Good morning, and thank you for joining Lincoln Financial Group’s Fourth Quarter 2017 Earnings Conference Call. [Operator Instructions] Now I’d like to turn the conference over to the Senior Vice President of Investor Relations, Chris Giovanni. Please go ahead Sir.

Thank you, Chelsea. Good morning, and welcome to Lincoln Financial’s fourth 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, 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 are described in the cautionary statement disclosures in our earnings release issued yesterday and our reports on Forms 8-K and 10-Q 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. 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 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. good morning, everyone. Fourth quarter results were strong with operating earnings per share up 12% compared to last year. This capped a record year, which included a 20% increase in EPS, a 13% increase in book value per share and a 13% ROE. As you know, we have a multi-year track record of strong financial results and importantly, we believe these results are sustainable over time as we continue to build our franchise and stay keenly focused on profitable growth and capital management. Let me briefly touch on the impact each of these in 2017 as well as some forward-looking thoughts. First, growth. Our powerful retail franchise, which brings together a broad product portfolio with distribution breadth is driving growth across all four businesses. Each generated sales or deposit gains of 6% to 12%. This includes an increase in annuity sales for the first time since 2013, the highest level of life sales in a decade, back to back years of growth in Group Protection sales and record in RPS deposits. The near-term sales outlook is encouraging, and we are also positioning Lincoln to further capitalize on long-term opportunities, including annuities with fee-based compensation options, linked benefit products, smaller faced term insurance and employee-paid group benefits. When looking at profitability, this year’s strong earnings were broad-based, as annuities, RPS and group all reported increases in operating earnings of at least 15%. Excluding notable items in both periods, Life Insurance also reported double-digit growth. Given this positive momentum, coupled with the impact of lower tax rates, earnings growth this year should remain robust for each business. Lastly, capital management. In 2017, solid capital generation enabled us to return approximately $1 billion to shareholders. Buybacks were completed at an average price under $70 per share, more than 20% below…

Thank you, Dennis. Last night, we reported income from operations of $440 million or $1.98 per share for the fourth quarter, a 12% increase from the prior year. Net income totaled $860 million or $3.67 per share, as results included a couple of nonrecurring items. The largest item was a $1.3 billion increase in our book value from the impact on our deferred tax liability as a result of tax reform. Partially offsetting this benefit was a $905 million noncash impairment of goodwill in the Life business. This is directly attributable to the tax reform driven increase in our book value, which is an immediate undiscounted impact, whereas the increase in fair value is a discounted impact. Additionally, you may be aware that the FASB is eliminating Step 2 of the goodwill impairment test beginning in 2020. Therefore, while we again comfortably passed Step 2 of our goodwill impairment test, we wanted to give you the most complete picture of the balance sheet post tax reform. So we early adopted the accounting change. Now let me touch on the performance of key financial metrics. For the full year, reported operating EPS of $7.79 was a record and up 20%. Our EPS, excluding notable items, was also a record, up 16%. Book value per share, excluding AOCI, grew 13% to $64.62. Operating return on equity was strong at nearly 13% in the quarter. For the full year, ROE increased 110 basis points to 13.1%. Sales growth in all segments helped drive a 5% increase in operating revenues. Positive consolidated net flows combined with equity market strength, led to record account values of $253 billion. Our capital generation and balance sheet remain important sources of strength and enabled us to return nearly $1 billion of capital to shareholders for the full year.…

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 only one follow-up and re-queue for additional questions. With that, let me turn it over to Chelsea.

Thank you. [Operator Instructions] And our first question comes from the line of Erik Bass with Autonomous Research. Your line is open.

Hi, thank you. First, I want to clarify your comments about projected capital generation following on tax reform. And should we take your comment as the 50% to 55% ratio of GAAP earnings is unchanged or that the absolute dollar amount of capital generation should be consistent with prior expectations?

It’s the latter, Erik. The dollar amount of capital generation, $850 million to $950 million, is what I would focus in on. Just as a reminder, we’ve done a little better than that the last couple of years, as we state, we have a target and we do everything we can to exceed that. We’ve got some things we’ve been able to leverage the last couple of years to go a little better, but I’d focus in on the dollar amount.

