Good morning. And thank you for joining Lincoln Financial Group's Second Quarter 2015 Earnings Conference Call. At this time, all lines are in listen-only mode. Later, we will announce the opportunity for questions and instructions will be giving at that time. [Operator Instructions] At this time, I would now like to turn the conference over to the Senior Vice President of Investor Relations, Chris Giovanni. Please go ahead, sir.

Thank you, Bridget. 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, trends and market conditions, including comments about sales and deposits, expenses, income from operations, 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 are described in the cautionary statement disclosures in our earnings release issued yesterday and our reports on Forms 8-K, 10-Q and 10-K filed with the SEC. We appreciate your participation today and invite you to visit Lincoln’s website www.lincolnfinancial.com where you can find our press release and statistical supplement, which include a full reconciliation of the non-GAAP measures used in the call, including income from operations and return on equity to their most comparable GAAP measures. So presenting on today’s call are Dennis Glass, President and Chief Executive Officer; and Randy Freitag, Chief Financial Officer. After their prepared remarks, 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, Chris, and good morning, everyone. Operating earnings per share increased over the first quarter of this as we saw significant earnings improvement in our Group Protection business. Elevated mortality in Individual Life driven by abnormally high claims severity resulted in EPS being roughly flat versus the prior year quarter. Excluding notable items in both periods, EPS would have increased mid-single digits. Positive momentum in key business drivers across our four segments is encouraging and supports our growth, profitability and capital management initiatives. Let me quickly touch on each of these areas before commenting on segment results. First, growth, in the second quarter sales compared to first quarter increased 9% or more in all of our businesses and we continue to benefit various product introductions and requirements. Importantly, our mix of sales is increasingly diversified and returns on new business remained very, very attractive. We also once again generated positive net flows in every business, which contributed to total average account values being up 6% to a record $224 billion. Next turning to profitability, we are encouraged by the earnings improvement we saw this quarter in Group Protection as management actions aimed at restoring profitability are beginning to gain traction. Total earning progress was masked by adverse Individual Life mortality, but our positive outlook for this business has not change and I hope you will get a better sense of our earnings potential in a more benign Individual Life mortality quarter and as Group Protection continues to recover. Lastly, capital management, our balance sheet remains a source of strength and capital generation continues to support active capital management with another $150 million of share repurchases completed in the quarter. We have put more than $2.5 billion towards buybacks over the past four years driving our share count to a…

Thank you, Dennis. Last night, we reported income from operations of $371 million, or a $1.46 per share for the second quarter. Excluding notable items, EPS increased 4% year-over-year as this quarter was negatively impacted by $0.03 while last year’s second quarter benefited $0.04. This year's results were also negatively impacted $28 million from elevated mortality in individual life due to several large claims. As you know, we do not normalize for mortality as it will fluctuate from quarter-to-quarter. However, we felt the abnormally high claims severity should be noted. This quarter, we produced positive results in several key performance metrics. The topline once again posted healthy mid-single-digit growth with operating revenue up 4%. Another quarter of positive net flows in all of our segments, combined with growth in equity markets resulted in average account values reaching $224 million, a record level. Book value per share, excluding AOCI, grew 8% to $50.83, as below the line items have been insignificant, enabling our operating earnings to consistently compound book value in the high single-digit range. Operating return on equity came in at 11.7%, up 50 basis points from the first quarter as Group Protection earnings improved. And finally, our balance sheet remains well-positioned to providing significant financial flexibility. Turning to segment results and starting with Annuities. Reported earnings for the quarter were $255 million, a 12% increase over last year. Operating revenues increased 7% from the second quarter of 2014, as positive net flows continued and equity markets remain supportive. This combination resulted in a 6% increase in average account values that reached $126 billion at the end of the quarter. Return metrics remained strong and consistent with recent periods. ROA increased 4 basis points versus the prior year while ROE came in at 25%, again a very strong result. And…

Thank you. [Operator Instructions] Our first question is from Jimmy Bhullar with J.P. Morgan. Your line is open.

