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Text: Before we begin, I have an important reminder.
We appreciate your participation today and if I should visit Lincoln's website www.
After their prepared comments, we will move to the question and answer portion of the call.
Lincoln had an excellent second quarter with record adjusted operating earnings per share and operating revenues and earnings growth in all four 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 reprice, 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, further broadens our sales opportunities up an already strong base of products and increases our long-term sales growth potential.
Our expanding shelf space and ongoing improvements in 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 in 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.
We are excited to provide you with more details next quarter.
Third, our high quality investment portfolio higher statutory capital in RBC ratios along with cash at the holding company and contingent capital all provide capital deployment flexibility.
Now, turning to the business segments; starting with Annuities.
We have long been a leader in annuities with a 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 growth across all product categories for the second quarter in a row and a good mix of product sales.
Last year, we established ourselves as a leader in indexed variable annuities.
This year we are seeing growth in both index variable annuities and traditional VAs without living benefits.
We also see ongoing market demand for with guaranteed living benefits at attractive economics to Lincoln has 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 indexed 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 we remain ahead of our earlier expectations.
Turning to flows VA 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.
In Retirement Plan Services we once again reported excellent results and remain well positioned with scale in our target markets of small and mid-case 401(k) healthcare, government and not-for-profit; a broad suite of products, a competitive cost structure and award winning digital technology.
Total deposits were up 21% and included double-digit growth in both first-year sales and recurring deposits.
Sales continue to benefit from the success of YourPath our target date fund alternative.
We have continued to innovate introducing Pathbuilder income, which includes an income solution as part of a target date like investment option.
This type of innovation will serve as a catalyst for future growth.
Finally, we once again reported positive net flows and while flows can be lumpy we expect this positive momentum to persist.
It was another outstanding quarter for the retirement business.
We continue to excel in our target market segments as we benefit from our attractive competitive position continued investments in 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 in new products for the broadens our portfolio and supports shelf space expansion with new distribution partners, including in the P&C space.
Complementing this expansion has been our continued focus on simplifying the client and advisor experience.
Nearly all of our business is E-submitted an e-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 generates 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 UL will variable UL and MoneyGuard 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'm confident the actions we have taken will result in sequential sales growth accelerating in the second half of the year as our new product offerings continue to garner additional shelf space supported by our industry-leading distribution.
Lastly, on Group Protection, where we have been driving toward our target margin range 5% to 7%.
Our selective price increases as well as our successful efforts to raise persistency led to a 2% increase in 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 expanding into higher margin employee paid products, which represented 56% of second-quarter sales.
Included within our employee paid products is supplemental health insurance where we will be adding a hospital indemnity solution another example of Lincoln, expanding our already broad portfolio of high quality offerings.
As we have communicated, we continue to take action to increase group Protection's 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 continue to invest in our claims organization and diligently manage expenses.
A few words on one of our key competitive advantages; our industry leading distribution.
As the industry evolves the strength of our distribution franchise remains the constant.
We are known in the marketplace for our consistent distribution presence with broad reach across channels as demonstrated by our recent Life insurance shelf expansion with a large P&C insurer.
Nearly 100,000 active producers, wholesalers, Group represented consultants and other distribution professionals sell our products and through strategic investments in 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 term.
We already see this as a distribution team is begin meeting with their clients in person again while still leveraging virtual tools both to improve service we deliver and tightly manage our expenses.
Our distribution team's productivity metrics are up and our efforts are being recognized as we received two industry awards this quarter for innovation in virtual training and digital marketing.
Briefly, on investment results, credit quality remains excellent.
Our general account portfolio is predominantly comprised of fixed income investments of which approximately 97% are investment grade and within that 59% are rated single A, single A equivalent or better examples of the underlying asset classes includes corporates, commercial mortgage loans and structured securities.
The commercial mortgage loan portfolio is high quality, well diversified and continues to perform well with nearly 100% of the loans and the two highest CML rating categories and within that 85% in the highest rating 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% in shorter duration assets reflecting our shorter duration product sales.
60% of our purchases were in investments other than public corporates providing diversification and good relative value and adding approximately 100 basis points of yield over comparably rated public corporates.
