional actions to further improve the capital generation of our in-force book.
Regarding our current capital position, our second quarter estimated RBC ratio was approximately flat sequentially with strength in our Group business, offsetting the headwinds we have previously discussed in our Life business. Overall, we are executing swiftly on our capital rebuild and capital generation efforts while successfully positioning the businesses to deliver a more diversified earnings mix. As we look ahead, we also highlight our goal of reducing financial leverage and building our capital to levels that are aligned with a prudent approach to capital return creating long-term sustainable value for shareholders.
Now turning to sales highlights for each of our businesses. In Retail Solutions, the diversity of our product offerings and strength of our distribution franchise enables us to provide the right set of product solutions for our customers while supporting our financial objectives.
In Annuities, second quarter sales declined 4% and versus the prior year quarter. However, year-to-date sales versus prior year are up 6%, and we expect to generate sales growth for the full year as we launch a range of product enhancements and actions with our distribution partners expected to elevate sales levels in the back half of the year.
In Index Variable Annuities, or IVA, which is our RILA product category, although sales were down 8% year-over-year, they were essentially flat sequentially. IVA represented over 1/3 of total annuity sales for the sixth consecutive quarter, and we are capitalizing on opportunities to further strengthen our market position through recently released product enhancements that will expand customer choice and our value proposition.
In fixed annuities, sales were down sequentially. However, on a year-to-date basis, sales were up over 100%. While some competitive pressure remains in the fixed annuity market, we have targeted actions with our distribution partners that are expected to increase fixed sales in the second half of the year. Although traditional variable annuity sales were down year-over-year, they were up 19% sequentially at attractive returns. We recently enhanced our VA products and continue to develop innovative solutions that address evolving customer needs.
In Life Insurance, sales were down as we embark on our shift towards a more capital-efficient product mix. Indexed Universal Life, or IUL, sales were up slightly while we deemphasize certain segments in both Term life and Variable Universal Life, or VUL, where sales declined. As we shift we are launching new relationships with field marketing organizations to ultimately grow more accumulation sales.
In our MoneyGuard suite of products, where sales were slightly down this quarter versus the prior year period, we continue to focus on expanding our distribution reach into new channels, particularly with our variable MoneyGuard hybrid product. Finally, Exec benefit sales are primarily large deals that can be variable in their placement timing period-to-period and were down in the quarter.
In our 2 retail businesses, Annuities and Life Insurance, the new business shift underway will take some time to fully gain traction that we are benefiting from a diversified product mix that is meeting our capital efficiency targets and exceeding our new business return targets. We expect the new business from both Annuities and Life to be important drivers of future capital generation and profitable growth.
In our Workplace Solutions businesses, where we serve more than 50,000 employers and close to 14 million employees, our differentiated product offerings and service capabilities have generated high customer satisfaction scores and strong retention, and we are beginning to see the results of ongoing investments in technology, the customer experience, our distribution franchise and our claims organization. With group and retirement under one roof, we are uniquely positioned in the market, and we expect our Workplace Solutions businesses to be key cash flow and earnings growth engines for the company going forward.
In Group Protection, premiums grew 6%, a direct result of the strong relationships we have with our customers and a reflection of the value proposition we are delivering across each of our focused market segments. These relationships and the positive customer experiences we deliver have enabled us to achieve strong persistency, while executing on the pricing actions that are a core part of our margin expansion strategy.
In what is not a seasonally large sales quarter, sales were down approximately 24%. However, following a strong first quarter of sales, on a year-to-date basis, sales are down approximately 3% as we execute on our plan to drive profitable growth. Importantly, we continue to see strong momentum in employee-paid sales, representing 55% of total group sales, up 6 percentage points year-over-year. This strong result was largely driven by supplemental health products where sales rose 52% and where we see continued opportunities to grow.
Lastly, in Retirement Plan Services, we achieved another quarter of positive net flows with very strong retention, helped by our digitally enabled high-touch customer experience. First year sales were down as compared to an exceptionally strong prior year quarter that included one of our largest stable value sales on record and up sequentially as we are seeing strength in our core full-service product offerings.
Finally, recurring deposits rose 4% as we see an increasing number of participants and higher contribution rates. Our Workplace Solutions businesses continue to meet or exceed capital efficiency and new business return targets. We continue to enhance our customer-focused strategies and expect our actions will lead to long-term sustainable growth.
Turning briefly to investments. Our high-quality portfolio with over 97% investment-grade holdings continues to experience net positive credit migrations and our commercial mortgage loan portfolio, including office, is performing well. We actively monitor the loans, have no material modified or restructured loans, no near-term maturity concerns and are not experiencing forced extensions. Chris will provide details on the mark-to-market accounting loss related to the Fortitude Re transaction that is largely a matter of timing and has no capital impact.
In summary, our investment portfolio is performing well, and we would expect manageable capital impacts under a variety of economic and credit scenarios.
In closing, we are making consistent progress executing against our priorities and delivering on our commitments. We remain highly focused on strengthening our balance sheet and improving our ongoing free cash flow. We are generating capital-efficient sales with returns at or above levels and our investment portfolio is well positioned, all of which gives me great confidence as we move forward.
I will now turn the call over to Chris to take you through the financials in more detail.

