Q2 2021 Lincoln National Corp Earnings Call
[music].
Good morning, and thank you for joining Lincoln financial group's second quarter 2021 earnings Conference call.
At this time all lines are in a listen only mode. Later, we will announce the opportunity for questions and instructions will be given at that time, if you need assistance at any time during the call. Please press the star key followed by the zero and someone will assist you now.
Now I'd like to turn the conference over to the Vice President of Investor Relations. Our Cup Jusino. Please go ahead Sir.
And thank you Catherine and good morning, and welcome to Lincoln Financial's second quarter earnings call before we begin I have an important reminder.
And he comments made during the call regarding future expectations 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 and the cautionary statement disclosures and our earnings release issued yesterday.
Well as those detailed and our 2020 annual report on form 10-K, most recent quarterly reports on form 10-Q, and from time to time and 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 and use them to reflect events word and circumstances that occur. After this date.
We appreciate your participation today and invite you to visit Lincoln's website, Www Lincoln financial Dot Com, where you can find our press release and statistical supplement which include reconciliations of the non-GAAP measures used on this call, including adjusted return on equity and adjusted income from operations or adjusted operator.
Income.
To the most comparable GAAP measures.
Presenting on today's call are Dennis glass, President and Chief Executive Officer, and Randy Free Tagg, Chief Financial Officer, and head of individual life. After.
After their prepared comments, we will move to the question and answer portion of the call I would now like to turn the call over to Dennis.
Thank you al good morning, everyone.
Lincoln had an excellent second quarter with record adjusted operating earnings per share.
And operating revenues and earnings growth and all 4 businesses.
The impact of pandemic related claims on earnings continues to decline.
And was more than offset by another quarter of strong returns from our alternative investment portfolio.
Driving these results is the execution of our re price shift and add new product strategy.
Expense management.
And improving customer experience from digital and virtual enhancements and a strong balance sheet, providing room for increased share repurchases.
Touching on each of these.
First our product introductions are adding new consumer value propositions.
Which open new market segments to us.
<unk> broadens our sales opportunities.
And already strong base of products and increases our long term sales growth potential.
Our expanding shelf space and ongoing improvements and distribution productivity are effectively getting these new products into the hands of consumers.
And we are achieving attractive new business returns on capital deployed.
Second we have a successful track record of increasing the expense efficiency of our product manufacturing back office operations and distribution functions, while enhancing the customer and partner experience.
This quarter, we reported lower expense ratios companywide and and most of our businesses.
As we've talked about recently, we are about to start on another program that will further improve efficiency and the customer experience and enable us to achieve meaningful savings.
I'll be excited to provide you with more details next quarter.
Third our high quality investment portfolio.
Our statutory capital and RBC ratios, along with cash at the holding company and contingent capital.
I'll provide capital deployment flexibility.
Now turning to the business segments.
Starting with annuities, we have long been a leader and annuities.
Diversified product portfolio.
Provides a broad range of customer value propositions.
Total annuity sales this quarter were again strong as we grew 14% sequentially with growth across all product categories for the second quarter and a role and a good mix of product sales.
Last year, we established ourselves as a leader and index variable annuities.
This year, we are seeing growth and both index variable annuities and traditional va's without living benefits.
We also see ongoing market demand for va's with guaranteed living benefits.
At attractive economics to Lincoln.
As protected income solutions continue to resonate with customers.
We had projected total annuity sales to begin the year at a similar pace to what we saw in the fourth quarter, then build over the course of the year.
Benefiting from shelf space, we added last year and are adding this year.
Which is driving index variable annuity growth opportunities.
We are pleased to see sales year to date ahead of our expectations.
Looking forward near term sales may be impacted by typical summer seasonality, but we are confident that full year sales will remain ahead of our earlier expectations turning to flows.
And a net flows were positive.
And while we reported negative net fixed annuity flows. This is a direct result of past management actions taken to maintain rigorous return standards and allow us to direct capital to its highest and best use.
We expect annuities earnings to continue to benefit from new sales growing fees on AUM from the strong stock market and our diversified high quality in force book.
And retirement plan services, we once again reported excellent results and remain well positioned with.
Our scale and our target markets of small and mid case 401 K.
Health care government and not for profit.
Our broad suite of products, our competitive cost structure and award winning digital technology.
Total deposits were up 21% and included double digit growth and both first year sales and recurring deposits.
Sales continue to benefit from the success of your path or target day funds alternative we have continued to innovate introducing past builder income, which includes an income solution as part of the target day like investment option.
This type of innovation will serve as a catalyst for future growth.
Finally, we once again reported positive net flows and.
And while flows can be lumpy, we expect this positive momentum to persist.
It was another outstanding quarter for the retirement business, we continued to excel and our target market segments, as we benefit from our attractive competitive position and.