Lastly, our alternative performance was once again strong, driven by portfolio construction that has emphasized buyout and growth equity strategies with a 10% return in the quarter, significantly exceeding our long-term target 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 in an excellent position to fund sales growth while increasing our capital deployment.
In short, we are very confident in our ability to continue to generate good earnings growth for shareholders.
As we've mentioned before, low rates affect us in three principal ways.
First; is product pricing and design and their impact on consumer demand.
Second; is spread compression.
Third; is the impact of cash flow testing on reserve requirements.
Second our focus on expenses, including the meaningful cost saving program.
I mentioned earlier, is expected to replace all earnings loss to spread compression over the next few years.
Third and finally, we have no significant cash flow testing reserve implications.
In some low rates have already been with us for some time and going forward, we expect to continue to meet or surpass our 8% 10% long-term earnings per share growth target.
Last night we reported second quarter adjusted operating income of $608 million or $3.17 per share.
Both record highs for Lincoln.
There were no notable items in the current or prior year quarter.
Additionally, this quarter's result was impacted by pandemic related claims, which reduced earnings by $43 million or $0.22 per share.
While results benefited from strong performance in the alternatives investment portfolio boosting earnings by $113 million or $0.59 per share above target.
It was an extremely strong quarter that highlights our underlying earnings power.
Net income totaled $642 million or $3.34 per share, boosted by gains in the investment portfolio an excellent performance from the variable annuity hedge program.
This quarter's 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 four businesses.
And the solid expense management as our expense ratio came down 130 basis points.
Consistent with the record earnings key financial metrics were excellent as adjusted operating return on equity came in at 78.3% and book value per share excluding AOCI grew 9% and stands at $75.45, an all-time high.
Now, turning to segment results; starting with Annuities.
Operating income for the quarter was $323 million compared to $237 million in the prior year quarter.
The quarter's 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 in this range turning up modestly over time.
Expense ratio improved to 110 basis points compared to the prior year period as our focus on expenses continues to benefit the 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 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 compared to $30 million in the prior year quarter.
This quarter's results were driven by higher fees on account values and included $7 million of favorable alternative investment results.
Total deposits of $2.8 billion helped drive $0.5 billion of net flows in 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 a strong revenue growth combined with diligent expense management led to an increase in profitability.
Base spreads excluding variable investment income compressed 8 basis points versus the prior year quarter, better than our stated 10 to 15 basis point range as credit in 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 in the prior year quarter.
This quarter's earnings included $83 million of favorable alternative investment experience and a return to pre-pandemic levels of mortality as pandemic related claims of $15 million were largely offset by favorable underlying mortality.
Earnings drivers, continue to grow with average account values up 12% and average life insurance in force of 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.
Expense ratio improved 90 basis points over the prior year quarter as our efficiency efforts continue to benefit margins.
The combination of accelerating sales, expense discipline and the timing 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 in the prior year quarter.
This quarter's earnings included $8 million of 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 that just noted, excluding pandemic claims and favorable alternative investment income, the Group margin of 6.1% was in the middle of a 5% to 7% range, an improvement from the first quarter.
The loss ratio was 79% in the quarter, a 750 basis point sequential improvement.
Excluding 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 in our claims organization to address elevated claim volume due to the pandemic.
We expect the expense ratio to improve when the pandemic subsides and we execute our ongoing expense savings initiatives.
Growing operating revenues coupled with improving underlying margin performance as 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 by year-end.
We estimate C1 factor changes being implemented by the NAIC will negatively impact our year-end RBC ratio by approximately 15 percentage points.
We are supportive of this factor changes 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 toward buybacks in 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 of stock in 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 AOCI, and adjusted operating ROE.
For all the reasons we discussed today, we feel great about continuing our excellent performance looking forward.
We will now begin the question-and-answer portion of the call.
As a reminder, we ask that you please limit yourself to one question and one follow-up and then requeue if you have additional questions.

user
compname reports q2 earnings per share $3.34.
q2 adjusted operating earnings per share $3.17.
q2 earnings per share $3.34.

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