Thanks. And given the timing differences between cash and GAAP taxes, does that change over time?

No. I think you pointed out, there is a difference between cash taxes and GAAP taxes. There’s a small impact on our cash taxes but not enough, where I would say it’s really have any ability on our – it has any impact on our ability to generate the numbers I talked about that $850 million to $950 million.

Thanks. And then finally, just given the strong sales momentum you have in life and now, in annuities, do you expect to allocate more capital to growth than you have in recent years? Should we assume more capital, I guess, going to growth and less to buybacks has been the case recently?

I think as we mentioned in the past, one of the items we leveraged over the last couple of years was a reduction in annuity sales. We put that capital to work. So as sales go up, there will naturally be a more capital allocated. Once again, not to the point where I would change the dollar amount of free cash flow that I expect us to generate. I’d point out in all our products also. We’ve done everything we can over the last five years or so to make them as efficient as possible from a capital required standpoint. You especially see this on the Life business with the mix of sales we have today much lower GUL sales, for instance, having brought the amount of capital required to issue that business down pretty substantially over the past five years.

All right. Thank you.

You bet.

Thank you. And our next question comes from the line of Jimmy Bhullar with JPMorgan. Your line is open.

Hi, good morning. First, you might have noticed just – the announcement by MetLife on issues related to benefits payments and its group annuity business. Have you looked at your business and do you have any comments on whether or not you’ve identified similar issues in your group or payout annuity business?

Yes, Jimmy. I see no connection to that issue in Lincoln. We’re primarily in the business of accumulation annuities. Any payment issues we would have were dealt with a few years ago when we went through the unclaimed property process. We’ve invested significantly in our ability to make sure that everybody is getting the dollars they are owed by Lincoln. And so have no expectations of an impact here.

Okay. And then just on the Liberty Mutual business, you expect, obviously, margins to go up, and I guess in the next two to three years as you re-priced the book. How should we think about or how much business are you – in your planning, are you assuming that you will lose as you raise prices just to get an expected decline in persistency or sales?

Jimmy, as we mentioned on the call, as we price that deal, one of the things that were so attractive to us was – is that there is a very little overlap between where we sell at Lincoln and where Liberty sells. And so in terms of sales, we think there’s a little bit of noise, but the dissynergies you would typically see in a transaction, we just don’t see. From persistency standpoint, we also priced in a little bit of persistency noise, but once again, not much. The persistency in that large case market is typically higher than the small to mid, where Lincoln is specialized. So we did price in some impacts, I would say that those dissynergies were modest compared to what we would have priced in prior deals we’ve looked at.

Okay. And then just lastly, if I could ask one more. Just on annuity flow, have you seen significant improvement in your sales? Are you expecting annuity sales or net flows in the annuity business to be positive in 2018 as a whole or by the end of the year?

The improvements give us more confidence in getting to breakeven net flows sooner than we have thought, but we’re still watching the sales. And as 2018 develops, we’ll be more firm in our expectations.

Thank you.

Thank you. And our next question comes from the line of Josh Shanker with Deutsche Bank. Your line is open.

Yes. Good morning, everybody. At the investor meeting that you guys conducted at the end of last year, you talked about getting into the index variable annuity market. I’m wondering what the market outlook for that? When you plan to launch it? And is there a risk that it cannibalizes other items that you might be selling? What the P&L impact of selling that product versus something else you sell?

Yes. The answer is we expect to be in the market, I think in May. And we think the value proposition of an index variable annuity is very different from the other products, both variable and fixed, that we have in the marketplace. So we view that predominantly as an addition, not a replacement of existing sales.

Is the customer who’s purchasing it as a suite with other things they’re buying or is it a different kind of customer?

Perhaps both, there will be new customers that are attracted to the value proposition. And yes, they’ll compare it to the other products and value propositions that are in the marketplace. But again, it is very – but it’s a very vibrant market already, and so us participating in a market with our distribution and capability should broaden the market and possibly will take some share.

And how long would you take – you think it would take to get it ramped up to where it has an effect on your earnings?

I think that – we actually think that this is going to ramp up pretty significantly over the next 24 months, so incremental contributions to earnings might be out a little late.