Hi. The first question is just on, if you think about the DOL standards, the way the preliminary proposal was, how does -- how do you think it will affect your business whether it’s in annuities or in life insurance or retirement?

Jimmy, it’s very difficult to speculate about provisions that are -- sorry, in motion if you will, that are changing. I think the analyst observations on this sort of focus on possibly the VA business being affected by it. That would be related to whether or not and how you charge for advice inside of qualified plans whereas commission or fee for advice. But on that particular plan, I’ll repeat what I said a minute ago, if VA sales were to be affected and decline a little bit, we think that capital that would be otherwise employed for the sales and buy share back and plant the large majority of that impact giving us time to pivot as we have demonstrated in the past, we can pivot. So I’m answering the question that I see in lot of analyst reports, first, not that I think that the outcome that is certain.

So besides commission, could it affect your ability to sell VAs without guarantees in retirement plans?

Would it affect our ability to sell renewals in return…

Within qualified brands, if you think…

If you have changed the structure of how you pay the advisors who are selling it, that’s the biggest issue. Again, we’re not all convinced that that’s going to happen. It could.

And any impacts that you see in any of the other businesses?

The other impacts are more opaque. It could be some issues in terms of extra cost in the retirement business which we would -- this is the problem with the Department of Labor’s proposal. It unfortunately could and again they are willing to move it or they are willing to respond because everybody’s goal is to keep cost low and value high for Americans. And so I think we have to work with the DOL to remove some of the extra paper work that seems to be required so that cost aren’t increased that might ultimately be transferred to the customer.

Okay. And then there has been a lot of talk about M&A recently. How do you view Lincoln in the current environment maybe just because you have interest in potential acquisitions? You’ve talked about interest in Group Insurance and retirement in the past. Are you still looking at doing deals in those businesses?

That’s a great question. I have been thinking myself for the last couple of days across the financial services of the industry, I guess, maybe excluding bank. It’s a bit of a rodeo out there. P&C, healthcare companies, and each of those industries that have sort of idiosyncratic reasons why it’s occurring. If you look at the life insurance industry, we’ve got two important transactions, of course, the protected transaction and now StanCorp which reflects new capital coming into the market place. New capital coming into the market place is a good thing. As we know or as has been talked about and it appears the returns that these companies are being brought at are probably mid single digit. If I look at and hear what’s going on elsewhere in our industry with some of the strategic deals that have been done over the past 24 months. Once again the discount rate seemed to be 7% to 8%, even after taking into consideration or taking in considerations synergies and revenue enhancing opportunities. So 7% to 8% for buying businesses. When you come -- are able to put new business up at 12% to 14%, when you can buy your capital back at 12% to 14%, it just seems to be at the moment pretty huge impediment for Lincoln to be doing transactions. Having said that, discount rates change, market environments change, sometimes some companies have a greater ability to affect the income of the target company so that you can get actually a lot of earnings and discount those earnings back at a decent discount rate and still win. But in summary, when you find business is 8% and you can sell your new product at 12% to 14, I think at Lincoln, we choose to selling new product at 12% to 14%. And if we don’t have -- and we’re generating more capital as we have, then what’s necessary to support new products who buyer our stock back because we still think we can get that kind of return on it. I am sorry. I have gone on a little bit.

No, thank you. And just lastly, if you could -- how do you see Lincoln as a potential takeout candidate in this environment, are you -- do you have scale in all the businesses that you are in that you could do well on your own or are you looking for or do you think you will be better off as part of a larger company and/or are you too large to be acquired because Japanese companies obviously the ones they bought were half of your size?

Yes, Jimmy, again over the time I have been in the business, all the things that you have mentioned has changed. What has not changed is our view that we will look to any opportunity to enhance shareholder value. And if that includes some of the things you talked about great. But the critical issue is what’s our potential as a standalone company, we think that’s great. If there is something else that might be better than that over the long term, obviously we will consider it. But our focus right now has to be, continues to be as it always has been building a great franchise that produces earnings growth and grows over time.

Thank you.

Thank you. And our next question is from Steven Schwartz with Raymond James. Your line is open.

