Earnings Call Transcript - LNC Q3 2025

Operator, Operator

Hello, and thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lincoln Financial Third Quarter 2025 Earnings Webcast. I would now like to turn the call over to Tina Madon, Head of Investor Relations. Tina, please go ahead.

Tina Madon, Head of Investor Relations

Thank you. Good morning, everyone, and welcome to our third quarter 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 and adjusted income from operations available to common stockholders, or adjusted operating income, to the 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 businesses, prospective services or products, future performance, or financial results, including those relating to deposits, expenses, income from operations, free cash flow or free cash flow conversion ratios, 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 2024 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?

Ellen Cooper, Chairman, President, and CEO

Thank you, Tina, and good morning, everyone. We appreciate you joining us. We delivered strong financial results in the third quarter, marking our fifth consecutive quarter of year-over-year growth in adjusted operating income and underscoring the broad-based momentum and disciplined execution as we accelerate our strategic priorities. We have remained focused and consistent in advancing our vision for Lincoln, and this quarter is another proof point. Each of our four businesses continued to make measurable progress against our transformation roadmap, translating strategy into results and contributing to the strong fundamentals that are reshaping the company into a more agile, scalable, and growth-focused enterprise with durable earnings power and a clear path to building long-term shareholder value. The core tenets of foundational capital, enhanced operational efficiency, and a strategy for profitable growth are increasingly evident in our results. We're evolving the direction of the organization with a clear focus on increasing our risk-adjusted return on capital, reducing the volatility of our results, and growing our franchise. And we're starting to see the benefits of those actions. Our capital position remains well in excess of our 20 percentage point RBC buffer, and we have made significant enhancements to optimize our operating model, creating a more efficient and nimble organization. Our businesses have made notable progress on strategies to shift to products and segments with higher margins, more stable cash flow profiles, and greater capital efficiency. We see meaningful opportunity ahead and are continuing to invest for future growth. Our businesses operate in attractive, expanding markets where we compete from a position of strength grounded in our trusted brand, leading franchise, and clear competitive advantages in distribution, product manufacturing, and customer service. Our trajectory continues to accelerate; our track record is increasingly clear, and while our progress won't always be linear, we're confident in the direction we're heading and excited about the path forward. I'd like to briefly comment on our annual assumption review, which continues to be a rigorous and comprehensive process encompassing all key assumptions. The outcome this year reflected some puts and takes, resulting in a small favorable impact to adjusted operating income in the quarter, highlighting the continued alignment between our underlying experience and our go-forward expectations. The process provides a strong foundation for disciplined evaluation and well-structured governance of assumptions. Now turning to our third quarter performance, excluding the impact of our annual assumption review. Each of our businesses generated robust year-over-year results, reflecting continued momentum and execution against our strategic priorities. Key highlights included Annuities recording earnings growth driven by higher account balances and strong and diversified sales. Life Insurance posted improved earnings, supported by stable mortality and operational efficiencies while achieving higher sales driven by executive benefits. Group Protection delivered earnings that were in line with its prior year record third quarter, healthy premium growth, and broad-based sales growth across market segments and products. Retirement Plan Services delivered higher earnings attributable to increased account balances and produced positive net flows in the quarter. Now turning to our business results, starting with Annuities. Our Annuities business continued to deliver excellent year-over-year and sequential sales growth, reflecting sustained progress in our strategy to diversify our new business mix. Reported sales reached $4.5 billion, our fourth consecutive quarter of increased sales with our spread-based products, including fixed annuities and RILA, representing 63% of the new business total. Each of our three core product categories, fixed, RILA, and variable annuities, exceeded $1 billion in sales, supporting our focus on building and sustaining a more balanced product mix, supporting our strategic and financial goals with strong profitability and capital efficiency and underscoring our differentiated ability to capture customer demand. Our go-to-market strategy, combined with our breadth of products, deep long-standing distribution relationships, and consultative wholesaler model, enables us to broaden our addressable markets and reach more customers seeking to retire with confidence and financial security. Our distribution partners value our customer-centric approach, which equips producers with the insights, tools, and capabilities to deliver the right solutions while enhancing their productivity and ease of doing business. As a holistic solutions provider with a product suite that continues to expand, we are positioning our Annuities business for further growth. As a leading product manufacturer, we are delivering innovative new features that meet evolving customer needs across various environments, further distinguishing us in the marketplace. Our fixed annuity sales increased by 36% year-over-year as we leveraged the foundational product and distribution capabilities we built to sustain a consistent and growing presence in the fixed segment. We also continue to invest in our service model to deliver more seamless value-add capabilities to support our customers. Additionally, during the quarter, we transitioned to fully retaining the flows from our fixed sales, which will enhance the growth of our spread-based earnings over time. Our RILA sales increased 21% year-over-year, a sixth consecutive quarter of sequential growth that reflects our ability to differentiate through distinctive and expanded product features and crediting strategies that resonate with customers. Sales volumes of our traditional variable annuities were also up year-over-year. Our variable product suite offers a broad array of features and benefits that meet