Okay. Well, thank you very much. Good luck.

Thank you.

And our next question comes from the line of Tom Gallagher with Evercore. Your line is open.

Good morning. First question, Randy, the $90 million per year contributions that you’ve been making to your New York subsidiary for SGUL, I believe 2017 was the last year that those contributions were supposed to run through. I just wanted to see if that’s right or if there’s still going to be some tail on those contributions. And if so, does that mean you’re now able to generate an extra $90 million a year of capital?

Yes, 2017 is the final year. The answer to that second question is no. If you remember, we did a reinsurance transaction a couple of years ago in Lincoln of New York and that reinsurance transaction has taken away that strength. And so while we’ve been putting up the $90 million in reserves, it’s been going out as part of this reinsurance transaction.

Got you. So no financial implications, may be other than the cost of that reinsurance no longer needing to use that for additional strength.

Correct.

Okay. And then my follow-up is, I just want to be clear, I understand this. The coinsurance deal you have with Athene looks like for the quarter that generated something like $200 million to $250 million of sales for you all. Does that – A, is that right? Is that the right number? And B, does that mean the aggregate sales that are being generated is more like $500 million and you’re keeping half of that as part of coinsurance? Or do I not have that right?

The total – so it’s not half of the total of sales, it’s the total sales. But as you recall, Tom, the profitability on what we retain is, over time, almost as much as if we sold the full amount without the reinsurance.

Got you. So Dennis, the total amount of the sale would be the $200 million to $250 million, is that directionally, correct?

It is about $300 million Tom.

300, okay.

But again the profitability on our portion of the – about half of the $300 million is as nearly as much of what we would have made in the traditional non-reinsurance basis, so the $300 million.

And Dennis, would you say the $300 million, is that a decent run rate? Is it accelerating? Because I know it's relatively new.

Tom I am reluctant to talk about a specific product and run rates. And if I could back us up sort of the top line, as Randy and I both reported, we've sold out $2.8 billion in the fourth quarter. About $500, $550 million or 20% of that is from new products that we've introduced, either late in 2016, in the middle of 2017. As I mentioned, we have additional product introductions coming this year. So I would take confidence, personally, the strength of distribution – I know you've got to say this a lot the breadth of our distribution, new product introductions, being on top of the market will consistently help us grow sales.

Okay, thanks.

And our next question comes from the line of Ryan Krueger with KBW. Your line is open. Mr. Krueger your line is now open. And due to no response, we'll go to the next question. Our next question comes from the line of Suneet Kamath with Citi. Your line is open.

Thanks. So on last quarter's call, Dennis, you gave us kind of a look in to what you're seeing in the fourth quarter with respect to variable annuity sales, it is good to see that come through. Has that momentum continued into 2018?

Lets first talk about seasonality. Fourth quarter is typically higher sales for most of our product lines than the first quarter, so adjusting out for that fact, I would say that all of the things that we have in place continue to encourage us that our annuity sales in total will continue to show growth in 2018.

Got it. And then just on the Group Protection, I guess can you help us think through – I think on the Liberty benefit call, Liberty Mutual call, you talked about price adjusting for a lower tax rate. Can you just give us a sense of what your expectation is in terms of how much pricing would come down because of the tax rate change?

I don’t have that precise open answer with respect to tax at the moment. But I would like to come back to Randy's statement, which is that over time, we expect to get to our 5% to 7% margins, and there will be a number of factors that combined to get us to the 5% to 7%.

And just maybe last one just on the tax rate. Other companies are talking about accelerating investment spending and things like that. It doesn't seem like you're guiding to anything like that in terms of your comments. I just wanted to confirm that.

It's interesting. We talk about tax reform but essentially what's happening is that you have lower cost. It happens to be, in this case, from tax reform, the one that we're talking about. As we've discussed, our digital program is expected to lower our costs significantly as well. So we're not focused on any one specific cost reduction program, but ongoing cost reduction both from, again, tax reform as well as other things that we have in mind, and we'll balance the need for further investment. Right now, the amount of investment that we're putting into digital is our major program announced well before tax reform and there is nothing at this moment that could be – is of that magnitude from an incremental perspective.