Christopher Michael Neczypor

Thank you, Ellen, and good morning, everyone. We appreciate everyone dialing in and listening to our call. I'm going to discuss 3 things this morning. First, we'll provide a recap of the quarter, including an update on capital. Second, we'll go through the segment level financials. And lastly, we'll finish with an update on our investment portfolio. So let's start with a recap of the quarter.
Last night, we reported second quarter adjusted operating income available to common stockholders of $343 million or $2.02 per diluted share. There were no notable items in the current or prior period. Alternative investments were in line with our targeted returns. Net income available to common stockholders was $502 million or $2.94 per diluted share.
The difference between net and adjusted operating income for the quarter is predominantly driven by 3 factors: first, higher equity markets in the second quarter, coupled with an increase in interest rates, favorably impacted market risk benefits, resulting in a nonoperating increase to our net income. Second, and again driven by the increase in equity markets and interest rates during the quarter, our hedge instruments declined in value. As Ellen mentioned, our repositioned hedge program continues to work as intended with an explicit capital hedge supporting our objective of reducing capital sensitivity to market volatility. And third, as a result of the reinsurance transaction we announced in May with Fortitude, we impaired securities down to fair market value as of June 30, resulting in an after-tax realized loss of $493 million.
Note, pursuant to the applicable accounting guidance, those impairments only included assets that were in an unrealized loss position. The remaining assets associated with the transaction were in an unrealized gain position totaling $374 million after-tax as of June 30. That gain, along with any subsequent change in fair value of the assets included in the transaction, will be realized at closing of the transaction. As Ellen mentioned, the timing dynamic of this impairment has no impact to statutory capital this quarter.
Lastly, I want to convey our continued confidence in closing the transaction with Fortitude Re. Given the size of the transaction, regulatory approval takes time, and we expect the deal to close in due course.
Before turning to capital, I want to highlight one housekeeping item regarding the quarterly pattern of the preferred stock dividend. For the second quarter, the dividend was roughly $11 million. This will increase to roughly $34 million in the third quarter, which reflects the timing of when the semiannual portion of the dividend is payable. This decrease is back down to roughly $11 million in the fourth quarter before again increasing in the first quarter.
Let's now turn to capital. We ended the quarter with an estimated RBC ratio that was flat with our first quarter level of approximately 380%. As Ellen noted, we expect the RBC ratio to increase by approximately 15 points at the close of the Fortitude transaction. Like with every quarter, there are headwinds and tailwinds with this quarter's strength in group helping to offset continued pressure in our Life business and the realization of modest credit losses related to the bankruptcy of First Republic Bank.
Lastly, we are continuing to hold capital above our target level at LNBar. We are pleased with the performance of our repositioned hedge program with actual performance being better than expected so far this year. However, markets have been relatively calm year-to-date, and thus, we continue to believe it is prudent to allow more time to pass before resuming regular LNBar dividends to the holding company.
Now turning to the segment results. Let's start with Group, which was once again the highlight in the quarter. Before we get into the numbers, I'd like to step back and say 3 things. First, the continued growth in this business and the team's focus on restoring the profitability of the platform is critical to the overall long-term strategy of Lincoln.
Over the past year, you've heard Ellen talk about our strategic objectives: growing our free cash flow, decreasing our capital sensitivity to market volatility and diversifying our earnings. At the risk of stating the obvious, a bigger, more profitable, well-run group protection business helps to accomplish each of these objectives.
Second, the margin this quarter was 8.6% or 450 basis points higher year-over-year. And while the earnings in this business are benefiting from very strong execution and the strategic steps we've taken over the last year with new management in place, there is also a favorable industry backdrop at the moment and second quarter tends to be seasonally strong. So it's a good story, but we would not expect the margin this quarter to be reflective of the run rate.
Third, as we look out over the next few years, our Group business will continue to become a bigger part of our story. While there are obviously many moving pieces to the overall earnings profile, Group contributed almost 1/3 of our operating earnings this quarter, not something we've experienced in recent history. We would expect that mix shift to continue over the long term as we execute on our strategic objectives.
Turning to the numbers. This quarter, Group reported operating income of $109 million compared to $49 million in the prior year quarter. The improvement was broad-based as both Life and Disability results continue to show progress. Our Disability loss ratio was 71% in the second quarter, an improvement of 800 basis points year-over-year. These results are driven by strong execution of our group strategy, including continued investments to support our claimants and their return to work journey and a favorable economic environment, resulting in lower new claims.
We are also seeing improved results from our Life product with a loss ratio of 72%, down from 81% in the prior year. The lower loss ratio reflects lower mortality trends consistent with the U.S. working age population mortality.
Turning to expenses. The expense ratio increased over the prior year from 12.5% to 13.6%, a reflection of our investment in talent and focus on strengthening our operational organization. While expenses are higher, we are seeing strong returns on our investments, allowing us to provide optimal outcomes for our customers. Overall, we are very pleased with the progress we are making in the group business, which is contributing in a meaningful way to both GAAP earnings and free cash flow. Going forward, growing the group business will continue to be important as we remain focused on executing against our enterprise strategic objectives.
Now let's turn to Annuities. Annuities delivered another solid quarter with operating income of $271 million compared to $294 million in the prior year quarter. The decrease was primarily due to higher expenses and lower prepayment income, partially offset by higher spread income. Sequentially, earnings improved $8 million when excluding the $11 million favorable tax item from the prior quarter, primarily due to higher fee income. Of note, the year-over-year impact from lower prepayment income on earnings will mostly subside in the second half of the year as the decrease in prepayment income began in the third quarter of last year.
Turning to spreads. As I noted earlier, Annuities earnings benefited from higher spread income relative to the prior year quarter. But sequentially, we experienced some temporary headwinds, driven by fluctuation in option costs impacting our interest credited line. Looking ahead, we expect annuity spreads to decline for one more quarter before leveling in the fourth quarter and rebounding in 2024.
Lastly, as a reminder, fixed annuities make up less than 10% of our overall in-force annuities block. And while surrender rates have increased due to the higher interest rate environment, the results are generally in line with expectations for this type of rate environment. Additionally, to reiterate comments I've made in the past, we have reinsurance in place, both for new business and on our in-force block.
