Lincoln National Corp (LNC) Q2 2021 Earnings Call Transcript

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Lincoln National Corp (LNC -2.08%)
Q2 2021 Earnings Call
Aug 5, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

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. [Operator Instructions]

Now, I'd like to turn the conference over to the Vice President of Investor Relations. Al Copersino. Please go ahead, sir.

Al Copersino -- Vice President of Investor Relation

Thank you, Catherine. Good morning and welcome to Lincoln Financial's second quarter earnings call.

Before we begin, I have an important reminder. Any comments made during the call regarding future expectations, deposits, expenses, income from operations, share repurchases, and liquidity and capital resources are forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from current expectations. These risks and uncertainties include those described in the cautionary statement disclosures in our earnings release issued yesterday as well as those detailed in our 2020 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 sort of circumstances that occur after this date.

We appreciate your participation today and if I should visit Lincoln's website www.lincolnfinancial.com where you can find our press release and statistical supplement, which include full reconciliations of the non-GAAP measures used on this call, including adjusted return on equity and adjusted income from operations or adjusted operating income to the most comparable GAAP measures.

Presenting on today's call are Dennis Glass, President and Chief Executive Officer and Randy Freitag 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.

Dennis Glass -- President & Chief Executive Officer

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 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.

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.

Randy Freitag -- Chief Financial Officer & Head of Individual Life

Thank you, Dennis. 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.

With that, let me turn to turn the call back over to Al

Al Copersino -- Vice President of Investor Relation

Thank you, Dennis and Randy. 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.

With that, let me turn the call over to Catherine to begin Q&A.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And our first question comes from Tracy Benguigui with Barclays. Your line is open.

Tracy Benguigui -- Barclays -- Analyst

Thank you. Good morning. I'll just quickly looking at interest rates, I mean it's not at the spot where most folks were thinking about probably as you began start speaking about entering into some type of a block sale and I'm just wondering as you're still exploring that avenue, where we are with interest rates is that to turn the progress at all in getting a deal time.

Dennis Glass -- President & Chief Executive Officer

Tracy, thanks for the question. Yes, I think the interest rates are obviously down a little bit over the last quarter or two, but I don't see interest rates as being a material driver of any change in value that we may have seen over that time. I'd remind you that on the other side of that equity markets were up nicely. So there are other factors that play and also remind do have a very diverse book of life insurance. So the type of business we can put into the marketplace can be influenced by a number of different factors. So, still feel very good about the whole block sale process like as I've said before, I think there is a lot of demand, especially on the legacy service side. And so, we continue to work very, very fully on potentially getting something done that we believe I would be additive to shareholder value. No promises there, but I think the environment still seems to be very attractive, especially in the life block sale side.

Tracy Benguigui -- Barclays -- Analyst

So is it fair, we should still hang on tight we hear more or anything you could give us some hints on where you are in that process.

Dennis Glass -- President & Chief Executive Officer

I hate to reality of the situation stress is that until you announce something that it seems like you're doing nothing and so that's what I can tell you. I can tell you we're working hard, we think there's a lot of demand out there and we have a lot of quality business here at Lincoln that we can put into that demand. So yes, you're going to have to hold tight. But I think as I said, I think the environment is still attractive for the search transactions.

Tracy Benguigui -- Barclays -- Analyst

Okay. And I recognize that you've introduced a bunch of new products and I'm wondering, you made some traction in sales, but when you think you'll reach an inflection point to return to production levels, pre-pandemic.

Dennis Glass -- President & Chief Executive Officer

Tracy, it's Dennis. As we have been saying for some quarters now; and then you've just pointed out, we've got broad suite of products. We've got great distribution and we expect to continue to see progress sales growth and it's difficult to predict in a business like what exactly, that's going to be, but all the trends are positive and we're comfortable with our comments about continuing to escalate sales in the long-term

Tracy Benguigui -- Barclays -- Analyst

Yes, I just -- sorry. Lastly on that something that caught my attention you mentioned that the market demand for your VAs with GLP are at attractive economics for maintain. Could we expect that these protected income solutions could that ever extent your variable-indexed annuities. I mean, at least we saw Prudential introduced the type of rider for their structured annuity product.