Got it, thanks.

Thank you. And our next question comes from the line of Alex Scott with Goldman Sachs. Your line is open.

Thanks. One more just on the group repricing. I mean with the tax reform happening pretty late in the year and a lot of the repricing occurring kind of near the end of the year. Is it fair to say that most of that won't really be going through for 2018 pricing, but it will be more around the conversations kind of at the end of next year?

Let’s just talk about short duration liabilities and Group Protection. A lot of the business has guaranteed rates for a couple of years and so those aren’t re-priced. New business of course is a different story. As Randy said, there's an expectation that over time, the tax rate on charter – the expense reduction due to tax reform on shorter duration liabilities will in part be put into the product. Now I think that's great. The consumers got a much better value proposition and we see benefits to the shareholder through increased sales.

Got it. One more just on the NAIC's group capital calculation that they're sort of coming up with. It sounds like some of the life captive reinsurance transactions may be aren't are grandfathered the way they are in AG 48. I mean do you see that as any risk at all? Do the rating agencies even sort of care about that ratio or will they care about that ratio?

The captives are taken into consideration by the rating agencies. The rating agencies are not guided by the NAIC and what policy changes they will make. With respect to the group calculation that the NAIC is working on, there continues to be a lot of discussion about what is going to be and what it's going to be used for. And so it's a – it's an evolving situation. I don't expect it's going to be a major issue for the industry.

Okay, thank you.

Thank you. And our next question comes from the line of John Barnidge with Sandler O'Neill. Your line is open.

Thank you. If you could talk about your mortality experience maybe in December, headlines are suggesting that the flu season thus far, is one of the worst in decades. And may be anything you could say about what you’ve seen so far this year to date.

Well John we are not going to talk about any specifics about what we've seen in 2018. But in terms of the fourth quarter, it was a good quarter for mortality. I think it was very similar to the fourth quarter of 2016. I think it gave us in 2017, a very stereotypical year, which is we had elevated mortality in the first quarter of the year, and we got it back in the third and fourth quarter. And it all led to a 99% ADE for the year, right in line for 2016. It was almost the same pattern. So we had good mortality throughout the fourth quarter. History would tell us that we'll have elevated mortality in the first quarter. That's what we've seen typically, but in terms of any specifics, I read the same articles that you do, so I think I even know some people who have had the flu but other than that, that’s all we’re going to say. History would tell us a lot of elevated mortality in the first quarter and the reality is that we had really good mortality in the fourth quarter.

I definitely appreciate that. And then my follow-up is do you feel like you’re seeing a massive influx in demand for across-the-board products or benefits products and maybe particular post tax reform?

What kind of products, John?

Benefits, Group Protection products.

Yes, I’ve got a sort of a big view on this, which is, from an individual perspective, individual tax reform change. I think it’s going to take a while for people to understand what it really means. We all know that the effective tax rate across income brackets is going to go down, and so short-term – or, excuse me, this year, I guess beginning in February people see more cash in their paychecks. When you get to April, what the effect of the elimination of certain deductions, adds to that or subtracts to that is yet to be same. So we’re paying attention to our financial advisers and what they’re hearing from their customers. But I think the whole individual tax rate is not settled in at this point and consumers are not taking action just yet.

That makes sense. Thank you.

Thank you. And our next question comes from the line of Humphrey Lee with Dowling & Partners. Your line is open.

Good morning and thank you for taking my question. Just a question on Life Insurance, I think last year on the same call, you talked about the quarterly run rate being $125 million a quarter on average. Obviously, you have some good sales in the quarter – sorry, in 2017, as spread compression improve. But looking at the growth, the earnings growth is still a lot stronger than the 2% to 4% that you highlighted at the Investor Day. So how should we think about the, I guess, first of all, what would be the new quarterly run rate as we move into 2018? And then how should we think about the near-term growth process as you talk about being pretty robust in 2018?