When you look at our reported numbers, it is important to remember that those numbers are on a gross basis and then there is an offset as it relates to the seeded surrenders that flows through on the account value line. So while there is always some noise quarter-to-quarter in a block of our size, the Annuity business once again delivered a solid result and significant free cash flow for the company. We continue to see long-term upside and are excited about the growth in this business.
Let's now turn to Retirement Plan Services. Retirement reported operating income of $47 million compared to $55 million in the prior year quarter. The decline was largely due to lower prepayment income and higher expenses. As in the Annuities business, the year-over-year impacts on the Retirement business from lower prepayment income will mostly subside in the second half of the year. Two items partly offset the headwinds. The first is higher base spreads, which expanded by 24 basis points relative to a year ago. As I mentioned previously, spread expansion will not be linear. Our expectation is that we end the year with spread expansion in the mid-single digits for retirement.
Second, positive net flows, combined with favorable equity markets, led to a 4% growth in average account values compared to the prior year. As we noted last quarter, while we continue to anticipate higher expenses for the remainder of the year, the tailwinds from higher account values, coupled with a stable spread environment, should result in continued strength for the retirement business.
Lastly, let's discuss Life Insurance. Life Insurance reported operating income of $33 million compared to $63 million in the prior year quarter. The decrease was primarily driven by run rate impact from last year's assumption reset, partially offset by higher alternative investment income. Additionally, seasonally improved mortality and better alternative investment income drove the sequential improvement in life earnings.
Turning to mortality. Our total underlying claims were mostly in line with expectations this quarter. However, the term Block experienced lower frequency of claims, while universal life-type products experienced higher severity. Note that under LDTI, term products will see less net reported variability around mortality in any given quarter, given that the liability for future policyholder benefit reserve, or LFPB, smooths the variability in over time. However, for universal life type products, there could be higher volatility quarter-to-quarter as the reserving mechanism did not change, and yet there is no longer an offsetting change in DAC amortization tied to quarterly profits.
Shifting to spreads. Base spreads were 113 basis points in the quarter, down 12 basis points from the prior year quarter due to the continued impact of certain duration extension programs put in place during the low rate environment. This, coupled with the long duration nature of the block, has delayed the benefits of the higher rate environment. We continue to anticipate spreads to bottom slightly lower than current levels before expanding in 2024.
Overall, persistent headwinds remain for the Life business as we walked you through in the first quarter. The benefits of seasonal mortality supported the sequential improvement, coupled with alternative investments performing in line with expectations but there's still more work ahead of us. We remain focused on improving the earnings power and free cash flow profile over time.
Turning briefly to company-wide expenses. Expenses remain elevated, and let me start by saying this is an area of focus for us as a management team. There are 3 key drivers to the increase. First is investment in our business. With new management over the last year, there has been a lot of diligence on what strategically we need to do to grow our businesses and really take a fresh look at the need for some strategic projects. And so part of this is nonrecurring once you start looking out to 2024 and beyond, but more importantly, some of that expense will be ongoing and will translate into better overall profitability.
The second thing to note is that there is some cost in the system as a result of the challenges we faced over the last year. Over time, these expenses will decline. And then the largest driver, obviously, is an increase in base expense and the impact of the current inflationary environment. Beyond these expense pressures, we remain committed to implementing the benefits of the Spark initiative which will support both our earnings growth and capital generation objectives. You will begin to see that spend dissipate next year, coinciding with increasing benefits from the initiatives.
Moving to investments, where our credit performance was once again solid for the quarter. Our portfolio remains conservatively positioned, and we experienced our eighth consecutive quarter of favorable net credit migrations, reflecting disciplined portfolio construction and proactive credit risk management. Our team regularly stress test the portfolio by asset class and sector name by name, with input from our outside investment managers. We remain highly confident in our ability to navigate various economic environments and expect credit to have a manageable impact on our capital levels under stress scenarios.
Turning to an update on our commercial mortgage loan portfolio, which continues to perform very well, representing 12% of total invested assets. Our CML strategy continue to be focused on 100% fixed rate senior loans on stabilized properties with weighted average loan-to-value and debt service coverage ratios of 46% and 2.4x, respectively, and negligible exposure to CM3 or below. We maintained disciplined underwriting and rigorous ongoing monitoring processes with no material loan modifications and no forced extensions and we have no direct real estate equity or transitional loan exposure.
Within our CML portfolio, Office represents 20% of the holdings, down 500 basis points from 3 years ago as we continue to proactively shift our portfolio away from Office, both from a mix perspective and on an absolute basis. In total, Office represents just 2.5% of our overall invested assets.
A key area of focus in Office remains near-term maturities. In the second half of 2023, we have only $17 million of remaining maturities. We have a further $163 million and $188 million of maturities coming due in 2024 and 2025, respectively. Office loans with near-term maturities are conservatively positioned and continue to perform well with an average debt-to-service coverage ratio of 3.3x.
Now turning to our alternative investment performance. We generated a return of 2.5% this quarter on our alternative investment portfolio, in line with our long-term targeted return, reflecting the strength of our portfolio construction and diversification across investment strategies that can perform well in a wide variety of economic environments. Additionally, the portfolio is benefiting from having only small allocations to venture capital and real estate.
Lastly, on our investment portfolio more generally and to reiterate a point I made on our call last quarter, our total investment portfolio and the asset listings in our statutory filings include assets both for Lincoln as well as those from certain of our reinsurance agreements on which we do not have the economic risk. As a result, the information I just discussed relating to our investment portfolio excludes the assets related to those reinsurance agreements.
In closing, let me reiterate 3 points. First, we know we have more work to do, but we're pleased with the progress we're making, and this quarter was a step in the right direction. Second, our investment portfolio continues to perform well, and our exposure to recent areas of market concern is very manageable. And third, rebuilding capital remains a top priority, and I'm confident in our teams as we execute on our plan and work to create long-term sustainable value for shareholders.
We appreciate everyone taking the time to listen today. Now we look forward to taking your questions. With that, let me turn the call back to Al.