<unk> investments and the plan sponsor and plan participant experience.
And our expanding set of solutions aimed at helping people secure their retirement.
Within the life insurance business, we continue to execute our product strategy that increases consumer value propositions, while further diversifying our product risk profile.
Our investment and new products further broadens our portfolio and supports shelf space expansion with new distribution partners, including and the P&C space.
Complementing this expansion and our continued focus on simplifying the client and adviser experience.
Nearly all of our business is E submitted and he delivered and our recently expanded online interview capabilities are resulting in higher placement rates at a lower cost per policy.
And this makes it easier for customers to do business with us and generate cost savings.
Our strategies have taken hold and are driving double digit sequential sales growth.
By product category individual life sales were up sequentially with growth seen in term life as well as across our expanded index UL variable U L and money Guard solutions. In addition, our executive benefit sales remained strong through the first half of the year.
And we expect momentum to continue into the second half.
I am confident that actions, we have taken will result, and sequential sales growth accelerating and the second half of the year.
As our new product offerings continued to garner additional shelf space supported by our industry leading distribution.
Lastly on group protection, where we have been driving towards our target margin range of 5% to 7%.
Our selective price increases as well as our successful efforts to raise persistency led to a 2% increase and premiums over the prior year period.
Although sales and what is a seasonally smaller quarter were down versus the strong prior year quarter. We continue to have success and expanding into higher margin employee paid products.
Which represented 56% of second quarter sales.
Included within our employee paid products and supplemental health insurance, where we will be adding a hospital indemnity solution on.
Another example of Lincoln and expanding our already broad portfolio of high quality offerings.
As we have communicated we continue to take action to increase group protections underlying operating margins.
Excluding pandemic related claims and excess alternative investment income we are in the middle of our target range and expect further expansion over time.
As we drive premium growth continuing to invest and our claims organization and diligently manage expenses.
A few words on 1 of our key competitive advantages are industry leading distribution.
As the industry evolves the strength of our distribution franchise remains the concept.
We are known and the marketplace for a consistent distribution presence with broad reach across channels and as demonstrated by our recent life insurance shelf expansion with a large P&C insurer.
Nearly 100000 active producers.
Wholesalers group representative consultants and other distribution professionals sell our products and through strategic investments and technology and training, we have positioned ourselves to influence where and how we engage with our active producers leading with a virtual first model for the long.
On term.
We already see this as a distribution team began meeting with their clients and person again, while still leveraging virtual tools both to improve the service, we deliver and tightly manage our expenses.
And our distribution teams productivity metrics are up and our efforts are being recognized as we received 2 industry awards this quarter for innovation and virtual training and digital marketing.
Briefly on investment results.
Quality remains excellent.
Our general account portfolio is predominantly comprised of fixed income investments.
Which approximately 97% are investment grade and within that 59% are rated single a single equivalent or better.
Examples of the underlying asset classes includes corporates.
<unk> mortgage loans and.
And structured securities with.
The commercial mortgage loan portfolio is high quality, well diversified and continues to perform well with nearly 100% of loans and the 2 highest C L rating categories and within that 85% and the highest creating category.
And virtually no credit losses or loan modifications.
Additionally, the structured securities are predominantly rated double a and higher.
With nearly no exposure to below investment grade securities.
During the quarter, we invested new money at an average yield of 2.7% with approximately 50% and shorter duration assets.
<unk> are shorter duration product sales.
60% of our purchases were in investments other than public corporates.
Biding diversification and good relative value and.
And adding approximately 100 basis points of yield over comparably rated public corporates.
Lastly on.
Our alternative performance was once again strong.
Driven by portfolio construction that has emphasized buyout and growth equity strategies.
With a 10% return and the quarter.
Significantly exceeding our long term targeted quarterly return of 2.5%.
In summary, our product strategy is helping sales momentum build at attractive returns.
Driven by new product introductions, expanding shelf space and overall distribution strength.
Group protection margins are recovering.
Expense savings initiatives will continue to contribute to earnings growth.
And our strong balance sheet and free cash flow generation and potential block sale transactions, all put Lincoln and an excellent position.
And sale growth, while increasing our capital deployment.
And short.
We are very confident and our ability to continue to generate.
Good earnings growth for shareholders.
Before I turn the call over to Randy a brief comment on how interest rate levels affect our business model.
As we've mentioned before low rates affect us and 3 principal ways.
As product pricing and design.
And their impact on consumer demand.
Spread compression.
Third is the impact of cash flow testing on reserve requirements.
Looking forward first as I've described this morning are repriced shift and add new product strategy.
And will provide us with sales growth opportunities and a variety of interest rate scenarios.
Second.