customer needs and remain integral to our overall offering. VAs remain a valuable contributor to our overall product mix, generating strong free cash flow and attractive risk-adjusted returns. In summary, these results demonstrate the success we are achieving in delivering a diversified product mix that meets customers where they are across different life stages, risk tolerances, and economic environments. The strategy to increase the proportion of our spread-based earnings through profitable new business generation translates into more resilient and predictable cash flows over time while meeting our risk-adjusted return targets and balancing the financial contribution across products. We remain confident in the strategic trajectory within our Annuities business and our ability to leverage our competitive strengths to achieve our profitability objectives. Now turning to Life Insurance. As I've mentioned on prior calls, we have taken decisive steps to reposition this business for long-term value creation. We have strategically shifted our new business mix to emphasize products that support our strategic objectives, those with growing addressable markets that offer compelling value propositions for our customers, enable efficient capital deployment, and position us for durable profitable growth. This quarter's results reflect the progress we are making as our strategic realignment continues to gain traction. Excluding the impact of our annual assumption review, Life earnings reached $54 million, marking a significant year-over-year improvement. Sales totaled nearly $300 million, with executive benefits accounting for two-thirds of that volume, driven by a couple of large cases. In this product category, we have enhanced our competitiveness through targeted product additions and by strengthening our distribution relationships and expanding our service model, enabling us to deliver a strong quarter for executive benefit sales. While we don't expect this level of sales to repeat in the fourth quarter, given the natural variability in large case activity, we have built the foundational capabilities to support a growing presence in this segment. We are continuing to invest to ensure a long-term growth path and are encouraged by the results we're seeing. Our other Life sales were a well-balanced product mix aligned to our targeted strategy. The momentum this quarter reflects the effect of the deliberate actions we've taken over the past several years, optimizing our wholesaler footprint, emphasizing products with more stable cash flows, and enhancing the customer experience. We are continuing to invest in modernizing our service model and advancing our digital offerings to deliver a more integrated customer experience. Through expanded technology, we are differentiating our capabilities to provide real-time insights to support faster data-driven decisions and position us for sustained growth. In the Life business, we are seeing the early impact of our repositioning efforts and remain steadfast in our commitment to enhance and grow this business and realize its full long-term potential. Next, turning to our Group Protection business. As mentioned earlier, Group's earnings were in line with its prior year record third quarter, although modestly below our expectations. Importantly, the core fundamentals of this business remain strong. We continue to execute on our targeted strategy of delivering value across three unique market segments: local, regional, and national, with an ongoing strategic focus on repositioning this business for sustainable profitable growth, transforming how we operate and delivering reliable quality customer service. We're seeing tangible results from our actions as reflected in our year-over-year 5% premium growth, driven by robust sales, strong persistency and pricing discipline across both new and renewal business. Our premium expansion was broad-based with increasing results across all market segments and product categories, with supplemental health, a strategic area of focus, increasing 33% year-over-year. This growth underscores the execution of our strategy to diversify across market segments, expand and deepen the product portfolio, and invest in the people, processes, and technology to create differentiated capabilities that deliver a simpler, faster, and more connected customer experience. While the third quarter is typically a seasonally lighter sales period, Group delivered year-over-year sales growth of nearly 40%, broadly diversified across market segments and products. In this business, servicing our customers with excellence is a strategic differentiator. As we look ahead, we will continue to drive our segment strategy in a profitable and sustainable way by broadening our distribution relationships, expanding our product suite, and continuing to expand our digital tools and technology to drive more productivity, efficiency, and effectiveness. Grounded in a strong foundation and disciplined execution from pricing to expansion in growing addressable markets, our Group business is well positioned to drive sustainable growth and profitability. While we expect some variability in results from quarter to quarter, the fundamentals are strong, and the long-term trajectory is positive. Now turning to Retirement Plan Services or RPS. RPS delivered a strong quarter, achieving 5% year-over-year earnings growth and first-year sales of $2.4 billion as the robust new business pipeline we previously communicated materialized this quarter. Additionally, total deposits increased 20% year-over-year and net flows were positive, driven by the strong sales momentum in the quarter. Our offerings and our core record-keeping and institutional markets continue to drive meaningful customer engagement, reinforcing our long-term growth potential. Looking ahead, we will continue to focus on initiatives that will enhance our operational and service capabilities, broaden our product offerings, and drive greater efficiency as we pursue sustainable and profitable growth. In closing, we are moving forward with conviction, intention, and collective determination. The progress we have made is evident not only in our financial results but in the precision of our execution and operating model we are continuing to refine and fortify and the durability of our capital position. We are expanding our strategic advantage by pivoting toward higher-margin, capital-efficient growth, investing in the foundational core that sharpens our competitive edge, and evolving into a more agile, scalable, and forward-looking enterprise. Through disciplined transformation, we are building a market-leading franchise equipped to thrive in a dynamic environment, align capital with strategic priorities, and capture value where we have built scale and momentum. In summary, we are delivering today while advancing the capabilities that will drive tomorrow. With that, I will turn the call over to Chris.