Humphrey, thanks for the question. I think the last time I talked about this was a little more than a year ago, when we talked about the Life business at $125 million, and I think we improved since then. So we’ve seen growth, as you’ve noted, over the last couple of years in the 4% to 6% range, and we’ve had spread compression, which has taken away some of that, which is netted to 2% to 3% a year. So when your roll 2% to 3% onto that $125 million over a couple of years, I think you get largely in line with what we’d expect, which is somewhere in that $130 million to $135 million range right now. If you look at the fourth quarter, we made $152 million. We had good mortality. We typically have some seasonally strong results in the fourth quarter. Expenses were a little higher, so we’d end up in that range maybe probably at the upper end of that range. If you look at the full year, we made $536 million, $551 million normalized. As Dennis mentioned, the quarter featured – the year featured some pretty strong results in the alternative portfolio, Life is the primary beneficiary of that. So once again, I think you would end up in that $130 million, $135 million range, probably towards the upper end of that.

Got it. thank you.

Once again, that’s before tax reform. So now you have to look at those tax rates – ranges that we provided and adjust your models for tax reform.

Okay. And then on Group Protection, specifically related to Liberty Mutual, back in the – at the Investor Day, you talked about the voluntary benefits participation among your customers is about 38% and you’re targeting to get to 35%. My understanding is the Liberty Mutual block, they don’t really have a lot of voluntary benefits. So as you try to kind of cross-sell to that 10 million individuals, like what do you expect in terms of the voluntary benefits participation could come through in the near term? And ultimately, is the 35% still a good longer term target?

Yes, let me respond to that in general. First, may be a little correction on the percentage of employee-paid sales. Today, in Lincoln stand-alone business, it’s 50% and also remind you that we have new products coming out, I think in the next six months or so going on sale next year that are ancillary employee purchase products. So momentum, existing 50% and more momentum, in terms of Liberty – I’m going to come back to Liberty for just a moment. Liberty is a high quality organization with really good products across the businesses. We’re so delighted that we are able to purchase the Group business, which the quality of business, the quality of service capabilities is just really very good, quality of people is really very good. So it’s really – and as Randy pointed out, very complementary, different markets, it’s a good acquisition. The second thing I would say, specifically in response to your question, is that the penetration on the employee-paid side at Liberty is less than what we see here at Lincoln. And it’s a great opportunity, we think for further revenue development, as we go down the road. But as we’ve said when we discussed the transaction and the pricing of the transaction, we did not include any revenue opportunities.

Thank you for the color.

Thank you. And our next question comes from the line of Ryan Krueger with KBW. Your line is open.

Hi, thanks, good morning. Sorry about that earlier. On the RBC ratio, you had previously guided to 460% after the Liberty deal. Is that still a good number? Does that changed at all from the 15 point DTA impact in the fourth quarter?

So using about $600 million of capital off the balance sheet, the impact of that is roughly 30 points. So we ended the year at just a little below 4.90, so I think we’re right in line, almost exactly in line with what we talked about earlier.

Got it. And then I guess any thoughts at this point in terms of if the RBC denominator has changed by the NAIC, how the rating agencies may react to that? And if you need to rebuild – you may need to rebuild that over time or just reset to a lower number?

Yes, look, I think that tax reform didn’t happen that long ago. So I’m sure they’re still formulating their thoughts but I’m also equally sure that when they were taking a look at Lincoln as we took the Liberty acquisition to them, and they thought about our ratings and how we were financing the transaction and they ultimately affirmed our ratings. I’m sure they were thinking about all of the things that could be going along the capital levels. The majority of them have their own capital models already. We have ratings consistent with the capital strength that we show in their models. So our AA ratings already reflect their capital models, which are different from anything the NAIC has. So very comfortable that the rating agencies have thought about this, but I’m sure they have some more thinking to do, as we all do.

And I’d just add to that, we were very pleased that Moody’s has in fact sought in their release indicated it as a credit improvement, the addition that what call it.

Credit positive.

Credit positive. And listed many of the same reasons for that statement, as we saw as we were exploring the opportunity.

Thank you.

Thank you. I’m showing no further questions at this time. I would now like to turn the call back to Chris Giovanni for closing remarks.

Perfect. Thank you all for joining us this morning. As always, we will take your question on our Investor Relations line at (800) 237-2920 or through e-mail at investorrelations@lfg.com. Thank you all and have a great 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.