Our focus on expenses, including the meaningful cost saving program I mentioned earlier is expected to replace all earnings loss spread compression over the next few years.
Third and finally, we have no significant cash flow testing reserve implications.
And some <unk>.
Flow rates have already been with us for some time and.
And going forward, we expect to continue to meet or surpass.
8% to 10% long term EPS growth target.
I will now turn the call over to Randy.
Thank you Dennis.
Last night, we reported second quarter, adjusted operating income of $608 million or $3 and <unk> 17 per share.
Both record highs for Lincoln.
There were no notable items and the current or prior year quarter.
Additionally.
This quarter's result was impacted by pandemic related claims.
Which reduced earnings by $43 million or 22 per share.
While results benefited from strong performance and the alternative investment portfolio boosting.
Boosting earnings by $113 million or <unk> 59 per share above target.
It was an extremely strong quarter and highlights our underlying earnings power.
Net income totaled $642 million.
Our $3.34 per share boost.
Boosted by gains and the investment portfolio and excellent performance from the variable annuity hedge program.
This quarters record bottom line result was driven by.
Strong top line performance with adjusted operating revenue up 16% from the prior year.
Which included growth in each of the 4 businesses.
And solid expense management.
Our expense ratio came down on 130 basis points.
Consistent with the record earnings.
Key financial metrics were excellent.
As adjusted operating return on equity came in at 17, 3%.
And book value per share, excluding a OCI grew 9% and <unk>.
Fans at $75 and 45.
And all time high.
Now turning to segment results starting with annuities.
Operating income for the quarter was $323 million.
Compared to $237 million and the prior year quarter.
The quarters earnings were driven by record average account values of $166 billion.
Up 24% over the past year.
And $12 million of favorable alternative investment income.
Base spreads excluding variable investment income decreased 7 basis points sequentially.
Looking forward, we'd expect spreads to be and this range.
And up modestly over time.
The expense ratio improved to 110 basis points compared to the prior year period as our focus on expenses continues to benefit our bottom line.
Return metrics remained solid with return on assets coming in at 78 basis points and.
Return on equity at 25%.
Risk metrics on the VA book once again demonstrate the quality of our in force.
With the net amount at risk at 47 basis points of account values for living benefits and at 33 basis points for death benefits.
Growing account values.
The high quality and high return and book of business and ongoing expense discipline are all indicators of strong future performance from the annuities business.
Retirement plan services reported operating income of $62 million.
<unk> to $30 million and the prior year quarter.
This quarters results were driven by higher fees on account values and included $7 million a favorable alternative investment results.
Total deposits of $2.8 billion helps drive half a billion dollars of net flows and the quarter.
Over the trailing 12 months net flows of $1.6 billion.
Combined with favorable equity markets drove average account values up 28% to 94 billion.
The expense ratio improved 240 basis points over the prior year quarter and strong revenue growth combined with diligent expense management led to an increase and profitability.
Yes.
Base spreads excluding variable investment income compressed 8 basis points versus the prior year quarter.
<unk> and our stated 10 to 15 basis point range as credit and rate actions continue to take hold.
Strong net flow performance and great expense management position, our retirement business nicely moving forward.
Turning to life insurance.
We reported operating income of $255 million versus a loss of $37 million on the prior year quarter.
This quarter's earnings included $83 million of favorable alternative investment experience.
And a return to pre pandemic levels on mortality.
As pandemic related claims of $15 million were largely offset by favorable underlying mortality.
Earnings drivers continued to grow.
And with average account values up 12% and average life insurance and force up 7% over the prior year.
Base spreads excluding variable investment income declined 7 basis points compared to the prior year quarter in line with our 5 to 10 basis point expectation.
The expense ratio improved 90 basis points over the prior year quarter.
Efficient efforts continue to benefit margins.
The combination of accelerating sales and expense discipline, and a declining impact from pandemic mortality positions us well for a strong second half of the year.
Group Protection reported operating income of $46 million compared to $39 million and the prior year quarter.
This quarter's earnings included $8 million per favorable alternative investment results.
Compared to the first quarter operating income rose from a loss of $26 million driven primarily by improved pandemic related claims of $28 million.
Down from $90 million sequentially.
As Dennis noted, excluding pandemic claims and favorable alternative investment income the group margin of 6.1% was and the middle of a 5% to 70% targeted range and improvement from the first quarter.
The loss ratio was 79, 3% and the quarter, a 750 basis point sequential improvement.
Excluding and pandemic related claims from both periods loss ratio improved 50 basis points to 76, 1%.
Due to better mortality results.
Group's expense ratio rose 30 basis points year over year, as we make ongoing investments and our claims organization to address elevated claim volume due to the pandemic.
We expect the expense ratio to improve and the pandemic subsides and we execute our ongoing expense savings initiatives.