Christopher Neczypor, Chief Financial Officer

Thank you, Ellen, and good morning, everyone. Our third quarter results represent another quarter of strong execution and meaningful progress on our strategic initiatives, delivering year-over-year adjusted operating income growth for the fifth consecutive quarter. This continued broadening momentum underscores the effectiveness of our strategy, and a disciplined approach consistently demonstrated across our businesses. Importantly, each of our businesses delivered stable or improved year-over-year earnings. Alongside this, we maintain a strong emphasis on free cash flow generation and capital efficiency, reinforcing Lincoln's ability to deliver attractive risk-adjusted returns and positioning the enterprise for durable long-term success. This morning, I'll focus on three primary areas. First, I'll discuss our consolidated results for the third quarter, including the outcome of our annual review of reserve assumptions. Second, I'll provide insights into our segment-level performance. And third, I'll offer a brief update on our capital position and investment portfolio. Let's begin with a recap of the quarter. This morning, we reported third quarter adjusted operating income available to common stockholders of $397 million or $2.04 per share. This includes the impact of this year's assumption review, which increased adjusted operating income by $2 million or $0.01 per share. Additionally, our alternative investment returns were largely in line with expectations, delivering an annualized return of just under 10% or $101 million. After tax, this was $2 million below our target or $0.01 per diluted share. Turning to net income. We reported net income available to common stockholders of $411 million or $2.12 per diluted share. The difference between the net income and adjusted operating income was predominantly driven by two main factors. First, there was a negative after-tax change of $151 million in the fair value of the GAAP embedded derivatives related to the Fortitude Re reinsurance transaction. This change was primarily driven by the impact of lower interest rates on available-for-sale securities in the funds withheld portfolio backing the agreement with the corresponding offset flowing through accumulated other comprehensive income or AOCI. Second, more than offsetting this negative was a favorable after-tax impact of $324 million within nonoperating income, driven primarily by the positive movement in market risk benefits amid a stable interest rate environment and higher equity markets. Of note, our hedge program continues to perform well, in line with expectations. As in prior years, the effectiveness of our hedging strategy allowed us to take a $50 million distribution from LNBAR this quarter. Before turning to our segment results, I want to briefly touch on the impacts of our annual review of reserve assumptions on adjusted operating income. As I noted earlier, the overall impact from the assumption review this quarter was minimal, resulting in a $2 million net benefit to adjusted operating income. While there were some positive and some negative adjustments, none were material relative to the scope of our reserves. Group Protection earnings benefited from a positive adjustment of $39 million this quarter, driven mainly by updated assumptions in our long-term disability and life lines, reflecting favorable trends we've seen over the past few years. This was offset by modest negative impacts in both our Life and Annuities operating income of $29 million and $8 million, respectively. As it relates to our life assumptions, the impact this quarter stems from slightly elevated mortality experience within our universal life block, which was primarily offset by more favorable mortality experience in our term block, consistent with the drivers of our recent results. Importantly, policyholder behavior remains broadly in line with our expectations. The impacts of our annual assumption review on our segment results for this period and the prior year period are detailed in our earnings release issued this morning. Now turning to our segment results. Excluding the impact of the assumption review, Group Protection operating earnings were $110 million, consistent with the prior year record third quarter, and the margin for the quarter was 8.1%, reflecting a modest decline of 40 basis points year-over-year. The main driver of our result was a moderation in our disability loss ratio, which increased to 76.7% compared to 70.5% in the third quarter of 2024, excluding the impacts of the assumption review. This increase reflected both volatility, specifically one month of unfavorable severity in our long-term disability experience, as well as lower long-term disability recoveries. While we've seen the volatility in severity normalize, the lower long-term disability recovery rate will likely continue. Over recent years, enhancements in our claims management practices have significantly improved early-stage resolutions. But as these practices mature, incremental benefits naturally moderate. Offsetting this unfavorability during the quarter was continued favorability in long-term disability incidence and continued favorability in life results. Group life results, in particular, remained strong year-over-year, delivering the second lowest loss ratio post the pandemic, supported by lower incidence and favorable severity outcomes. Excluding the impact of the assumption review, our life loss ratio improved relative to the favorable prior year quarter, declining to 65.3% compared with 71.8% in the third quarter of 2024. Although quarterly