Chris Giovanni - Senior Vice President, Investor Relations Dennis Glass - President and CEO Randy Freitag - Chief Financial Officer.

Jimmy Bhullar - J.P. Morgan Steven Schwartz - Raymond James Suneet Kamath - UBS Bob Glasspiegel - Janney Colin Devine - Jefferies Michael Kovac - Goldman Sachs Jay Gelb - Barclays.

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 post-merger low.

Now turning to our business lines starting with annuities, it was another quarter of great results as our high quality income stream continues to grow. Total annuity sales of $3.4 billion were consistent with the outlook we have provided in the first quarter. Recall, we expect the sales to exceed $3 billion.

Sales grew 13% from the first quarter and increased sequentially for the first time in the last year, a testament to our consistent approach to the market and our commitment to this high return business.

Variable Annuity sales totaled $3 billion and our strategic goal to increase the percentage of VA sales from products without living benefits to 30% has almost been obtained. This quarter, we reached 28%, marking the eighth straight quarter of sequential increase.

When factoring in the impact on sales covered by our reinsurance treaty, non-guaranteed products comprise 59% of total VA sales. An important contributor to this risk diversification strategy has been the very successful launch of Investor Advantage, our investment focused VA product that provides an efficient platform for account value performance.

It is worth noting that in the first year Investor Advantage sales exceeded $650 million, marking another very successful pivot for Lincoln. Net flows totaled nearly $400 million, more than double first quarter levels. When combined with favorable equity markets through most of the second quarter, average account balance increased 6% to $126 billion.

All of which supported another solid earnings quarter. We have produced a track record of consistent high quality annuity earnings. We expect this to continue as new business returns remain attractive.

Demographic tailwinds still support product demand and we believe our disciplined approach to risk management combined with product innovation will enable us to respond to future changes in the marketplace. Turning to Individual Life, we recognized though we focused on our second straight quarter of adverse mortality.

We continue to view this as a fluctuation in mortality and note the underlying experience in each quarter was very different. Randy will touch on this later. In terms of sales, total Life Insurance sales in the quarter were $201 million, a 17% increase from prior year quarter as a results benefit from a large holy sale.

Sales across our aggregate Life portfolio continues to achieve our 12% to 15% pro rate or returns. The strength of our distribution along with product breath enables us to advance our product portfolio diversification including selling more products without long-term guarantees.

This quarter, no single product represented more than 23% of our total production. An improvement from last year and 73% of our sales did not have long-term guarantees, up from 58% in the prior year quarter.

Focusing on Individual Life Insurance, sales increased 12% sequentially as the strong momentum we discussed on our first quarter earnings call was sustained. MoneyGuard sales increased 15% over the prior year quarter, as we are benefiting from the expansion of our MoneyGuard II product, which we released in 2014.

Indexed Universal Life sales are growing as the marketplace adapts the new illustration requirements that take place beginning September 1st. Growth in these two products has been offset by decline in VUL and Term though we expect new product launches to help drive future sales in these products.

Our outlook for the Life Insurance business remains positive, drivers continued to indicate mid single-digit earnings growth as our diversified product portfolio combined with depth and breath of our distribution distinguishes Lincoln in the marketplace.

Turning to Group Protection, as I noted earlier, we are encouraged by the earnings improvement this quarter and reiterate that we expect to approach our target margin range of 5% to 7% by late 2016, early 2017. Second quarter sales of $62 million were down 15% compared to the prior year quarter.

Our pricing actions continue to put downward pressure on new business opportunities and we expect sales growth to remain soft as we move through the year. We continue to make inroads on our targeted strategy to further expand the employee paid voluntary market.

This is an important element in our overall strategy to achieve and sustain profitable growth in this business. In the quarter, 44% of sales were employee paid up slightly year-over-year.

So the bottomline in Group Protection is, we are encouraged by the earnings improvement we saw this quarter, management actions aims at restoring profitability are gaining traction and position as well to achieve our target margin range.

In Retirement Plan Services, earnings were impacted by higher expenses, in part related to investments for future growth, combined with lower spread income. The underlying business drivers remained firmly intact. Second quarter deposits of $1.9 billion, were up 3% from a year ago and included growth in both recurring deposits and first year sales.