Growing operating revenues, coupled with improving underlying margin performance and that's what the group business on much firmer footing looking forward.
Turning to capital and capital management.
We ended the quarter with $11.2 billion of statutory surplus.
And estimate our RBC ratio at 483%.
As a reminder.
Our RBC ratio includes 26 percentage points from non economic goodwill associated with the Liberty acquisition that we expect will go away per year ends.
We estimate C..1 factor changes being implemented by the NTIC will negatively impact our year end RBC ratio by approximately 15 percentage points.
We are supportive of the factor changes and.
And would note that they have no impact on our view of credit.
Nor do we expect them to change our capital deployment strategy.
Cash at the holding company stands at $762 million.
Above our $450 million target.
As we have pre funded our $300 million.
2022 debt maturity.
We deployed $150 million towards buybacks and the second quarter in line with our goal communicated last quarter to return to pre pandemic quarterly buyback levels.
Supported by the strength of our balance sheet.
We intend to repurchase up to $200 million stock and the third quarter.
This will position us to have full year buybacks in line with pre pandemic levels.
To conclude.
We delivered excellent results.
With record earnings.
Book value, excluding LCI and adjusted operating ROE.
For all the reasons, we discussed today.
We feel great about continuing our excellent performance looking forward.
With that.
Let me turn turn the call back over to al.
Thank you Dennis and Randy we will now begin the question and answer portion of the call.
And as a reminder, we ask that you. Please limit yourself to 1 question and 1 follow up and then re queue. If you have additional questions.
With that let me turn the call over to Catherine to begin Q&A.
Yeah.
Thank you.
And to ask a question you will need to press star 1 on your telephone to withdraw your question press the pound key.
For optimal sound quality. Please do not use a speaker phone. Please speak directly into your receiver are you say wired headset with a microphone.
And our first question comes from.
Tracy Thank God.
And Gucci with Barclays. Your line is open.
Thank you and good morning.
And quickly looking at interest rates I mean, it's not at the spot where on.
And most folks were thinking about probably IC began start speaking about entering into some type of block sale and I'm just wondering if you're still exploring that avenue.
And where we are with exit rate does that can turn on the progress at all and getting a deal done.
Tracy Thanks for the question.
Yeah, I think interest rates are obviously down a little bit over the last quarter or 2 but I don't see.
Interest rates as being a material driver of any change and value that we may have seen over that time I would remind you that on the other side of that.
Equity markets are up nicely.
So there are other factors at play and all.
Also remind you trace and we do have a very diverse book of life insurer and so the type of business, we can put into the marketplace.
And be influenced by a number of different factors, so still feel very good.
The whole block sale process like as I've said before.
I think theres, a lot of demand, especially on the life and certain side.
And so we continue to work very very.
Fully on potentially getting something done that we believe that would be additive to shareholder value no promises there, but I think the environment still speak associates, we are attractive.
Especially on the life block sale side.
So is it is it fair with Cisco hang on tight to hear more or anything you could get some hint on where you are on that process.
The reality of these.
Situations Tracy is that until you announce something it seems like Youre doing nothing right.
And so that's what I can tell you can tell you we're working hard and we think.
We think there's a lot of demand out there and we have a lot of quality business here at Lincoln and that we can we can put into that demand. So yeah, youre going to have to hold tight, but I think that and as I said I think the environment is still attractive for those sorts of transactions.
Okay, and I recognize that you've introduced a bunch of new products and I'm wondering and you made some traction on sales, but when you think you'll reach an inflection point to return to production level pre pandemic.
Yes.
Tracy it's Dennis.
We have been saying Chris on <unk>.
<unk> now.
And then you've just pointed out we've got a broad suite of products, we've got great distribution and.
And we expect to continue to see progress.
Sales growth.
And it's difficult to predict.
And a business line.
Uh huh.
Where exactly that's going to be but all the trends are positive and we're.
We're comfortable with.
Her comments about continuing to escalate sales and.
The intermediate and long term.
Yes, just sorry, lastly on that something that caught my attention you mentioned that the market demand for your V. Ace with <unk> are at attractive economics for Lincoln and can we expect that to be protected income solution could that ever extend to your variable indexed annuity and the at least we saw prudential.
And she is the type of rider for their structured annuity product.
And that's a possibility.
And we will continue to look at what is the consumer really interested in and of particular product.
For the most part the IV as well as protection.
Consumer value proposition.
And Thats, where our focus is right now continuing to make improvements on the overall.
EBITDA offering and.
And to the extent that consumers demand some type of thing and guaranteed income growth, we'll look at that.
Okay. Thank you for taking my question.
Thank you. Our next question comes from Erik Bass with Autonomous Research. Your line is open.