fluctuations in mortality outcomes are expected, this continued strength underscores the effectiveness of our disciplined pricing. As a reminder, we typically experience seasonal pressure from the third to fourth quarter. Looking ahead and incorporating the third quarter trends and these seasonal factors, we expect to end the full year with a margin in the range of mid- to upper 8%, representing a roughly 50 basis point improvement year-over-year. We remain confident in our strategy, disciplined execution, and ability to deliver attractive and resilient long-term performance. Now turning to Annuities. Excluding the impact of the assumption review, Annuities delivered operating earnings of $318 million, up $18 million year-over-year, driven by higher average account balances, net of reinsurance, and continued growth in spread income. Additionally, this quarter's earnings included a benefit of approximately $10 million from favorable expense dynamics, primarily related to expense timing and certain tax items that were partially offset within Other Operations. Turning to spreads. Spread income continued to grow with spread-based products representing 29% of total annuity account balances, net of reinsurance, reflecting our commitment to diversifying our annuity business. RILA account balances increased 16% over the prior year quarter, representing 22% of total balances, net of reinsurance. Fixed annuity account balances were 11% higher year-over-year as we began retaining all of the fixed business we sold during the quarter. From a net flows perspective, variable annuity net outflows continued at a similar pace as in recent quarters, reflecting the maturity of the block, while net flows into spread-based products exceeded $1 billion, further underscoring the success of our strategic diversification efforts. Overall, our Annuities business delivered strong earnings growth, reflecting our ongoing efforts to diversify and strengthen the stability of our earnings base in this business. We remain confident that our disciplined approach positions us well to deliver stable, attractive returns over the long term. Retirement Plan Services reported operating income of $46 million, up slightly from $44 million in the prior year quarter, driven by higher account balances amid a favorable equity market backdrop and spread expansion. This was partially offset by pressure from stable value outflows over the past 12 months, although the level of stable value outflows has stabilized in recent quarters. Sequentially, earnings improved by $9 million, the result of favorable equity markets and improved spreads. It's worth noting that this quarter benefited from approximately $2 million of nonrecurring items, primarily driven by net investment income favorability, which had an offset in Other Operations. Base spreads were 107 basis points, up from the prior quarter and prior year. The sequential increase reflects normalization following last quarter's one-time administrative adjustment as well as about 2 basis points of benefit from the nonrecurring net investment income dynamic just discussed. On a normalized basis, spreads are broadly consistent with last year's third quarter. Net inflows totaled $755 million, reflecting strong sales momentum and a robust pipeline noted last quarter. As we look ahead to the fourth quarter, we expect flows to be pressured by a few known plan terminations, the majority of which were not meeting our profitability targets. Account balances benefited from equity market performance, with average balances increasing nearly 8% year-over-year. End-of-period balances reached $123 billion, up 5% sequentially. Overall, our third quarter results highlight steady improvement and positive momentum within Retirement Plan Services. While we remain focused on disciplined expense management and continue to target efficiencies aligned with our long-term earnings objectives, it's important to remember that the fourth quarter typically brings a seasonal increase in expenses, which we expect to be a modest sequential headwind. Beyond expense discipline, we remain focused on initiatives aimed at delivering underlying growth and enhancing the long-term profitability of Retirement Plan Services. Now turning to Life. Excluding the impact of the assumption review, Life delivered operating earnings of $54 million for the third quarter compared to $14 million in the prior year quarter. The increase was driven by stabilization of our mortality experience, increased investment income, and continued expense discipline. Mortality results for the quarter improved compared to the prior year quarter, driven by lower incidence. While severity was slightly higher, overall experience was consistent with our expectations. Turning to expenses. We continue to see year-over-year improvement driven by disciplined expense management. Net G&A expenses declined 4% compared to the prior year quarter, reflecting continued underlying efficiency. Annualized alternative investment returns for the quarter were roughly 10%, essentially in line with our target, but below the 11% return we achieved in the prior year quarter. More broadly, we are beginning to realize the benefits of increased investment income, driven in part by continued growth in alternative investments, which remain well aligned with our life liabilities, as well as ongoing enhancements to our overall investment profile, all of which should continue to support earnings going forward. Overall, the strong results this quarter highlight the ongoing progress that we have made in our Life business, further validating the strategic