Deposits increased 9% sequentially due to a pickup in first year sales activity. We believe this momentum is driven by investments we're making in our sales force and technology, and we expect to benefit further from these investments over time as we grow into our improved infrastructure. Net flows remained a strong story in our retirement business.

Net flows of $306 million in the quarter increased our year-to-date total to $422 million, compared to just $5 million in the prior quarter. Success has been driven by a number of factors, including stronger sales momentum in the mid-large market where we have had nearly three times as many wins compared to this time last year.

Our pipeline remained strong. And as a result, our outlook for positive net flows is intact and we now expect flows in the third quarter to exceed the second quarter, marking the third straight quarter of sequential growth. Fourth quarter is when we typically see large case movement, which reduces our ability to forecast net flows at this point.

But we can provide more insight next quarter. In distribution, we had another strong quarter. The depth and breadth of our retail, wholesale and worksite teams continue to be a differentiator, enabling us to drive sequential increase in sales, I noted in my business segment commentary. Distribution also enables us to shift our business mix.

Notably, 69% of our total sales did not have long-term guarantees, up from 62% a year ago. We continue to invest in and grow our client facing professionals as total headcount now stands at over 1,400, up 3% versus the prior year.

These professionals help tell our compelling story to the 64,000 producers that sold Lincoln products over the past year and the 91,000 that have sold our products in the last 24 months.

You’ve heard we say many times that distribution is a competitive advantage for Lincoln and I expect this to continue, as our strong diverse distribution franchises are well-positioned to navigate future product and marketplace changes.

And briefly on investment management, we put new money to work in the second quarter at an average yield of 4.3%, which was up from 3.8% in the first quarter, as we benefited from rising market yields and asset mix. We continue to see value in less liquid asset classes where yields and underlying fundamentals remain attractive.

We are not reaching for yield in the low investment-grade assets, which represented 4.4% of purchases this quarter and is less than our total portfolios below investment grade assets at 5.2%.

Alternative investment income improved to $28 million, compared to $8 million in the first quarter with positive contributions from both our private equity and hedge funds strategies.

Lastly, with respect to the Department of Labor fiduciary standards proposal, consistent with the DOL's goals, we want Americans to buy the right product at the right price with a complete understanding of the cost and benefits. The tug and pull is around how best to achieve these objectives.

We submitted comment letters last week with our recommendations as to the number of other industry participants and major trade associations. Importantly, the DOL seems to be showing a willingness to listen and make changes to the proposal. We recognized there are questions on the implications to our business.

However, it is still early and hard to predict where this will end up. I would say if there is short-term sales disruption, lowering sales for some reason, we would be able to reallocate capital to share buybacks to blunt much of the earnings per share impact.

Over that period, we would be very active, pivoting to new products, expanding our reach in existing markets while accessing our broad and diverse set of producers to drive future sales growth. You’ve seen us do this repeatedly and very effectively across all product lines in the past 36 months.

And I'm confident we will once again respond to marketplace or regulatory changes effectively. In closing, I'm very pleased our actions taken to restore profitability in Group Protection are getting momentum.

Our investments in RPS position us well for future growth while in our life business, drivers continue to indicate mid-single digit earnings growth potential. In Annuities, we once again grew our high quality income stream.

Bottom line, as we continue to see sales grow with very attractive new business returns across our franchise, we are confident future earnings will follow. I will now turn the call over to Randy..

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 in fact, Annuity ROEs have consistently been exceeding 20% for several years now. Strong results from our hedge program combined with minimal policyholder behavior impact, further demonstrates the very high quality of our annuity income stream.

Importantly, we also remain disciplined in how we allocate capital to our Annuity business and this has not hampered our ability to maintain strong ROEs, something that Dennis mentioned earlier that we expect to continue. Turning to our Life Insurance segment. Earnings of $105 million were down due to elevated mortality.

Importantly, our claim counts declined as expected from a seasonally high first quarter. Sequentially, claim counts decreased 11%, while the year-over-year increase was consistent with in-force growth. Therefore, our adverse mortality this quarter was primarily driven by several large claims that resulted in abnormally high claims severity.

As I noted upfront, this negatively impacted earnings by $28 million. Let me bring you inside Lincoln’s private perspective on how we assess and analyze this quarter’s mortality results, including our key takeaways. Let’s start with account experience, which measures frequency.