Hi, Thank you.
Maybe building on that last question can you talk about competitive dynamics and the buffered annuity market and as companies innovate more on features and crediting rate mechanisms is this shifting the risk profile of the product at all.
There's certainly more people entering the market because theres so much.
Eric consumer demand for it.
On the <unk>.
Competition on ourselves we continue to.
And you change some of the.
Hmm, the rider and not the writers, but some of the.
Characteristics of the product.
It is not.
To answer your question changing the risk profile to Lincoln.
<unk> product changes and again I'd say that on the IV a product.
Designs.
Sort of at the margin.
On the metal.
So, it's a good product and consumer market and.
And.
It's a solid product from a risk perspective.
Income standpoint.
Got it. Thank you and then how are you thinking about the use of flow reinsurance as a way to help fund growth and particularly and more asset intensive lines like fixed annuities and is this a way to accommodate your distribution without tying up capital.
And in the.
<unk>.
And the.
And our history as you know Eric we've done flow deals.
And from time to time and.
And we continue to look at that.
And as a way to trigger.
And.
Improve the overall sales stream capital efficiency and.
And so forth.
So we'll look at it and.
And if.
And if it makes sense, we'll do it.
Got it and I think historically, you've done it with fixed annuities and made us.
Is there an opportunity to potentially to expand that to other products.
We've done it with fixed annuities and we've had reinsurance.
Our transactions.
Transactions.
Guaranteed lifetime income products as well.
And so on.
Thanks, Paul.
But.
And fixed annuities and VA.
Where you can see the opportunity for <unk>.
Those kind of.
On opportunities of transactions.
Got it thank you.
Yeah.
Thank you. Our next question comes from Tom Gallagher with Evercore. Your line is open.
Thanks.
Question, Randy the decision to ramp up buybacks too I think you said 200 million and and Q3 can you can you expand on how we should view this.
Is this part ongoing cash flow as part excess capital drawdown or is this more based on visibility for.
Dividends and cash flow and maybe talk a little bit about what youre seeing between now and when bar in terms of dividend flows there. Thanks.
Yes.
Tom Thanks for the question and I think when you think about the strength of the <unk>.
Earnings that we talked about you know let flow through the statutory also and so we've seen.
Significant growth and our overall capital and I think our capital.
Has grown roughly $1 billion year to date.
And the RBC ratio itself has grown by roughly.
30 points since the beginning of the year and I think the main driver of that is the underlying strength of the earnings that we just talked about.
I think you do also see a little bit of benefit.
We do benefit when the markets move, especially in our favor. So I think there's a lot of positive things over there and those positive elements are really what led us to and now it's.
Getting back to really full year pre pandemic and pre pandemic levels.
By the end of the third quarter, which means we will do a couple hundred million here and the third quarter and I think that's really an indication of for us.
So we feel about the strength of our balance sheet, how we feel about the strength of our capital generation capabilities looking forward that we're back to those levels and I think in terms of what we think for the fourth quarter for next year.
We will cross those bridges, when we get there, but at this moment in time, where and an extremely strong position, which will allow us to.
And go out and buy it a little bit of and elevated rate and third quarter.
Got you and Randy and any.
Any clarity for how dividend flows youre looking at for both Lincoln National as well as when bar at this point I know for some time.
You didn't you stopped taking dividends out of Lindbergh are you back to taking taking some on some.
And some cash out of there.
We took them out and the first quarter.
And we're always looking at the different entities and where they are at any moment in time.
And just talked about the life companies happen to be in an extremely strong capital position. So that's where we took most of our dividends from and the second quarter.
It's just sort of quarter by quarter, what do we intend to do and we look at the various resources, which include blend bar includes the life companies, both of which are and a very strong cash.
Capital position right now so we didn't happen to take any of the second quarter, but that was more about the strength that we saw and.
And the life company capital than anything else, so and I see both of them.
It's a resource looking forward.
Got you and then 1 just final 1 for me the very favorable underwriting experience and individual life ex COVID-19.
And now had that for 2 quarters in a row.
Any any sort of sense for what you think is driving that is it is it possible we did see a pull forward.
Of mortality over the last year and so maybe we'll see some continuation of the favorability and any any color on what you expect on what Youre seeing there.
It's hard to know for sure with just 1 or 2 quarters of data, but as we analyze as we look inside and.
And where did the pandemic claims that we had this quarter occur once again and with the older and the older ages, but when you look and total at the older Ages. They were sort of that's where a lot of the benefit was so I think when.
And when we look at that there's probably an element of a pull forward are benefiting from.
People, who unfortunately passed last year. So I think it's a combination this quarter of some pull back some.
Some pull forward and so I'm just underlying good experience, which was driven primarily by severity. So severity was pretty favorable this quarter.