Dennis Glass -- President & Chief Executive Officer

That's a possibility. And we'll continue to look at what is the consumer really interested in a particular product for the most part of VAs as protection consumer value proposition and that's where our focus is right now. Continuing to make improvements in the overall are being offering and to the extent that consumers demand some type of big and guaranteed income we'll look at that.

Tracy Benguigui -- Barclays -- Analyst

Okay. Thank you for taking my questions.

Operator

Thank you. Our next question comes from Erik Bass with Autonomous Research. Your line is open.

Erik Bass -- Autonomous Research -- Analyst

Hi, thank you. Maybe building on that last question; can you talk about competitive dynamics in the buffered annuity market and its companies innovate more on features and crediting rate mechanisms as this shifting the risk profile of the product at all.

Dennis Glass -- President & Chief Executive Officer

Certainly more people entering the market because there's so much Erik consumer demand for it. The competition and ourselves we continue to change some of the riders not the riders, but some of the characteristics of the product is not to answer your question, changing the risk profile for Lincoln these product changes and again I would say that on the IVA product designs that sort of at the margin fundamental. So, it's a good product with consumer market and it's a solid product from a risk perspective from Lincoln standpoint.

Erik Bass -- Autonomous Research -- Analyst

Got it, thank you. And then, how are you thinking about the use of flow reinsurance as a way to help fund growth, in particularly in more asset intensive lines like fixed annuities and is this the way to accommodate your distribution without tying up capital.

Dennis Glass -- President & Chief Executive Officer

In our history as you know, Eric, we've done flow deals from time to time and we continue to look at as a way to improve the overall sales stream, capital efficiency again and so forth. So we'll look at it and if it makes sense, we'll do it.

Erik Bass -- Autonomous Research -- Analyst

Got it. And I think historically, you've done it with fixed annuities. I mean, is there an opportunity to potentially to expand that to other products.

Dennis Glass -- President & Chief Executive Officer

We've done it with fixed annuities and we've had reinsurance transactions on guaranteed lifetime income products as well. And so I think all but fixed Moody's MBAs or where you can see the opportunity for those kinds of opportunities at transactions.

Erik Bass -- Autonomous Research -- Analyst

Got it. Thank you.

Operator

Thank you. Our next question comes from Tom Gallagher with Evercore. Your line is open.

Tom Gallagher -- Evercore -- Analyst

Thanks. First question. Randy, the decision to ramp up buybacks to -- I think you said $200 million in Q3; can you expand on how we should view this? Is this part ongoing cash flows part excess capital drawdown or is this more based on visibility for dividends and cash flow. Maybe talk a little bit about what you're seeing between LNL and wind bar in terms of dividend flows there. Thanks

Randy Freitag -- Chief Financial Officer & Head of Individual Life

Tom, thanks for the question. I think when you think about the strength of the earnings that we talked about that flows through statutory also. And so we've seen a significant growth in our overall capital. 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 also see a little bit of benefit. Just we do benefit when the markets move, especially in our favor. So I think there's a lot of positive things under there and those positive elements are really what led us to announce, getting back to really full-year pre-pandemic and pre-pandemic levels by the end of the third quarter, which means we'll do a couple of hundred million here in the third quarter. And I think that's really an indication of, for us, how 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. I think in terms of what we think for the fourth quarter for next year I think we'll cross those bridges, when we get there, but at this moment in time we're in an extremely strong position, which will allow us to go out and buy it a little bit of an elevated rate in the third quarter

Tom Gallagher -- Evercore -- Analyst

Got you. And Randy, any clarity for how dividend flows -- you're looking at -- for both, Lincoln National as well as win bar [Phonetic] at this point. I know for some time, you stopped taking dividends out of win bar [Phonetic] you back to taking some cash out of there.

Randy Freitag -- Chief Financial Officer & Head of Individual Life

We took some out in the first quarter. We're always looking at the different SKUs and where they are at any moment in time. As I just talked about the Life companies happen to be an extremely strong capital position. So that's why we took most of our dividends from in 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 win bar [Phonetic] includes the Life companies, both of which are in a very strong capital position right now. So, we didn't happen to take any in the second quarter, but that was more about the strength that we saw in the life company capital than anything else. So I see both of them as a resource looking forward.

Tom Gallagher -- Evercore -- Analyst

Got you. And then one just final one for me, the very favorable underwriting experience in Individual Life ex-COVID, you've now had that for two quarters in a row Any sort of sense for what you think is driving that, 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 any color on what you expect and what you're seeing there.

