Chris Giovanni - IR Dennis Glass - CEO Randy Freitag - CFO.

Suneet Kamath - UBS John Nadel - Piper Jaffray Tom Gallagher - Credit Suisse Seth Weiss - Bank of America Merrill Lynch Michael Kovac - Goldman Sachs Jimmy Bhullar - JPMorgan Ryan Krueger - Keefe, Bruyette & Woods Yaron Kinar - Deutsche Bank Humphrey Lee - Dowling & Partners Steven Schwartz - Raymond James & Associates.

Good morning. And thank you for joining Lincoln Financial Group's Third 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 like to turn the conference over to the Senior Vice President of Investor Relations, Chris Giovanni. Please go ahead, sir..

Thank you, Lauren. Good morning. And welcome to Lincoln Financial’s third 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.

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 question-and-answer portion of the call. I would now like to turn things over to Dennis..

Thank you, Chris, and good morning, everyone. This quarter was remarked by significant capital markets volatility, Lincoln's growth, profitability and capital management initiatives produced solid results.

Top line metrics were very strong as we benefited from a number of new product introduction, as a result we generated positive net flows in all our segments which led to a 17% increase in consolidated net flows while life insurance sales also grew 8%.

EPS excluding notable items in both periods increased 10% as we noted in the press release our annual plus function review reduced reported ESP [ph]. Never look back this was a non cash item and our balance sheet continues to be a stores up strength.

To this point our book value per share excluding AOCI increased 7% and buybacks accelerated to 200 million as capital generation remain solid. Bottom line our franchise earnings growth potential and balance sheet are all very strong. Equally important our quarterly result should mitigate several recent areas of investor uncertainty.

Notably individual life mortality returned to the normal levels following elevated experience in the first half of 2015. Annuity earnings proved be resilient despite market volatility and group protection produced stable results as we continue our past to a forward recovery in earnings. Now turning to our business lines starting with annuities.

Total annuity sales of 3.3 billion were steady with our quarterly average part of the past year which is a testament to our consistent approach for market. We are focused on delivering and diversifying the mix of our annuity sales and there are couple examples in this quarter.

First 27% of our VA sales did not have living benefits as we are well good and reach our strategic goal of 30%. Investor advantage our investment focus VA product remains an important contributor to this risk diversification strategy.

Also in October we amended our variable annuity reinsurance treaty we now have an additional $2 billion of capacity through year in 2016 which provides another lever for diversification.

Next, fixed annuity sales approached 600 million more than doubled of prior year and up 55% sequentially as we broadened our index annuity portfolio and expanded relationships. Market volatility in August also likely contributed the style of growth although it dampened VA sales.

This shift is just another example of the benefit of a diverse set of product offerings and meet different consumer needs. Subsequent to end of the quarter we introduced a new benefit again with the goal of diversifying our annuity portfolio and meeting different consumer preferences.

Our recently launched market select advantage is a variable annuity rider designed offer greater investment flexibility in a living benefit without the guaranteed roll up traditionally offered with GMWB's. Market select advantage is positioned to fill the gap between investment focused VA's and VA's with roll up living benefits.

Net flows in the quarter totaled 536 million as we continued to consistently generate positive organic growth. And this marks the second straight quarter of sequential improvement. Positive net flows has more than offset unfavorable equity fund performance as average account balances increased versus the prior period to 123 billion.

Our annuity business remains a high quality source of earnings. This was attributable to decisions we made over a decade ago when we entered the living benefit marketplace. Mainly fully hedging capital market risks and not participating in competitor feature awards, as a result we have produced a long track record of success.

I would encourage you all to look at our presentation in Barclay's financial conference last month.

In that we reviewed our extended record of positive net flows and e-growth [ph] that compares favorably to asset managers, when combined with effective risk management and a movement to a lower risk profile, I continue to believe this business is very under appreciated.

Turning to individual life, total life insurance sales in the quarter were $173, an 8% increase from the prior year quarter, while individual life insurance sales increased 5%. Overall sales once again achieved our expected per rate returns of 12% to 15%.

Digging into a few noteworthy product stories MoneyGuard sales increased 21% as we are benefiting from continued market acceptance of our MoneyGuard II product and traction in recently approved sales. Indexed Universal Life sales increased 17% due to the success of new product launches.

Momentum should continue as new regulations that began in September required many competitors to make significant reductions in maximum illustration rates as a result, our market position should improve, product portfolio diversification continues to be a strategic focus within our life business as well.

This quarter no single product represented more than 30% of our total production and 67% of our sales did not have long-term guarantees up from 63% in the prior year quarter. Overall, key business drivers indicate mid-single digit earnings growth potential for our life insurance business consistent with our expectations.

Turning to Group Protection, we are pleased with the continued progress we're making with our re-pricing efforts and the improvements of our claims management effectiveness. Overall earnings increased from depressed results in the prior year quarter and we're consistent with the second quarter as we work towards achieving our targeted margins.

Third quarter sales $61 million were down as our pricing actions continue to put pressure on new business opportunities. Despite this pressure, we're pleased with our continued progress to improve the contribution of the more profitable employee head, voluntary market.

In the quarter 49% of our sales were employee paid, up from 45% in the prior year quarter. It is worth noting, we do see momentum building in our sales pipeline going into the fourth quarter, which is important as this quarter typically contributes about 50% of full year sales.