This quarter was favorable 2% to our expectations, while amount experience which measures dollars of claims was unfavorable by 14%. Favorable account experience and unfavorable amount experience indicates claims severity as the underlying driver results.

On a statistical basis, this quarter was a 99 percentile kind of event, equivalent to a one in one hundred event. It’s a very uncommon. Included in this quarter's elevated claims severity was unfavorable experience in the large phase segment, meeting policies above $5 million.

Within this cohort was an unusual concentration of injury-related deaths, which occurred to policyholders in their 40s. It is also worth mentioning that the business we recaptured at year end was largely in line with our expectations and was not a driver of the quarter's adverse mortality.

We continue to expect to recapture transaction to be accretive to EPS. Quickly on life earnings drivers, average account values increased 5%, with in-force base amount of 3%, consistent with recent performance and our organic growth expectations. Normalized spreads came in at 165 basis points, down 3 basis points from the prior year.

Spread compression continues but it's definitely abating. So overall, adverse mortality results in the quarter, but our analysis points this being the quarter marked exclusively by volatility. We continue to expect that when viewed over more extended period of time, mortality experience will be in line with our longer term expectations.

And in fact, if you look at both count and amount experience, for more extended period of time, let’s say 2010 to 2014, we see that was right on top of our expectations. Our outlook for life insurance business remains positive marked by mid-single-digit driver growth, good returns on new business and prospects for spread compression to abate.

In retirement plan services, we reported earnings of $30 million. Account values benefited from positive net flows in the second quarter along with supportive equity markets and as a result, average account values increased sequentially and ended the quarter at $55 billion, up 5% versus the prior year.

Normalized spreads compressed 12 basis points versus the prior year quarter, consistent with our expectations for spreads that decline by 10 to 15 basis points annually in the retirement business.

Earnings were negatively impacted a $2 billion from expense anomalies that are unlikely to persist but I would note that results will continue to include incremental investments in IT and our sales force.

We expect these incremental investments to position us well for future growth, that when combined with rising interest rates should lead to earnings growth in RPS. Group protection earnings of $19 million were well above the $2 million reported in the prior year quarter and operating losses the past two quarters.

Loss ratios benefited from the pricing and claims management actions we have been implementing. Non-medical loss ratio improved from 78.1% in the first quarter to 73.6% this quarter. This marks our lowest loss ratios since the third quarter of 2013. Sequential progress was driven by improvement in all product lines, life, visibility and dental.

Our disability loss ratio improved 7 percentage points over the prior year as LTD incidents and recoveries continue to improve. Caseloads per claim examiner which were elevated are likely to reach targeted levels in the third quarter, which should help reduce some of our recent earnings volatility.

Excluding $10 million of accelerated amortization back in the first quarter, this marks our second straight quarter of solid earnings improvement. So we are encouraged by this momentum which reflects management actions aimed at restoring profitability. Nevertheless, claims can be volatile quarter to quarter.

Despite that I believe this quarter validates that we are in a path to an earnings recovery in Group Protection. Before moving to Q&A, let me comment on a few other items of note. Our business model continues to generate capital allowing us to support sales growth at very attractive returns, also allocating capital to shareholders.

Capital return remains a key focus and to this point, buyback totaled $150 million in the second quarter, moving us to $500 million year-to-date. Statutory surplus stands at $8.4 billion and we estimate our RBC ratio will end the quarter at approximately 505%, a very strong number.

Holding company cash ended the quarter at $545 million as we returned $250 million of debt in June. Recall that, we prefunded that maturity with our March debt offering. On prior conference calls, we have noted we remain comfortable with our leveraging capital structure.

As you know, our capital structure includes hybrid which move the floating rate coupons in 2016 and ‘17. I would like to point out though that we have entered into swaps to lock in the fixed rate, a fixed rate on those securities and our current intent is to hold them. So to conclude and looking forward, organic growth drivers are firmly intact.

Margin improvement and Group Protection is emerging. Abnormally high claim severity and individual life is unlikely to repeat. Enterprise expense discipline creates an earnings lever.

Spread compression is abating and at current rates, we expect to be at the low end of the 2% to 3% range we previously communicated and our outlook for capital management remains strong and is aligned with shareholders. With that, let me turn the call over to the operator for questions..

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..