So I think it's both elements, but to be fair just a couple of quarters of data from a mortality standpoint is not enough to know any answer with 100% certainty.
Okay. Thank you.
Thank you and as a reminder, if you would like to ask a question. Please press. The Star then the 1 key on your Touchtone telephone.
Our next question comes from Elyse Greenspan with Wells Fargo. Your line is open.
Hi, Thanks. Good morning on my first question within that group, if I adjust price a faithful VII and COVID-19 on as I said, it's true that on.
Margin and the quarter kind of and midpoint of your target range.
And you get some more granularity on.
And at the core trend and the quarter and anything you're kind of calling out favorable or unfavorable and then on I know you guys had pointed to getting to the top end of that range over the longer term I believe is that still and Katanga typically fitness.
Alicia Thank you for the question.
So we made 46 million on the quarter of 2 items, we spiked out where the pandemic of $28 million and then go on the other way it was favorable to about it. So if you make those 2 adjustments youre at $66 million and.
That's what drives the 6.1% underlying margin.
Well I didn't spike anything out in my script, because I find the quarter relatively unremarkable and that every all of the key drivers were sort of inside of.
Sort of a normal confidence intervals, so looking at disability true big drivers incidents.
I already and resolutions incidents was right in line with our expectations severity was a little bit high but resolutions were a little better than we expected. So I think the overall quarter itself that 66 million underlying earnings per our numbers and just very solid and I really think really reflects really good performance in terms of what take.
Ex it from from 6.1 to the upper end of the range you know I think it.
That's the only 1 point I think it's probably the reality is that the combination of continued expense improvements and Dennis referenced on.
Other expense savings initiatives.
And a little bit up from underlying improvement and loss ratio. So feel great about the quarter and I think we feel great about our ability to continue see continued improvement going forward over time.
And then going back on the potential for a risk transfer transaction.
And what kind of heat up and seeing life insurance area, where you're focused on for the time being you've also spoken about maybe doing a VA Joe on the past or is it safe to assume that recognize and you take a lot of time and effort that.
And it will be on the life insurance side, and then once they perhaps can be on there and potentially shift to the VA side or are you looking into transactional and dumb I'm on.
Okay.
I think what we said in that regard to lease and that continues to.
To be our view.
And just believe there's more demand on the life side and that just makes.
Something on that side more likely 10, otherwise I think this is at the end of the day rule by supply demand and just happened to believe theres more demand on the life side, So something is more likely there and that hasn't changed.
Okay, and then 1 last 1 sorry, if I net corporate costs were a little bit higher on the quarter I know, sometimes they Barry was there anything impacting that number.
2 things I would point out.
On a lease.
And theres, a little bit of seasonality with some of our brand spend but.
Spiked a little bit and the second quarter, that's a little bit of it but the other thing.
Dennis referenced the next expense saving initiatives and we did.
With consistent with some of the.
Analysis, we've been doing we did book.
About $9 million after tax or expenses associated with some of that pre work on that program and to other operations.
Okay. That's helpful. Thanks for the color.
Net.
Thank you. Our next question comes from Humphrey Lee with Dowling Your line is open.
Good morning, and thank you for taking my questions.
Randy.
And if we were to take a step back and just look at the underlying results for the second quarter adjusting for the Covid claims and the favorable VII. The $2.80 seems very strong for free.
And your earnings power, obviously, there are gives and takes and in any given quarter and you highlighted some of that on your earlier remarks, but from your perspective on any reason why it won't growth from this level going forward.
Humphrey. Thanks for the question Yeah, you did the math on the second quarter.
We reported $3.17, and when you adjust for those 2 items, which were both on my script you end up at $2.80.
Humphrey I would point out that if you went back to the first quarter and.
And you adjusted for the exact same things that I mentioned and more.
Script.
Got to $2.66, so 266 last quarter to 80 this quarter.
And what do we know happened and the second quarter I think 1 of the big things and so that the average equity markets were up a little over 8%.
Humphrey, we've talked a number of times about.
And the impact of of movements and the equity markets on earnings and so if you do the math there are rules of thumb. We've given you over the years, you would get about a dime and.
And then we also know that we bought back a little over 1% of our share so $2.66.
<unk> It ended up right about the 280 of underlying earnings power. We had this quarter. So for me.
This quarter is right and aligns with our expectations.
And we expect to continue to grow off that level right. I mean, you can and any given quarter.
You can always have things on.
And surround us that these businesses I've mentioned, a few this quarter so good underlying mortality and life, but on the other side you had some expenses we booked across the organization among a number of other things I, just think and total all those pluses and minuses.
Sort of added up.
2 and pretty close to zero. So I think the $2.80 number is just a good reflection of the underlying earnings power of Lincoln.