Hey, good morning, everybody. A couple. I don’t know if Mark is there and this question has to do a little bit I think with the DOL and FINRA in this case. Does LFN sell VA’s with [C-shares] [ph]? There seems to be a movement of FINRA trying to forbid this practice, which seems to be contracting the DOLs. So I am just wondering about LFN.

Steve, we’re going to get back to you on that. At LFN, we sell products on a variety of commission-based fees. We don’t have in front of us the statistics as to which one dominates. So if you don’t mind, we will get back to you on that.

No, not a problem. I realize I always a little bit out of the box. Two more though. Randy, was the takeaway -- I am just going a little fast, is the takeaway on the mortality that it was predominantly driven by accidental deaths people in their 40s?

Yes. As I noted, we had $28 million of after-tax impact in the quarter. Now if you turn that into dollars of claims, it was about $46 million of claims over and above what we expect. If you dig inside of that $46 million, what you see is that $32 million of it was located as I mentioned in my script in policies that were bigger than $5 million. So it definitely had a large claim bias. And inside of that $32 million, we saw was $20 million or so, $19 million, $20 million was located inside of the $40 million, a younger age bucket, a younger age cohort, people in their 40s, and they were predominantly accidental deaths in nature. So when I think of accidental deaths, I think of things like homicides, accidental deaths, suicide that sort of stuff. So it was definitely driven by these large claims for the quarter as they made up nearly 70% of the total. And inside of that, there was a trend in younger age, which is just well outside of the norm, well outside of our expectations.

Okay. All right. That’s good and said. And then one more for you. You talked about a little bit retirement plan, but I think overall prepayments may cause another variable. Investment income was very low for the quarter at least relative to what’s in the supplement. Is there a way to put a number on this by any chance, first do you agree? And then second, is there a way to put a number on this?

I guess I don’t think. Are you asking, is the level unusual in those two categories?

Well, in general for the company?

Well, let me respond specifically to what happened in the quarter. We had $28 million of alternative income, which is about where we’ve been over the last two years, 2013 and 2014, averaged around 25. On prepayment, we’re at 11, which was compares to about $30 million over the last two years. So it’s little bit less than what we experienced. Prepayment income is moving income from one period to another. So we don’t focus on that a lot. We did do a lot of analysis as to whether or not there is potential for that number to increase or decrease. I think where interest rates are for our book specifically, prepayment income will probably play a part of our earnings for a couple more years.

Okay. Thank you, Dennis.

Steven, I would point out in that regard that when you freeze down to the businesses year-over-year, prepayment income last year was really a benefit for the life insurance business in the second quarter. And if you remember on last year’s call, life insurance business I noted that they had roughly $6 million after-tax of benefit from strong prepayment income. It’s probably a little bit of benefit in the retirement business last year in the second quarter, but I specifically spiked up last year’s $6 million for the life insurance, but didn’t have this year.

Okay. All right. Thanks, guys.

You bet.

And our next question is from Suneet Kamath with UBS. Your line is open.

Thanks. Good morning. Just first on the mortality, Dennis you had referenced two sequential quarters with bad mortality. So as we sit here ahead of the third quarter deck review, how should we think about how these two quarters are going to inform whether or not you may needed to take some action on the life deck in the third quarter review?

I think you asked me, but I am going to turn that quickly over to Randy.

I will take that, Suneet. Obviously when we look at our assumptions, especially our long-term assumption like mortality, it’s a lot more greater than the last two quarters. So while it may have some small impact over the 80s we would project going forward, it’s relatively small. When you think about the longer-term context, the amount of mortality experience we have in the company, I would point on this mortality. I talked about this particular quarter, the count experience was 2% favorable and the amount experienced was 14% unfavorable. If you look at those same statistics over a more extended period of time, just the right on top of our expectations. I talked about a 5 year period, 2010 to 2014, both those numbers exactly at a 100% of our expectation. Now year by year, you would see at 1% higher or 1% lower, 2% higher or 2% lower, but over that more extended period of time right on top of our expectations. So really see these two quarters as outliers. And I wouldn’t expect them to have a significant impact on the third quarter unlocking.