initiatives we've implemented to position this business for sustained profitability. Turning now to expenses. As we've discussed, expense management remains a strategic priority across the organization, and we've made meaningful progress year-to-date. Through the first three quarters, we achieved significant improvements in operational efficiency with expenses tracking favorably compared to the prior year. This disciplined approach has been driven both from a total company perspective and through targeted actions such as within our Life business. However, as is typical, we anticipate that expenses will rise sequentially in the fourth quarter in certain areas, largely attributable to higher variable compensation, including the impact of anticipated growth in sales volumes during the quarter. Additionally, certain strategic investments intended to enhance the long-term profitability of our businesses will have a slightly greater impact in the fourth quarter compared to earlier quarters. Despite this expected sequential increase, our full year expenses will reflect the disciplined actions we've executed this year, which we expect will result in relatively flat expenses compared to the prior year despite higher sales and increased volumes. We remain committed to disciplined expense management, ensuring we maintain and build upon our progress in managing the expense base effectively. Now for an update on capital. We again ended the quarter with an estimated RBC ratio well above our 420% buffer, continuing to maintain a strong excess capital position above our target due to the Bain proceeds and growth in retained free cash flow during the year. As we've indicated previously, we expect to deploy this excess capital over the next year as we execute against our strategic objectives. This quarter, we made meaningful progress on three specific initiatives. First, we fully transitioned to retaining all of the fixed annuity business we originate with the exiting of our external flow reinsurance agreement. The strategic objective of achieving a more balanced mix of variable and spread annuity earnings will come through various actions with the full retention of existing sales being the important first step. Leveraging our Bermuda-based affiliate and a more fully optimized asset allocation framework will allow us to expand profitability while a portion of the proceeds from the Bain transaction currently sitting in excess capital will be deployed to support this retention. It's worth noting from a GAAP perspective, you'll see slightly higher retained acquisition expenses in the near term, which should translate to higher spread income and profitability over time. Second, we continue to scale our institutional funding agreement program with $1.9 billion in issuance completed year-to-date. As we've discussed previously, FABN and other similar programs are an important growth engine for our spread earnings and will utilize some of our excess capital over the next year or two. Over the next year, we plan to begin disclosing the specific earnings metrics as we scale the program. Lastly, optimizing our legacy life block has been a critical objective that we've been working on for the last three years. And as we discussed, post the Bain transaction, we are evaluating a number of actions that should enhance the long-term free cash flow from this block. We'll have more to say on this in our outlook discussion next quarter. Looking ahead, we remain committed to a disciplined and balanced approach to deploying our excess capital aimed at enhancing our risk-adjusted returns and positioning Lincoln for sustainable long-term success. Turning to investments. Our investment portfolio delivered solid results in the third quarter, reflecting disciplined management, effective diversification, and ongoing execution. Portfolio credit quality remained strong with 97% of investments rated investment grade and below investment grade exposure near historic lows. Our partnership with Bain Capital continues to enhance our investment capabilities, and we are already benefiting from increased sourcing flexibility and execution efficiency. Within private credit, we remain comfortable and confident in our long-standing disciplined approach and continue to lean into investment-grade private and structured strategies as we further optimize our investment portfolio while supporting objectives around sales growth, earnings potential, and capital generation. Lastly, alternative investments generated roughly a 2.5% return for the quarter, generally consistent with our long-term expectations and reflecting continued strength across strategies. In closing, our third quarter results reflect another period of consistent execution and meaningful progress on our strategic priorities. We delivered strong earnings across all businesses, advanced initiatives to diversify and enhance our earnings base, and maintained a healthy capital position. These outcomes underscore the effectiveness of our strategy and a disciplined approach we've taken to enhance capital efficiency, free cash flow generation, and long-term profitability. While our results will not always be linear, the broader momentum across the enterprise remains clear. The actions we've taken this year position Lincoln for a strong 2025, and we remain focused and on track to achieve the objectives outlined in our 2026 outlook. Our commitment to disciplined execution and balanced capital deployment continues to reinforce our ability to deliver durable, attractive risk-adjusted returns and long-term shareholder value. With that, let me turn the call back over to Tina.