Got it thank you for that.
Shifting gears to 2 Rps flows were very good and as you pointed out earlier.
You have very strong for us first year sales and recurring deposits.
And thinking about on the first year.
<unk> perspective, some of your peers have talked about lack of activities last year, causing a lot of little tampering.
Sales in 2021, but that doesn't seem to be the case for Lincoln can.
Can you just talk about like what you have done differently on where do you are getting traction compared to some of your peers.
Yes.
So let me take that and thank you for the question.
I would say it this way.
And just excellent execution on a very strong model.
And when I talk about strong model.
Talk about we have a good product portfolio I've mentioned on a couple of day.
Strong products within the portfolio.
And I've mentioned that we focus on the fastest growing markets and.
And we have a top 10 position and each 1 of those markets.
We're leveraging some of the strength of the overall organization.
To add distribution strength LSD in particular.
We're also had good reach and our consultant and see channels.
So just overall, it's just execution on a model, which we think is.
Demonstrated good growth and good sales over several years and our ROE now.
Turning to total deposits we are seeing.
And recurring deposits and that's related to more participants and.
Employers increasing their contributions to their employees plans, so I would just.
Theres nothing unusual about the quarter, that's just great execution on a good model.
That's been in place for some time.
Thank you for that.
Yeah.
Thank you and we have a question from John Barnidge with Piper Sandler Your line is open.
Okay.
Thank you.
G&A expenses were up sequentially.
And pretty much all segments, how should we be thinking about this prospectively and the backdrop of probably more activity happening.
John Thanks for the question I think you can always get some period.
And at noise I think I'd point, you to the fact that as I mentioned in my script. If you look over the last year.
<unk> have grown at a significantly lower rate and revenues and so you're seeing significant earnings.
Leverage across the organization a couple of points I would make is you.
Move quarter to quarter as you might imagine with a quarterly strong you start to see some of your variable expenses like incentive compensation and that sort of stuff start to elevate a little bit so there's a little bit about that.
The other thing I'd mentioned and total as I mentioned to an earlier question is we did book 9 million after tax or expenses associated with our expense initiative I talked a little bit about some of the.
Uh huh.
Period noise, you can get and in the brand and spend so we feel great about expense management.
And when you adjust for those things I think.
Demonstrate that at Lincoln.
We have a strong focus on expenses, we've always had a strong focus on expenses and it comes through and the results.
Thanks for your answer my other questions have been answered as well thanks.
Yes.
Thank you and I'm showing no further questions at this time I'd like to turn the call back to al <unk> for closing remarks.
Well. Thank you all for joining us this morning as always we're happy to take any follow up questions that you have you.
You can email lists and investor relations at LFG Dot com. Thank you all and have a great day.
This concludes today's conference call. Thank you for participating you may now disconnect speakers standby.
[music].
[music].
[music].
[music].
Good morning, and thank you for joining Lincoln financial group's second quarter 2021 earnings Conference call.
At this time all lines are in a listen only mode. Later, we will announce the opportunity for questions and instructions will be given at that time, if you need assistance at any time during the call. Please press the star key followed by the zero and someone will assist you.
Now I'd like to turn the conference over to the Vice President of Investor Relations. Our Cup Jusino. Please go ahead Sir.
Thank you Catherine and good morning, and welcome to Lincoln Financial's second quarter earnings call before we begin I have an important reminder.
And the comments made during the call regarding future expectations and deposits expenses income from operations share repurchases and liquidity and capital resources are forward looking statements under the private Securities Litigation Reform Act of 995.
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 and the cautionary statement disclosures and our earnings release issued yesterday as well as those detailed on our 2020 annual report on form 10-K. Most recent quarterly reports on form 10-Q, and from time to time and 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 and use 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 Lincoln financial Dot Com, where you can find our press release and statistical supplement which include a full reconciliations of the non-GAAP measures used on this call, including adjusted return on equity and adjusted income from operations or adjusted operating income.
Come.
To the most comparable GAAP measures.
Presenting on today's call are Dennis glass, President and Chief Executive Officer, and Randy Free Tagg, Chief Financial Officer, and head of individual life.
After their prepared comments, we will move to the question and answer portion of the call I would now like to turn the call over to Dennis.
Thank you al good morning, everyone.
Lincoln had an excellent second quarter with record adjusted operating earnings per share.
And operating revenues and earnings growth and all 4 businesses.
The impact on pandemic related claims on earnings continues to decline.
And was more than offset by another quarter of strong returns from our alternative investment portfolio.
Driving these results.
The execution of our re price shift and add new product strategy.
Expense management and.
And improving customer experience from digital and virtual enhancements and a strong balance sheet, providing room for increased share repurchases.
Touching on each of these.