Al Copersino

Thank you, Ellen and Chris. We will now begin the question-and-answer portion of the call. (Operator Instructions) With that, let me turn the call over to the operator to begin Q&A.

Question and Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Ryan Krueger from KBW.

Ryan Joel Krueger

Chris, I think last quarter, you talked about is one area that you could potentially work on to improve free cash flow balance sheet structure. Can you give any update on your progress there and how to think about maybe the timing of when that could occur?

Christopher Michael Neczypor

Thanks for the question, Ryan. I would say specifically, we are focused on closing the Fortitude transaction that remains the top priority. But you're right, there are a number of other projects that we're looking at. And we've gotten the question around free cash flow and capital. So maybe it might be helpful to just step back and talk about not only that but the broader view.
And so last year, we communicated a range of $300 million to $500 million of free cash flow. This year, RBC, as we mentioned a moment ago, has been flat year-to-date. And so having returned $150 million to shareholders in the first half of the year being the dividend, that would imply that we're in the range communicated maybe tracking toward the low end. And keep in mind, that's with 2 to 3 RBC points in credit pressure from the handful of regional banks that we took some losses on.
So the back half of the year, we will have some positives, some negatives. And so we'll see what that looks like over the next 2 quarters. But I would point out that we're tracking right in the range of what we communicated last year despite having to take some losses on the banks.
Then if you then look out beyond this year, to your question, I would reiterate a few things, right, that we highlighted last quarter as you think about improvement. First is basically timing, right? So they'll see life blocks we've discussed we're dealing with some reserve and capital needs over time that will lessen. And to be clear, that's a gradual improve. But our expectation is that each year going forward, there will be some improvement. So we're at a trough as it relates to that, and that will lessen over time.
The other dynamic around timing is we have some blocks that are relatively young, where there are modest earnings in the early years as you pay acquisition expenses and build reserves. But then as those blocks grow and mature, you see a significant improvement in free cash flow. And then the last point on timing is we would expect to return to a more regular LNBar dividend depending on markets as you think about the go forward.
The second driver to increased free cash flow is really management actions, and we talked about that last quarter, but that's really running the business more efficiently with a focus on profitable growth. And so I think the group business this year is a good example of that. We touched on expenses in the comments, but without getting into too much of that today, I would say that even beyond Spark, I think there's more to do there. And then really just being more efficient with the way that we deploy capital relative to the goal of maximizing long-term distributable earnings, that's a big lever.
And then the third tailwinds will be structural solutions, right? And I would highlight the Fortitude transaction as an example of that. And then specifically to your question, really where are there other balance sheet or inorganic levers that we can look at to accelerate the capital build or improve free cash flow.
So long way of saying, Ryan, we're focused today on closing the previously announced transaction. You should expect us to continue to look at a wide array of other projects. But taking all that together, we do think that as we communicated, despite having to take some idiosyncratic credit losses this year, next year in bond, we have a number of headwinds that should lessen in turn to tailwinds, we continue to look for larger and more strategic ways to accelerate our capital goals.