Dennis Glass -- President & Chief Executive Officer

Yes, it's hard to know for sure with just one or two quarters of data. But as we analyze as we look inside where did the pandemic claims that we have this quarter occur once again it was in the older ages but when you look in total at the older ages, they were sort of, that's where a lot of the benefit was. So I think when we look at that there is probably an element of pull forward or benefiting from people who unfortunately passed last year. So I think it's a combination this quarter of some pullback 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 answer with 100% certainty.

Tom Gallagher -- Evercore -- Analyst

Okay, thank you.

Operator

Thank you. [Operator Instructions] Our next question comes from Elyse Greenspan with Wells Fargo. Your line is open.

Elyse Greenspan -- Wells Fargo -- Analyst

Hi, thanks. Good morning. My first question; within the Group, if I adjust for the people VII and COVID as I said, it's 6% margin in the quarter, kind of in the midpoint of your target range I just hoping to get some more granularity on kind of the core trends within the quarter and anything you're kind of calling out that the favorable or unfavorable? And then, I know you guys -- it pointed to getting to the top end of that range over the longer term; I believe is that still the target for the Group business?

Randy Freitag -- Chief Financial Officer & Head of Individual Life

Elyse, thank you for the question. So, we made $46 million in the quarter of two items we spiked out where the pandemic of $28 million. And then, going the other way was favorable also body; so if you make those two adjustments here at $66 million, and that's what drives the 6.1% underlying margin. But I didn't spike anything out in my script because I find the quarter relatively unremarkable, in that every, all the key drivers were sort of inside of sort of a normal confidence interval. So now looking at disability through big drivers incidents and resolutions incidence was right in line with our expectations severity with a little bit high but resolutions were a little better than we expect. So, I think -- so overall quarter itself that $66 million underlying earnings per number is just very solid, and I think really reflects really the performance. In terms of what takes it from 6.1% to the upper end of the range. I think it's, that's only one point, I think it's probably the reality is that the combination of continued expense improvements.

Dennis referenced another expense savings initiatives and a little bit from underlying improvement in loss ratio. So feels great about the quarter and I think we feel great about our ability to continue to see continued improvement going forward over time.

Elyse Greenspan -- Wells Fargo -- Analyst

And then, I'm going back on the potential for a risk transfer transaction guys kind of heat up been Life insurance area where you're focused on for the time being. You've also spoken about maybe doing VAG on the past. So, is it safe to assume that recognizing these deals take a lot of time and effort that the focus will be on the life insurance side and then once we perhaps going to be there, then potentially shift to the VA side or are you looking into transactions on simultaneously with [indecipherable] the business?

Dennis Glass -- President & Chief Executive Officer

I think what we said now regard to lease some of that continues to be our view. We just believe there is more demand on the life side and that just makes something on that side more likely than otherwise. I think this is at the end the day a rule by supply demand and just happen to believe there is more demand on the life side, so something is more likely there and that hasn't changed.

Elyse Greenspan -- Wells Fargo -- Analyst

Okay. And then one last one, sorry, if I missed this. The corporate costs were little bit higher in the quarter. I know sometimes they vary. Was there anything impacting that number?

Randy Freitag -- Chief Financial Officer & Head of Individual Life

Two things I would point out Elyse. One, there is a little bit of seasonality with some of our brand spend that spikes a little bit in 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 of expenses associated with some of that pre-work on that program into other operations.

Elyse Greenspan -- Wells Fargo -- Analyst

Okay, that's helpful. Thanks for the color.

Operator

Thank you. Our next question comes from Humphrey Lee with Dowling. Your line is open.

Humphrey Lee -- Dowling & Partners -- Analyst

Good morning and thank you for taking my questions. Randy, just 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 280 seems very strong focus for your earnings power. Obviously, there are different takes in any given quarter. And you highlighted some of that in your earlier remarks, but from your perspective any reason why it won't grow from this level going forward.