Okay. And the while we are on the subject of the third quarter unlocking, any comments on where we sit today in terms of interest rates?

No, but broadly speaking on the third quarter unlocking. And when I think about unlocking, I really sort of break it down into three buckets. First, I think about elective policyholder behavior, and you are well aware that’s been a very strong story at Lincoln, things like lapses we think over the last 4 or 5 or 6 year. It’s just been a very strong story. It hasn’t had much impact at all on the results. And I would imagine I don’t expect really much impact from the last year experience and you’ve got an elective policyholder behavior, that’s mortality. We just talked about mortality. And then you have the market-driven inputs, you have the J-curve, the long-term great assumption and then the long-term growth rate of the separate accounts. We will look at both those. We have another year of information, we have another year of low rates, and that will impact somewhat our analysis. But I am not going to front run the results, but we will definitely take a hard look at those market-driven inputs.

Got it. And then just for Dennis, I guess this one is for you. On the DOL proposal, I hear your comments about potential changes that may come to pass over the next couple of months. I have read some stories in the press about that as well. So I guess my question is when you talk about your expectations that things may change. Does that based on the conversations that you're actually having in DC? Or is it based on just kind of the general commentary in the media? And the reason I asked the question is I've talked to our own contacts and some contacts in DC, I just get the sense that the view is that there probably won't be any major changes to the DOL. So I just want to get a sense of where your confidence is coming from if I'm characterizing it correctly.

Yes. Let me answer the question very specifically, Department of Labor Secretary, Perez, in the hearings said, he thought changes would have to be made to the proposal. So my comment is based upon his statement, public statement in the hearing. And whether or not he’s drifted from that, I can’t tell you. What I do know is you’re right, there’s a lot of rumor actually on both sides of the question. So we just collectively have to continue to work for good outcome for Americans and a good outcome, mostly for Americans. Again, the tug and pull is not about the objective, the tug and pull is, are some of these proposals at odds with the intent of the Department of Labor when you dig into. I think all of the industry and trade association comments have been -- come on let’s understand a little better practically what these things would do in the way they affect American consumers retirement products.

Okay. Thanks, Dennis.

Thank you. And our next question is from Bob Glasspiegel with Janney. Your line is open.

Good morning, Lincoln. Question on group protection, are you still sticking with sort of the timing of late '16, early '17 for where you’re going to get to your targeted margins?

Yes. I said that in my comments.

Okay.

Yes.

Okay. I just want to make sure because it looks like a good run rate to get there from Q2 to Q1 improvements. On the life side, you're saying I think the first quarter was a frequency blip and the second quarter was a severity blip, so no need to adjust underwriting and pricing actions?

No, Bob, not at all. As I noted in my script to once again highlight the points you made, the frequency was actually down 11% in the second quarter from the first quarter. And it was actually a little better than our expectations for the number of claims that we would have. So the second quarter was definitely a severity-driven event, which was very different. I mean, the first quarter if you remember, I believe is more related to a bad flu season, it was spread across the entire portfolio. And so it was the number of claims spread across the entirety of the business that we issue whereas the second quarter was very focused in these larger claims as I mentioned. And some very abnormal items such as this focused on younger age, accidental claims that I talked about, so very different in the nature of the two quarters. And nothing that I would expect to cause any changes at all in our underwriting practices, which we believe are industry-leading and that have over time delivered great mortality results and mortality results that are exactly inline with our expectations.

Nice to hear your confidence. Thank you.

You bet.

Thank you. Our next question is from Colin Devine with Jefferies. Your line is open.

Thank you. Dennis, I was wondering if you could just draw into the potential impact from the DOL a little deeper. And I appreciate your comments about leveling compensation for your agents. But what about 12b-1 fees, what about marketing allowances? And if those had to go away, what would be the impact on Lincoln? And how might you be able to replace those?