Ryan Joel Krueger

Great. That was really helpful. And then just a quick follow-up on mortality. I know you said it was in line overall. Was it in line as well as it comes through under GAAP LDTI? Or were the dynamics between term and UL that you mentioned, did that cause a negative GAAP impact?

Christopher Michael Neczypor

Right. So that's the exact question we are to help with that detailed answer, Ryan. And essentially, on an underlying basis, mortality was in line. But given the dynamics with LDTI from a GAAP perspective, it would have been slightly negative. And so it's really the dynamic of term relative to the UL and how that flows through.

Operator

Next, go to Alex Scott from Goldman Sachs.

Taylor Alexander Scott

I just wanted to see if you could unpack the RBC movement this quarter a little bit further. I mean, it sounded like there must have been a decent offset from SGUL. I would have guessed that the lower new business production and Life and Annuities would have helped a bit. Can you talk about what was the life drag there? And any way to think through like what it would have been under the situation once Fortitude is closed? If that dynamic has sort of resulted in a more flattish RBC this quarter would have been different and will change as we get through the Fortitude closing?

Christopher Michael Neczypor

Sure. So thanks for the question, Alex. We -- look, we're not going to give distributable earnings or RBC dynamics at a business unit segment. We are thinking about the best way to give more clarity there going forward. I think the general trends that you lighted though are fair. There was a number of the same dynamics that we talked about at GAAP would apply to stat as well in RBC. So better group results translate to better stat earnings and better RBC. Some element of reduced sales, does help to a degree on the capital side, although that's relatively in expectations.
And then there are some negatives as we talked about on the life side, they persist. I wouldn't say that there was anything new there this quarter. And then we did take a loss on First Republic, as I mentioned as well. So any quarter, there's going to be lots of different new pieces. I think the points that you're making as it relates to the pluses and minuses are indicative of some of the highlights this quarter. And then post Fortitude, what we've said is that there will be a $100 million incremental improvement to free cash flow on an annualized basis once that closes.

Taylor Alexander Scott

Got it. Second question I had is on mortality. I think we're still seeing a decent amount of volatility across the industry anyway on the old age mortality blocks in particular. And just as we approach the 3Q review in light of some of the nerves just coming off of last year. Anything you can say around in you confidence in your mortality results and just whether you've reached conclusions at all on whether the heightened old-age mortality is more of a pull forward or potentially an adjustment to long-term assumptions?

Christopher Michael Neczypor

Sure. So I'll say one thing on mortality and then we can also hit the question about the third quarter. And look, we have seen elevated older age mortality. I think that, that's not just us, that's the industry. We've seen it for a while, obviously exacerbated by the pandemic. And obviously, we hold higher staff risk policies in the 90 plus. But I don't think that there is anything in particular as it relates to this quarter that we would call out as it relates to the older age mortality. But it's something that we and the industry have been dealing with.

Ellen Gail Cooper

And Alex, as it relates to mortality as we head into the third quarter and just in general, as you know, our annual assumption review, it's extensive, it's robust. It's undertaken with many areas of the company. We have an incredibly strong governance process around that. And at this point in time, given where we are, it would not be appropriate for us to speculate or comment. So we're going to do as we always do, and that is we're going to complete to review and, and we will discuss the results of the overall assumption process in our third quarter call.

Operator

Your next question comes from the line of Tom Gallagher from Evercore.

Thomas George Gallagher

First question is in terms of the additional strategic levers transactions you're considering, is internal reinsurance something that you explored? I know you already have LNBar as, we'll say, a structure that's in place. But is that something that you're considering or pursuing?

Ellen Gail Cooper

So Tom, the answer is yes. And we have -- as Chris has highlighted, we have a number of areas that we are exploring as it relates to additional actions. I would put some type of additional internal reinsurance into the category of balance sheet optimization. And then we're continuing to look at whether or not there are other considerations, all along the lines of really focusing on achieving our enterprise strategic objectives.
So every action that we're looking and we've communicated a number of things that we've already done. The Fortitude transaction is a very good example of this from an external perspective, but we're continuing to look at opportunities that will improve our ongoing free cash flow, reduce capital sensitivity to capital markets and also continue to diversify the overall earnings mix and internal reinsurance would squarely fit inside of all of that as well and potentially support us as it relates to continuing to focus on capital as well.