First.
Our product introductions are adding new consumer value propositions.
Which open new market segments to us.
Further broadens our sales opportunities.
And already strong base of products and increases our long term sales growth potential.
Our expanding shelf space and ongoing improvements and distribution productivity are effectively getting these new products into the hands of consumers.
And we are achieving attractive new business returns on capital deployed.
Second we have a successful track record of increasing the expense efficiency of our product manufacturing back office operations and distribution functions, while enhancing the customer and partner experience.
This quarter, we reported lower expense ratios companywide and and most of our businesses.
As we've talked about recently, we are about to start on another program that will further improve efficiency and the customer experience and enable us to achieve meaningful savings.
I'll be excited to provide you with more details next quarter.
Third our high quality investment portfolio.
Our statutory capital and RBC ratios, along with cash at the holding company and contingent capital.
I'll provide capital deployment flexibility.
Now turning to the business segments.
Starting with annuities, we have long been a leader and annuities.
Diversified product portfolio that provides a broad range of customer value propositions.
Total annuity sales this quarter were again strong as we grew 14% sequentially with.
With growth across all product categories for the second quarter, and a role and a good mix of product sales.
Last year, we established ourselves as a leader and index variable annuities.
This year, we were seeing growth and both index variable annuities and traditional va's without living benefits.
We also see ongoing market demand the va's with guaranteed living benefits and.
Attractive economics to Lincoln as per.
Protected income solutions continue to resonate with customers.
We had projected total annuity sales to begin the year at a similar pace to what we saw it and the fourth quarter and then build over the course of the year.
Benefiting from shelf space, we added last year and are adding this year, which.
Which is driving index variable annuity growth opportunities.
We are pleased to see sales year to date ahead of our expectations.
Looking forward near term sales may be impacted by typical summer seasonality, but we are confident that full year sales will remain ahead of our earlier expectations.
Turning to flows D. A net flows were positive and while we reported negative net fixed annuity flows. This is a direct result of past management actions taken to maintain a rigorous return standards and allow us to direct capital to its highest and <unk>.
Skus.
We expect to annuities earnings continued to benefit from new sales.
Growing confused on.
AUM from the strong stock market and our diversified high quality in force book.
And retirement plan services, we once again reported excellent results and remain well positioned with scale and our target markets of small and mid case 401 K.
<unk> care government and not for profit.
Our broad suite of products, our competitive cost structure and award winning digital technology.
Total deposits were up 21% and included double digit growth and both first year sales and recurring deposits.
<unk> continued to benefit from the success of your path on.
Target day funds alternative we have continued to innovate introducing past builder income, which includes an income solution as part of the target day like investment option.
This type of innovation will serve as a catalyst for future growth.
Finally, we once again reported positive net flows and.
And while flows can be lumpy.
We expect this positive momentum to persist.
It was another outstanding quarter for the retirement business and we continue to excel and our target market segments, as we benefit from our attractive competitive position and.
<unk> investments and the plan sponsor and plan participant experience.
And our expanding set of solutions aimed at helping people and secure their retirement.
Within the life insurance business, we continue to execute our product strategy that increases consumer value propositions, while further diversifying our product risk profile.
Our investment and new products further broadens our portfolio and supports shelf space expansion with new distribution partners, including and the P&C space.
Complementing this expansion has been our continued focus on simplifying the client and adviser experience.
Nearly all of our business is E submitted and he delivered and our recently expanded online interview capabilities are resulting in higher placement rates at a lower cost per policy.
This makes it easier for customers to do business with us and generate cost savings.
Our strategies have taken hold and are driving double digit sequential sales growth.
By product category individual life sales were up sequentially with growth seen in Perm life as well as across our expanded index UL variable U L and Moneycard solutions. In addition, our executive benefits sales remained strong through the first half of the year.
And we expect momentum to continue into the second half.
I am confident that actions, we have taken and will result, and sequential sales growth accelerating and the second half of the year.
As our new product offerings continued to garner additional shelf space supported by our industry leading distribution.
Lastly on group protection, where we have been driving towards our target margin range of 5% to 7%.
Our selective price increases as well as our successful efforts to raise persistency led to a 2% increase and premiums over the prior year period.
Although sales and what is a seasonally smaller quarter were down versus the strong prior year quarter. We continue to have success and expanding into higher margin employee paid products.
Which represented 56% of second quarter sales.
Included within our employee paid products and supplemental health insurance, where we will be adding a hospital indemnity solution on.
Another example of Lincoln and expanding our already broad portfolio of high quality offerings.
As we have communicated we continue to take action to increase group protections underlying operating margins.
Excluding pandemic related claims and excess alternative investment income.
And are in the middle of our target range and expect further expansion over time as we drive premium growth.