Colin, again, I think, that’s a good question. It’s fairly specific. And I think, I’d rather answer in general terms. And we've been conveying to the department labor, you have to look through the expenses to see what the benefit the customer is achieving. And so, for example, the DOL seems to think that the fees charged for VA living benefit guarantees or VA’s are the little bit expensive for the consumer in total. The response is the total fee isn’t what matters it’s what are the benefits. But we keep coming back to -- we have well-designed products that provide very good consumer value and that ought to continue and we ought to be able to get those products into the marketplace, into the hands of consumers on a cost-effective basis. So, there can be change in one or two of the line item of expenses but it takes a certain amount of fees and expenses to deliver good products. And I suspect that even the demand or living benefit products, there would be an industry way to accomplishment.

All right. If I hear what you’re saying then you’re feeling confident that you could replace but the 25 basis points to [indiscernible] fees you’re collecting now and what I assume is another 25 basis points or so of marketing allowances from the fund companies inside the VA?

I would say that's a level of detail that’s hard to respond to specifically. And so I want to just take this up to level and say, there are certain costs and benefits that are necessary to get good product in the hands of the consumer. And I'm hopeful between the industries involved in this debate and DOL will arrive at a reasonable middle ground on that.

Okay. Then one follow-up, Lincoln, has also been fairly active in de-risking. Its VA block. You move to bunch of assets under managed risk funds, you move to much element to index funds. What do you think your ability is going to be to do initiatives like that going forward with respect to the VA assets that are inside retirement accounts or inside IRA’s, if this thing goes down pretty much at its laid out?

Yeah. As we’ve discussed and if I can go to the Life side just for a second, I believe, if I recall correctly, we use to sell 65% of our business and guaranteed universal life, but today that’s down to 12% or 18%. And any product in the Life Insurance portfolio is no more than 29% of our current sales. So we really made good progress in diversifying what we sell in the Life portfolio. By move to the Individual Annuity portfolio and I know you know this or not, I’m just repeating it for everybody's benefit. We’ve gone from selling essentially 92% of the business on a guaranteed basis to where today we’re almost at 70% on a guaranteed basis, just gross sales. And so we moved the dial diversification of VA portfolio, 20% in the space of 36 months, both with the ability to tap into new markets, which are represented by the 91,000 different advisors that have brought our products over the last 24 months and by adding products like Investor Advantage. So, I will tell you separate from the DOL issue. It’s our intention to continue to diversify products and that would include responding what we sell into the variable annuity market. And we look at this very carefully. We see some opportunities and as we come forward with more ideas on that and our actionable ideas will convey that too, our investors and the people on this phone.

Let me add. We’ve actually done very little of -- I think what you referenced. I think what you’re referencing the things like VA buy-outs and that sort of stuff. And I think as …

I was talking about this [SunTrust] [ph] market, where you did a fairly significant move I believe last year into index funds, the SEC approved it obviously, as well as in the managed hedge funds of in-force assets.

The majority of what we have has just been sold. So, I think as you would expect out of a high quality book covered by a high-quality hedge program like ours. I really don't see the inability to do things like that would have any impact on this at all, because there is really not a need to do anything like that.

Okay. Thank you.

You are welcome.

Thank you. And our next question is from Michael Kovac with Goldman Sachs. Your line is open.

Hi. Thanks for taking my question. A question on variable annuities. It look like sales were strongly rebounded in the quarter and the ROE looked stable. But the equity in this business was up about 20% versus the year ago. The account values were up maybe closer to single digits and given the mix shift that would expect to more or less capital intensive products that you might see sort of -- and inverse of that. Can you let us know what’s going on there?

Yeah. We’ve seen -- in the annuity business, we have some flows on our capital we allocate to the business that are linked to account value. We have floors because the VA guarantee businesses is a type of business, especially in out markets where your sarcastic models will really tell you that you can take capital out of the business and I think what you end up is a bad risk position. The most floors have really sort of kicked in over the last year, 18 months and pushed the capital. Now despite that, I would point out, Michael that we have continued to report ROEs in the mid-20s. So the capital is definitely -- we are not driven by the very conservative approach we have to allocating capital, which is the greater of these account value linked floors and a sarcastic approach. We continue to report very strong returns.

