Dennis Glass
President & Chief Executive Officer at Lincoln National
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 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 company-wide 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.
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 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.
Looking forward, first as I've described this morning our reprice shift and add new product strategy will provide us with sales growth opportunities in 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 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 EPS growth target.
I will now turn the call over to Randy.