Thomas George Gallagher

Got you. And Ellen, is that -- is like something meaningful on the internal reinsurance side, more likely a 2024 initiative? Or is that something you might potentially do even before the Fortitude deal closes?

Ellen Gail Cooper

Yes. So Tom, as Chris had alluded to, right now, our highest priority as it relates to additional actions is the closing of the Fortitude Re transaction. And we will be back to you with any type of specifics as it relates to timing on internal reinsurance or other actions.

Thomas George Gallagher

Got you. And then just my follow-up, just related to the Fortitude deal. Related to the MoneyGuard part of the transaction, was that full risk transfer? Or were there parts of that those policy in terms of the risk that you retain like the long-term care rider for instance?

Christopher Michael Neczypor

Sure. Thanks for the question, Tom. So as it relates to the deal, in any reinsurance deal, you're retaining risk just to a certain degree. And so in a deal of this size with the blocks that are included, the size of the complexity, there's a lot of work that goes into crafting a transaction that achieves your goals. So our goal is to remind you with the Fortitude transaction were to increase our free cash flow, increase our RBC and derisk the balance sheet, particularly in the GUL block right, which is where we had the large charge last year. And to try and do all that while retaining as much of the economics as you can to support the ongoing earnings from what remains.
And so for this deal, as I mentioned on the call last quarter, we retain the risk of future YRT increases on the GUL business. And as we've noted before, we recently renegotiated rates on the majority of that business. So we know that the risk is manageable at this point. It's important to note, though, as it relates to the GUL that the lapse risk, which is the primary assumption that drove last year's unlocking impact has been completely transferred to Fortitude.
To your question, Tom, with regards to MoneyGuard. As you know, we created that market decades ago. And as a result, we have more experience with that business than any other company in the industry. And MoneyGuard has been a very profitable block for us and was included in the transaction really given its strong cash flows, right? And we talked about that during the transaction call just to explain how we put together the liabilities.
So as we structured the deal with the goal toward optimizing free cash flow, we negotiated retaining some mortality and morbidity of the block via YRT reinsurance with Fortitude, which while not material in the scope of our overall earnings profile does help support our long-term goals of increasing mortality and morbidity risk and diversifying our source of earnings away from capital market-sensitive products. Other risks in this block are fully ceded to fortitude, including all of the lapse risk and default risk.
And then the last question, which you didn't ask, but we've gotten from some other analysts, this may be obvious to some, but when you have a reinsurance deal as opposed to a sale, there is always the tail risk that in the event of insolvency of the reinsurer, right? The assets and liabilities come back to you.
And so you'll hear us and our peers talk about counterparty risk. And so when you're dealing with a long tail block like GUL in particular, it's critical you're confident in the overall strength of the counterparty. We take into account the rating of the reinsurer, our internal assessment of their creditworthiness, the negotiated investment strategy that they would apply to the block and a whole cost of other dynamics.
And as you would expect, different rated reinsurers or more aggressive investment strategies can result in higher ceding commissions, but you need to balance all of that with the long-term nature of the counterparty relationship. We've said this before, but we mitigate that risk with significant counterparty protections, including assets held in the trust backing the liabilities, plus additional assets held as over collateralization. As we've mentioned before, we had many reinsurers, both legacy and new interested in the blocks when we brought them to market.
And so the point is we're very excited to have partnered with a strong counterparty such as Fortitude, but when you're thinking about risk retention in a broader sense, by definition of the transaction, there will always be counterparty risk out in the tail. So look, I think there is probably more information than most companies disclose as it relates to these deals, but we wanted to make sure that we're answering your questions and giving you all the appropriate level of insight. I hope that helps out.

Thomas George Gallagher

That does, Chris. And just to be clear, so it sounded to me like you're retaining some of the long-term care rider risk and some of it's being. So it's a sharing of the long-term rider explicitly. Do I have that right?

Christopher Michael Neczypor

So I wouldn't -- what I would say is that we have a YRT structure such that depending on how the mortality and the morbidity right, because you want both of those risks to be together, how they evolve there is risk that transfers back to us. But the lapse risk in the default risk in the base risk moves over to Fortitude.

Operator

Your next question comes from the line of Elyse Greenspan from Wells Fargo.

Elyse Beth Greenspan

My first question is on the Fortitude deal. So hoping you could provide some color, what part of the regulatory process is taking longer than you guys had expected? And you guys both said that the deal should close in due course. So are you assuming a Q3 or Q4 close at this point? And with the effective date of the deal now will be July 1?