Tina Madon, Head of Investor Relations

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

Operator, Operator

Your first question comes from the line of Joel Hurwitz with Dowling & Partners.

Joel Hurwitz, Analyst

I wanted to start on Life. So good to see another quarter of improved earnings. Can you unpack the drivers there? Anything unusual in the quarter? And then there's been volatility over the past several quarters with Life earnings. I believe your 26 guide that you provided a couple of quarters ago suggested earnings may even be above the level we saw in Q3. Any way you could help us understand the earnings power of this business in the near to intermediate term?

Christopher Neczypor, Chief Financial Officer

Sure, Joel. It's Chris. What I would say is that this quarter was really a reflection of a stable quarter for the life insurance block. If you think about it, there's drivers of volatility that are probably more outsized for that business. As you're well aware, mortality and alternative investment returns as the two big ones. And as I said in my prepared remarks, both mortality and alternative returns came in basically as expected for this quarter. And so it's actually a really nice quarter because you can see in a stable environment for the big drivers of volatility what the third quarter earnings power would look like. The reason I emphasize third quarter is because, as I'm sure you know, there is seasonality in that business. And so third quarter and fourth quarter tend to be, call it, $20 million higher than the average second quarter tends to represent a flat quarter. And then first quarter would be $40 million worse just given the drivers of mortality. So you could look at the third quarter as a good run rate once you normalize for seasonality. What I would say as it relates to the drivers, because when you do that for this year and last year, you are seeing growth year-over-year, which is positive. It's in line with the expectations that we had set out. And it's driven by the things that we said it would be driven by. Its increased net investment income, part of that is the growth in the alternative investment income portfolio, not necessarily the rate which has stabilized, but the growth in the balances. We've discussed how they are a good long-term fit for the long-duration nature of the liabilities. And most importantly, you continue to see the expense discipline that we've talked about, and that's starting to come through in a more fulsome way. So, at the end of the day, a number of those drivers should continue as we look out over the next couple of years. We're excited about the growth potential as it relates to the earnings power of that business. And it's just nice to have a really clean quarter so you can see what the underlying earnings power looks like for a third quarter.

Joel Hurwitz, Analyst

Got it. That's helpful. And then just on capital, with leverage essentially back to your 25% target and a much improved capital position, where do you guys stand on resuming a share repurchase program?

Christopher Neczypor, Chief Financial Officer

Yes, Joel, thanks for the question. I think, as you know, we tend to talk in more detail about our capital plans and free cash flow outlook and so forth as part of our fourth quarter earnings call when we give the outlook. What I would say is that relative to the guidance that we put out two years ago and then reiterated at the beginning of this year, we are tracking at expectations, if not better, across almost all the metrics. So we feel really good about the direction of the company, both from a GAAP earnings perspective, sales, free cash flow, and RBC. We're obviously working through the deployment of the Bain proceeds over the next year. And at the end of the day, as we've talked about before, when we get to the fourth quarter and give a more detailed look as it relates to how we're thinking about capital and deployment, both internally and for return to shareholders, we'll go through that in more detail.

Operator, Operator

Your next question comes from the line of Ryan Krueger with KBW.

Ryan Krueger, Analyst

I had a question to start on Group. So with this year's margin expected to come in at the mid- to upper 8% range, is that a good starting point when thinking about going forward? Or I mean, because I think you probably still had pretty favorable mortality this year, and it sounds like disability maybe is reverting more to a bit of a lower level. So just trying to think through if that's a good starting point or if we should actually normalize a bit lower going forward, at least in the near term.

Christopher Neczypor, Chief Financial Officer

Sure. I’ll respond to your question and provide more detail than you might have anticipated. First, we feel very optimistic about the direction of the Group. A few years ago, the business operated with a 1% to 3% margin, which has now increased to over 8% last year. We expect to see an improvement of another 50 basis points this year, with average premium growth of 4% to 5%. The outlook for the Group remains unchanged. What we are observing this quarter is some normalization that we perhaps expected to occur more in 2026, but it is happening slightly earlier. I want to emphasize that we are confident in the Group's trajectory, and our overall outlook has not shifted. Looking at the details of this quarter, particularly regarding disability and life, the disability loss ratio has increased by about 6 points. This ratio is influenced primarily by two factors: the incidence of new claims filed and the resolutions as claimants return to work. The incidence trend continues to be positive, showing no signs of reverting, and we anticipate it will remain strong into the fourth quarter. However, resolutions are where we've noticed less favorable outcomes this quarter. Half of the 6-point change in the disability loss ratio can be attributed to severity volatility, which means that the average claim size in August was unexpectedly low. This volatility is not uncommon, and we have already seen recovery in September and October. The other half is due to the normalization of the resolution rate, which, while still strong compared to historical levels, is adjusting from an exceptionally robust rate in 2024, and we expect this trend to persist. Over the past couple of years, we have invested in our systems and processes, which had previously led to resolutions trending lower than expected. Regarding our long-term outlook for 2026, 2027, and beyond, we had always anticipated this normalization. Ultimately, while the third quarter results were slightly less favorable regarding the resolution rate, this was expected at some point, and it's occurring a bit earlier than we anticipated. Looking ahead to next year, our expectations remain unchanged. On the Life side, I would mention two things. First, we have seen solid results over the last two years, with improvements in mortality as we continue to emerge from the pandemic, leading us to a more stable state. Additionally, a significant portion of our rate increases and actions over the past two or three years have been implemented through the life block. In 2025, we will continue to see the benefits of mortality improvement along with these rate actions, which contribute to enhanced loss ratios. Year-to-date, our life loss ratio has improved by around 5%, thanks to favorable mortality and pricing actions. We also account for supplemental health in the life loss ratio and will consider providing additional disclosures in the future. Moving forward, while we anticipate some quarterly volatility, this year's results have generally aligned with our expectations, with the third quarter likely on the lower end of that spectrum. As we approach the fourth quarter, we remain optimistic about ongoing positive trends.