Yeah. I appreciate that. And then thinking about group, in terms of the pricing that you think you still need to take to get to your margin goals, where are we on that basis and what are you seeing in the competitive environment in terms of the ability to push through that much pricing?

Yeah. I think, if you go back to the beginning of this, we talked about a $1 billion of business to reprice and I think we’re roughly 55% of the way or so through that. By the end of this year, we will be three quarters to 80% ROE through that and the balance will come over the remainder of 2016. So, we’re working our way through it. In terms of the other big earnings driver, it would be the things that we’ve done on the claims management area. And as I mentioned, I think we are pretty much where we need to be on that, I’d expect to be there in the third quarter.

Let me expand on your questions just a little bit. Just give you a couple of high-level statistics. We had year-to-date premium renewal about $512 million and we were able to move the net after-tax margin on that business up by 7% versus what it had been at. And somewhat -- because getting price increases needs to -- that's one piece of it. The other piece is how much you are retaining, what is the margin on what you're retaining and what the margin on what’s leading? And so this 7% increase in margin sort of captures all of that and it’s a pretty good indication about pricing actions that we’re taking are getting traction.

Thanks. I appreciate the answers.

Okay.

Thank you. We do have time for one more question. Our next question will be from Jay Gelb with Barclays. Your line is open.

Thanks. Sorry, if it’s already covered but the $159 buyback faced in 2Q, should we view that as a reasonable run rate for the rest of the year?

Jay, as you’ve read, we don’t get into the specific around this. I’ll go back to the words I said at the beginning of the year really, which is we’d expect to exceed last year’s buyback total of $650 million. We’re at $500 million in the first two quarters of the year. I point out that cash of the holding company remains strong $545 million, above the 500 million that we target. We continue to generate strong earnings in the balance sheet at the life company is very strong 505% RBC ratio. The other thing I point out is that I would expect over the last half of the year to likely to do obviously financing transaction that would also free up a little bit of capital. So I think, everything is in place and very supportive of continuing to do a buybacks at healthy pace.

That’s great, Randy. And then Dennis, in your prepared remarks, I believe you mentioned mid-single digit earnings growth potential. Was that for the whole company and if it was, did that pull back a bit from mid to high single digits previously in terms of an outlook?

Though let’s be very specific about the answer to this question. In terms of my specific remarks, that if you remove notable items and look at EPS growth first quarter 2000 -- excuse me -- second quarter 2014 versus second quarter 2015 and that was middle single digits. I would direct you for a longer term deal back to what I thought was a pretty good chart of potential earnings growth over the next couple of years and specific drivers of that growth which I think added up to, Randy?

8% to 10%.

8% to 10%. So in my comment specifically quarter-over-quarter after notable adjustments and there's no reason for us to think that that chart -- statistics in that chart are any different today than they were when we put it there.

Okay. Great. So 8% to 10% long-term EPS growth potential. And then finally, just a quick one for Randy on the individual life segment, the operating income $105 million but based on your commentary about the elevated mortality, am I thinking right that several run rate in that business is closer to 125 or might be higher?

No. I think if you just mathematically take 105 and add 28 million of mortality that I know that would be in the mid 130s, which is more in line with my expectations. You can get there a number of different ways. If you go back to the last year second quarter when we made $148 million and back off the prepayment income was $6 million that I mentioned you mentioned back off, there was a $5 million normalizing item. It would be sort of in that mid 130 area again. You can go back longer term in that. If you go back a few years and you look at what the business made and you grow and you back off the spread compression and the capital actions that you’ve talked about, once again hit in that mid 130 range. So when I think about the business I continue to think about right in that range, the mid 130s and what earnings drivers that are growing at 4% to 5%.

Very helpful. Thank you.

You bet.

Thank you. And that does end our Q&A session. I’ll now turn the call back over to Mr. Christopher Giovanni.

Thank you again, Bridget. Thank you all for joining us this morning. As always, we will be around to take questions at the Investor Relations line at (800) 237-2920 via email at investorrelations@lfg.com. Thank you all again and have a good day.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day. Speakers please standby.