Ellen Gail Cooper

So Elyse, what we can share and what we mentioned in the prepared comments is that we want to be very clear on our continued confidence in closing the transaction. The transaction does require regulatory approvals and most deals, particularly of this complexity levels do.
And as a result of that, we are continuing to work really on focusing on the transaction close. And that's as much as we can say as it relates to the overall regulatory process. We will be back to you as we continue to focus on the close and look again, conveying our confidence that we will close the deal, we'll be able to give you more specifics as soon as we have some timing around that.

Elyse Beth Greenspan

Okay. And then you guys have spoken about the improvement in free cash flow from the Life Insurance business following the Fortitude deal. Can you just help us with your expectations for the actual amount of annual free cash flow you expect from Life Insurance? And then once the deal closes, should we expect the Life Insurance earnings on a GAAP basis to basically be de minimis?

Christopher Michael Neczypor

So Elyse, as I mentioned to Alex earlier, we're not going to provide free cash flow by business segments. It is something that we're looking at what would be helpful for investors in the future, but it's not something that we're providing today. I would say that the improvement post Fortitude, as you said, is about $100 million on an annualized basis.
As it relates to GAAP, that's right. The -- I think the quarterly impact for life is $33 million to $35 million we said this quarter, I think we -- on a GAAP basis for Life did $33 million. And so I understand the math. Obviously, that will bounce around quarter-to-quarter with mortality, and that bounce around quarter-to-quarter with VII alternatives. But hopefully, that helps with the baseline.

Ellen Gail Cooper

Right. And Elyse, we just want to reiterate again, and Chris mentioned this in his upfront comments. We know that we're not done. We're going to continue to work on improving the in-force business, it's clearly under pressure. And I also want to be clear that we are confident and actually feel really good about the new business that we're putting on the books.
I spoke in my upfront remarks around from a new business perspective. And as we are focusing on capital efficiency and in particular, in the life book, we're shifting away from some of the products that we've talked about, such as the commoditized term and into more of the accumulation-type products, and this is -- this really is an effort that's being supported by our distribution. It's being supported by the development of new products, new channels, new segments. And so we really believe in the longer-term value from a new business perspective as well as continuing to work on all the improvements that we have talked about and shared with you in the past as it relates to the in-force.

Operator

Your next question comes from the line of Erik Bass from Autonomous.

Erik James Bass

Can you provide an update on how you see the cadence of Spark expenses and savings coming through? And is this the same on a GAAP and cash basis? Or are there differences there?

Ellen Gail Cooper

Yes. So -- so Erik, as it relates to overall Spark, and I want to reiterate that we continue to be on track with the original guidance and expectations that we provided to you. So if you think about the fact that at the end of year-end '22, and we were about 18 months in, and the overall net savings rate at that point was about $22 million of run rate savings as we moved into '23. We have provided guidance that in '23 that the net savings impact would be in the $60 million to $100 million range, and we are tracking exactly for that.
As we move into '24, that will increase to $200 million to $240 million. Again, this is net of the upfront expenses. And by year-end '24, the ongoing run rate at that point would be in between $260 million to $300 million. The -- as part of this net run rate, of course, are some direct onetime investments that are needed to be made in order to achieve the savings. And the total investment that we have made is $400 million, and we're about 63% into that. So you may recall that in the first quarter, the overall Spark expenses were a little lower than what you see this quarter. We're expecting that total direct investment in '23 to be in around the $150 million range just to give you a sense of we're thinking in the back half of the year. So again, very much on track. And yes, these are expensive that will have a similar effect as it relates to GAAP and distributable earnings ongoing.

Erik James Bass

And then maybe pivoting to Group. I mean you had the 8.6% margin this quarter, so well above target levels and very strong performance. And clearly, there's some of the macro factors that are helping underwriting right now. But do you think even as that normalizes? Have the changes you've made in the business gotten it to a point where you be kind of running at that 7% level going forward? Or are there still more expense efficiencies and other things that are going to come through?

Ellen Gail Cooper

So Erik, our long-term margin expectation continues to be in the 7% range. And you may recall that as we were coming into this year, our margins were well under even a 5% range. So this is a significant improvement in terms of a longer-term trend. So we recognize right now exactly as you said, that we've got a favorable macroeconomic environment, and we're seeing low unemployment. We're seeing elevated wage growth, rising interest rates, all of which are very much supporting and we're seeing this across the board from many carriers.
We are also seeing that when it comes to renewals for us that we are very much remaining disciplined in our approach. We're being very intentional around the balance of achieving rate increases and maintaining relationships with our existing customers. And so we really believe that we're going to be able to achieve rate increases and persistency levels that we need to grow our business and at the same time, we're enhancing some of our offerings, in particular, around supplemental health.
So -- and we know that price is important here, and so we're remaining price disciplined while we're focusing on profitable growth and importantly, differentiating ourselves as it relates to customer service that's really critical to retaining the business. So we take all of those factors, which are very much management actions and management led, which we believe will sustain. The macroeconomic environment, as you know, will see from a pricing perspective that while the market right now is remaining largely rational, that at some point, we could see some competitors start to make changes to respond to that or the macro environment starts to change. Underneath all of that, we have executed on all the management actions that will enable us and again, with a lot of confidence to sustain margins in the 7% range.