Randy Freitag -- Chief Financial Officer & Head of Individual Life

Humphrey, thanks for the question. Yes, you did the math on the second quarter. So, we reported 317 and when you adjust for those two items, which were both in my script end up to 280. Humphrey, I'd point out that if you went back to the first quarter and you adjusted for the exact same things that I mentioned in my script, you got to 266. So 266 last quarter to 280 this quarter. And what do we know happen in the second quarter I think one of the big things is that the average equity markets were up a little over 8% Humphrey, we've talked a number of times about the impact of movements in the equity markets on earnings. So if you do the math there the little bit math, we've given you over the years, you would get about a dime and then we also know that we bought back a little over 1% of our shares. So, 266 allow with end up right about the 280 of underlying earnings power had this quarter.

So for me this quarter is right in line with our expectations and we expect to continue to grow off that level, right. I mean you can in any given quarter. You can always have things on surround is that these businesses, I've mentioned a few this quarter. So good underlying mortality and life, but on the other side, you have some expenses we booked across the organization among a number of other things. So, I just think in total, all those pluses and minuses sort of added up to pretty close to zero. So, I think the 280 numbers. So it's a good reflection of the underlying earnings power of Lincoln.

Humphrey Lee -- Dowling & Partners -- Analyst

Got it, thank you for that. Shifting gears to RPS, flows were very good and as you pointed out earlier, you have a very strong first year sales and recurring deposits. Just thinking about on the first year sales perspective some of your peers have talked about lack of activities last year, causing [Phonetic] kind of sales in 2021, but that doesn't seem to be the case for Lincoln. Can you just talk about like what you've done differently or where you're getting traction compared to some of your peers?

Dennis Glass -- President & Chief Executive Officer

Humphrey, it's Dennis, let me take that. Thank you for the question. I would say it this way. It's just X month's execution on a very strong model and when I talk about strong model I talked about, we have a good product portfolio, I mentioned a couple of the strong products within the portfolio. I've mentioned that we focus on the fastest growing markets and we have a top 10 position in each one of those markets were leveraging some of the strength of the overall organization to add distribution strength LSD in particular. We also have good reach in our consultancy channels. So just overall, it's just execution on a model, which we think has demonstrated good growth and good sales over several years in a row now.

Turning to total deposits, we are seeing strength and recurring deposits, and that's related to more participants and employers increasing their contributions to their employees plans; so, I would just say there's nothing unusual about the quarter. That's just great execution on a good model that's been in place for some time.

Humphrey Lee -- Dowling & Partners -- Analyst

Thank you for that.

Operator

Thank you. And we have a question from John Barnidge with Piper Sandler. Your line is open.

John Barnidge -- Piper Sandler -- Analyst

Thank you. G&A expenses were up sequentially and pretty much all segments. How should we be thinking about this prospectively in the backdrop of probably more activity happening?

Randy Freitag -- Chief Financial Officer & Head of Individual Life

John, thanks for the question. I think you can always get some period to period noise. I think I'd point you to the fact that, as I mentioned in my script, if you look over the last year expenses have grown at a significantly lower rate than revenues. And so you're seeing significant earnings leverage across the organization. A couple of points I would make as you sort of move quarter to quarter as you might imagine, with a quarterly strong you start to see some of variable expenses like incentive compensation and that sort of stuff. Sorry to elevated a little bit. So there's a little bit about that. The other thing I'd mention in total, as I mentioned to an earlier question, as we did book $9 million after-tax of expenses associated with our expense initiative. I talked a little bit about some of period noise you can get in the branding spend.

So, we feel great of a higher expense management and when you adjust for those things just 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 in the results.

John Barnidge -- Piper Sandler -- Analyst

Thanks for your answer. My other questions have been answered as well. Thanks.

Operator

Thank you. And I'm showing no further questions at this time, I would like to turn the call back to Al Copersino for closing remarks.

Al Copersino -- Vice President of Investor Relation

Well, thank you all for joining us this morning. As always, we're happy to take any follow-up questions that you have, you can email us at investorrelations@ LFG.com. Thank you, all, and have a great day.

Operator

[Operator Closing Remarks]

Duration: 51 minutes

Call participants:

Al Copersino -- Vice President of Investor Relation

Dennis Glass -- President & Chief Executive Officer

Randy Freitag -- Chief Financial Officer & Head of Individual Life

Tracy Benguigui -- Barclays -- Analyst

Erik Bass -- Autonomous Research -- Analyst

Tom Gallagher -- Evercore -- Analyst

Elyse Greenspan -- Wells Fargo -- Analyst

Humphrey Lee -- Dowling & Partners -- Analyst

John Barnidge -- Piper Sandler -- Analyst

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