Ellen Cooper, Chairman, President, and CEO

As we consider future growth, we continue to observe premium growth. Our priority will always be on profitable growth rather than just top-line growth. Overall, we experienced a 5% increase in premium year-over-year. We are focusing on local markets, which offer higher margins, and we've invested significantly in building our capabilities to strengthen relationships with brokers in these areas. Additionally, there's a growing opportunity in supplemental health, where we saw a 33% year-over-year growth. We believe there are opportunities to expand coverage lines both regionally and nationally in this sector. Overall, we see significant potential for growth in the Group business.

Christopher Neczypor, Chief Financial Officer

So when you put all that together, Ryan, to answer your question specifically, yes, there will be some normalization of some of the long-term disability trends that we've talked about. But offsetting that will be the positive impact from the dynamics Ellen just walked through, the growth in supplemental health, continued repricing. So I wouldn't say that we're expecting deterioration in our margin. I think that this quarter, we just saw a little bit of that normalization happen earlier.

Ryan Krueger, Analyst

Great. I appreciate all those details. Just a quick follow-up on disability resolutions. Do you think it relates to the economy, or is it more company-specific, considering how favorable it had been and is now normalizing to a more sustainable level?

Christopher Neczypor, Chief Financial Officer

I don't believe this is primarily related to the economy. It's more than just company-specific factors. There are two main dynamics at play. One is the increased processes and overall investments in our claims management. This is a strategic initiative specific to Lincoln that we've discussed. Additionally, the incidence rates have been quite low over the last two years, causing a shift in the composition of our claims inventory. As you may know, late-stage claims have a lower probability of being resolved. Therefore, as the mix of inventory changes, the rate will normalize over time, which is not just specific to Lincoln but affects the entire industry.

Operator, Operator

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

Suneet Kamath, Analyst

I wanted to start with the assumption review, acknowledging that it was fairly minor. Are there any statutory impacts that we should think about? And is there any kind of ongoing earnings GAAP impacts that we should think about as well?

Christopher Neczypor, Chief Financial Officer

No, nothing material. We would spike it out if there was anything to note there.

Suneet Kamath, Analyst

Got it. And then I guess on the retention of the fixed annuity business, is that something that we're going to actually see in the earnings in the near term here? Or is that going to take some time to sort of develop? Just curious about the cadence of that.

Christopher Neczypor, Chief Financial Officer

Yes, good question. The answer is both, but for different reasons. You will see the net retained account balances grow, along with an increase in investment income and interest credited. We are looking at how spread-based account values will become a larger part of the annuities block, and we plan to improve disclosure next year to clarify some of the individual drivers involved. Aside from that, growth in spread income will occur as the assets and liabilities develop over the life of the policy. In the near term, we will experience slightly higher retained acquisition expenses. This is related to the absence of the flow deal, which means there won't be an offset with some acquisition expenses, posing a slight near-term challenge for Annuities. However, over time, growth in spread income will be evident.

Suneet Kamath, Analyst

Got it. Is there any way to size that drag?

Christopher Neczypor, Chief Financial Officer

We'll provide more information regarding the fourth quarter outlook. Previously, we mentioned that we were ceding 60% to 70% depending on the specific time period related to fixed annuity flow. If you have an estimate for the acquisition expenses, you might observe that. In this quarter, we had one or two months of retained fixed annuity flow on a full basis. You can analyze some of the expense line items for further insights. However, we will offer more detailed information concerning the 2026 outlook.

Operator, Operator

Your next question comes from the line of Alex Scott with Barclays.