Operator

Your next question comes from the line of John Barnidge from Piper Sandler.

John Bakewell Barnidge

I know Group did really well on the earnings perspective this quarter and was 1/3 from the contributor and it might not be that high going forward, but it's definitely a growth area. Can you maybe talk about where you think that settles in over time not from a actual dollar amount, but more from a percentage perspective?

Ellen Gail Cooper

John, what we can tell you is -- and our comments reflect at this is that we are focused as it relates on the Group business, first of all, we think that the long-term sustainable margin outside of this very positive macroeconomic environment that we're experiencing is in the 7% range. At the same time, we really believe that we can continue to grow. And you saw that we had year-over-year 6% premium growth, that's speaking also to strong retention and very much supportive of our relationships and everything that we're doing.
And additionally, some of what is in there is our continued focus on employee benefits. And so employee paid and supplemental health, which we believe is going to be a bigger piece. So I think that there are 2 parts to the equation here. There is the sustained margin and then there's growing the overall business. And we have every intention of continuing to grow the overall business across all segments and we're making -- as we've communicated, we're making a lot of investments in order to do that.
So no specific numbers for you today in terms of that long-term Group representation of long-term earnings, but just now, we expect it to be bigger, and we expect to sustain the margins.

Operator

Your next question comes from the line of Jimmy Bhullar from JPMorgan Chase.

Jamminder Singh Bhullar

So first set of question on your sales and retail products, specifically Annuities and Individual Life. They were down a lot in both product lines. And I'm wondering if it's because of you shifting your product mix and it takes a while for that to run through the distribution channels versus maybe wanting to sell less to preserve capital? Or is there -- I'm assuming you're not seeing any pushback in terms of -- pushback from the distributors and wanting to sell your products? But maybe if you could talk about what's driving the weak sales in retail products?

Ellen Gail Cooper

Sure. So Jimmy, I want to be really clear that we are not seeing any pushback from anybody as it relates to the sale of our products. So let me just start with our overall strategy and the pivot that we're making as it relates to our new business approach. So we are doing exactly what we intended to do. We are shifting to a product mix with more capital efficiency and enhanced value creation.
And as we've talked about, we're seeing improvement as it relates to sales per dollar of capital as well as our new business present on a distributable earnings. And we have talked about the fact that as we're doing this pivot that we are expecting about $300 million less in our allocation to new business capital this year. So if you take Annuities, for example, we saw that in the second quarter, overall sales declined by 4%. However, if you look at year-to-date sales and you compare it to last year, sales are actually up 6%. And importantly, we expect full year sales growth for the full year of 2023.
We are launching a range of product enhancements. We have a number of actions coming with our distribution partners, all of which are expected to elevate sales in the back half of the year as it relates to annuities and align with our capital-efficient goals.
On the Life side, where we did see overall sales were down year-over-year, 36%. We talked about the fact that executive benefit is lumpy, and we saw that this quarter we expect to see that be higher as we look at the second half of the year. If you take out the lumpiness of the executive benefit, and you look also at term, term was also significantly down. We have previously communicated that we have stepped away from the commoditized portions of term. So where we are selling term is exactly where we want to be in terms of our overall proportion.
And then if you look at the 3 other product segments at UL, at MoneyGuard and at VUL, and you compare that year-over-year, we're about 9% down. And again, part of what we're seeing there is the beginnings of our shift, which will take some time into more accumulation product. And we talked about the fact that we've entered into some new distribution agreements with completely new channel as it relates to field marketing organizations, which should support that. And I want to emphasize also that as it relates to our distribution, we have a proven track record of pivots. I think you all know the importance of our distribution leadership broad diversified across a whole range of channels. We are continuing to invest in the distribution franchise in terms of data intelligence, in terms of value-add content, in terms of really supporting our firms and our clients with really understanding value propositions and being solutions providers as opposed to product pushers. And we're continuing to build relationships.
As an anecdote, I have had the opportunity to visit with our distribution team over the summer with our financial advisers directly with some of our channels directly. We continue to receive really significant brand and recognition, and there really has been a lot of energy around the strength of our brand and reputation and franchise in general as it relates to our clients. So we're going to continue to do everything that we're doing. We feel good about where we are and most importantly, focus on capital-efficient sales as it relates to the Retail business and the Workplace business.

Operator

This concludes our question-and-answer session. Mr. Al Copersino, I turn the call back over to you.

Al Copersino

Thank you for joining us this morning. We're happy to take any follow-up questions that you have. You can e-mail us at investorrelations@lfg.com. Thank you, and have a good day.

Operator

This concludes today's conference call. You may now disconnect.