Taylor Scott, Analyst

First one I've got for you is just on the topic of private credit. I'd be interested in what your take is on some of the, I guess, one-offs that have kind of popped up recently. And maybe just to add on to that, just your views of potentially growing into private credit as we're looking at the growth in your business, retaining more. I assume that comes with a little more private credit allocation to the Bain partnership. What is your comfort with the stability of that business and the quality of the assets that you're putting on?

Christopher Neczypor, Chief Financial Officer

Yes. Regarding the one-offs, we don't really have a perspective on them. We're not significantly affected by some of the recent headlines. Overall, if you compare our portfolio to others, particularly in the annuity sector, we've been somewhat underallocated in the private credit and structured securities asset classes. While we have maintained a healthy allocation over the past decade, it hasn't been a primary growth focus for us due to our smaller presence in certain retained spread businesses historically. We are confident in our portfolio. The investment details we provide each quarter show that the credit quality remains very stable. Our credit losses this quarter were among the lowest we've seen recently and are consistent with the past two years. Therefore, we don't anticipate any problems related to our current portfolio or our growth prospects. We will continue to be thoughtful, applying the same discipline in portfolio construction and risk management as we have in the past. We believe this will be a key driver for us, but it doesn’t necessarily mean that we will take excessive risks.

Taylor Scott, Analyst

Got it. Helpful. Second one I had for you is on the SGUL. You mentioned optimizing that block further. And I just wanted to see if you could provide any extra color around some of the things you're considering. Are we talking about things that are more internal or external reinsurance? Any way you can help dimension that for us?

Christopher Neczypor, Chief Financial Officer

Sure. And again, I think we'll have more to say next quarter when we give our outlook as we do every year. But Alex, what I would do is probably reiterate what we've said in the past. We think there's a number of ways to continue to optimize that block, some external, some internal. We think that the options as it relates to repositioning the asset portfolio would be a driver to free cash flow and net investment income over time. We've talked a lot about looking at our historical captive framework and looking for efficiencies there. We've talked about the potential to explore another external deal. So I think we went through this when we announced the Bain transaction, but all of those projects are in the works from an exploration perspective, some we think will have real meaningful impact, some we're still studying. But at the end of the day, part of the capital as it relates to the Bain equity will be deployed to execute on a number of the things that we've discussed.

Operator, Operator

Your next question comes from the line of Wesley Carmichael with Autonomous Research.

Wesley Carmichael, Analyst

I had a question on, Ellen, your comments, just thinking about increasing the risk-adjusted ROE of the company and reducing volatility. Just wondering if there's any kind of new developments in terms of products that you want to lean into there. And I understand you've been growing Group Protection, but are there other kind of product areas you'd point to where ROE and cash flow are more attractive now?

Ellen Cooper, Chairman, President, and CEO

When we consider our overall product strategy and expansion, our actions across our businesses are designed to support our strategic and financial goals. We are focusing on areas with growing markets and opportunities for stable cash flow and higher risk-adjusted returns. We evaluate each case individually. For instance, we saw strong sales in Life Insurance this quarter, particularly in executive benefits. We historically had a presence in this area, but over the last year, as we have pivoted the Life franchise, we have significantly improved our offerings. We have expanded our capabilities, strengthened distribution relationships, and established essential capabilities, leading to some large cases this quarter. The sales in our life portfolio reflect our emphasis on products that promote accumulation and provide limited guarantees for stable cash flows. We have introduced new products in the Indexed Universal Life space and Accumulation Variable Universal Life, along with a risk-sharing product in our MoneyGuard offerings. We are also enhancing our pre-sale and post-sale tools and have optimized our distribution strategy. In our annuity business, we have seen a 32% year-over-year sales growth due to our continued expansion in each product category, with unique crediting strategies and index features. In Group Protection, we are focusing on supplemental health. In Retirement Plan Services, strong quarter sales were driven by a 24% increase in small market sales, particularly in pooled employer plans, which are among the higher-margin segments of our business. Our stable value investment offerings have also more than doubled, aided by a newly developed shorter-duration product. We will keep focusing on new product development and expansion, listening closely to our customers' needs while aligning with our strategic and financial objectives.

Christopher Neczypor, Chief Financial Officer

So we just have a few points. I think Chris covered the majority of it. But just to reiterate that as we go through our strategy of leaning into product expansion and areas where we see higher-risk adjusted returns, I think it's also important to lean into partnerships and distribution relationships because those are also coming alongside some of the promising growth areas that we see.

Operator, Operator

That concludes our question-and-answer session. I will now turn the call back over to Tina for closing remarks.

Tina Madon, Head of Investor Relations

Thank you, everyone, for joining our call today. If you have any follow-up questions, please don't hesitate to reach out at investorrelations@lfg.com. Thank you for your time.

Operator, Operator

Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.