In retirement planned services, third quarter deposits of $1.9 billion were up 17% from a year ago and it included growth in both the small and mid-to-large market. First year sales increased 65% as our investments in our sales force and technology continued to gain momentum.

Net flows of 251 million marked to third consecutive quarter of positive net flows and increased our year to date totals to $673 million compared to just $55 million in the prior year. The fourth quarter is when we typically see large case movement.

To this point, we were recently notified the case termination, as a result we expect to have negative flows in fourth quarter, however our annual net flows will be positive and marked a significant improvement from last year.

Bottom line our pipeline remains robust and we're confident our growth can outpace the market as our strategic investments improve our infrastructure and deepen our relationships and value proposition with consultants, plan sponsors and participants.

In distribution, we differentiate ourselves in marketplace through our retail, wholesale and worksite teams that once again delivered exceptional results. Strong sales growth noted in many products within the business section has been on our terms and importantly aligns with our business mix shift.

Our 1,400 client facing professionals and base of 91,000 producers has sold Lincoln products over the past two years continued to be a strategic advantage.

We remain focused on increasing productivity of this sales force and to this point, sales driven by distributors where we have multiple products on their platforms increase sequentially in key cross-sell areas, such as RPS, MoneyGuard and fixed annuities.

In the quarter Lincoln Financial National network produced year-over-year sales growth across life annuities and RPS as the retail advisor network of 8,300 delivered our valuable customer solutions.

We’ll continue to invest in already deepen and powerful distribution to drive future growth and pivot to products that clients need and that Lincoln is uniquely positioned to offer. Lastly, on investment management, we put new money to work in the third quarter at an average yield of 4.4% about 10 basis points above the prior quarter.

We benefitted from higher average treasure rates and wider spread. The investment portfolio quality remains strong with investment grade assets representing just 5% of our fixed maturity portfolio down slightly from the prior year.

Our alternatives portfolio was a strong contributor to investment income in the quarter, alternatives now represents 1.3% of our total invested assets and has steadily grown towards our long-term target of 1.5%. As we expand this portfolio, we expect to drive further growth in alternative investment income.

In closing underlying EPS growth of 10% is consistent with the target we provided at our investment -- Investor Day last year driven by organic earning, modest capital tailwinds and effective capital management.

We remain confident in our ability to drive earnings growth as we leveraged attractive growth opportunities, enforce margin improvement and our strong balance sheet which supports our active capital allocation. I’ll now turn the call over to Randy..

Thank you, Dennis. Last night, we reported income from operations of 289 million, or a $1.11 per share for the third quarter. As Dennis noted, excluding notable items, EPS increased 10% year-over-year as this quarter was negatively impacted by $0.55, primarily from our annual review of debt consumptions.

While last year’s third quarter benefited $0.05 largely from the annual review. This year's DAC assumption review results were driven by $121 million negative impact from lowering our long-term earned rate assumption by 50 basis points.

A couple of important items to note, this is a non-cash charge and the impact was consistent with the sensitivity we previously provided, recall we last lowered this assumption three years ago also by 50 basis points.

Outside of changing our long-term earned rate assumptions there were a series of pluses and minuses that meted to a modest positive impact to operating earnings of 7 million. A few comments on this year’s review process. With the 50 basis point reduction in our long-term earned rate we are very well positioned with this particular assumption.

Our ultimate earned rate now assumes only modest annual increases from today’s level, increases that are largely in line with the forward curve and significantly below the rate implied by the Federal Reserve’s own expectation.

In conjunction with the 50 basis point reduction and our long-term earned rate, we lowered our separate account return assumption by a similar amount. I will discuss this in more detail in the annuity section of my remarks.

Every year we go through this extensive review of all of the assumptions underlying our debt balances and we consistently have come back with the same results that is that when viewed in total the assumptions underlying our balance sheet are sound. In fact over the past five years the cumulative impact has been just 0.3% of our equity.

During the same period of time our book value per share excluding AOCI has grown by approximately 40, including 7% this year to $51.47, an all-time high. Moving to the performance of key financial metrics, all which normalized for notable items.

The top-line continues to show growth with operating revenues up 2% driven by another quarter of positive net flows.

Our forward segment showed year-over-year growth in earnings, operating return on equity came in at 13.5% and finally, our balance sheet remains an important source of strength providing a significant financial flexibility and an ability opportunistically respond to marketplace dislocations.

One other item of note before shifting to segment results and that is investment, again this quarter was strong with alternative running 11 million after tax and DAC ahead of our targeted returns. Prepayment related investment income remains elevated but was right in line with our quarterly average of the past three years.

Now to business results and starting with annuities. Reported earnings for the quarter were 259 million, a 6% increase over last year. Net favorable items this quarter totaled 5 million, primarily related to taxes with 1 million of the total coming from the net impact of our DAC assumption review.

As I noted earlier we did lower our separate account return assumption which is an important input inside annuities DAC models. This reduction brought our return assumption down to 7.6% compared to 8.2% last year. We did not unlock our reversion for the main corridor, this currently still provides a cushion against weak equity markets.

Return metrics remained strong and consistent with recent periods. ROA increased 3 basis points versus the prior year while ROE came in at 24%, again an outstanding result. So overall our annuity business continues to generate organic growth and excellent returns.

The financial impact of changes to assumptions that underlie the earnings and valuation of the business was minimal and are a testament to this being a well-managed and strong high quality source of earnings. Turning to our Life Insurance segment.

Our annual assumption review had the greatest impact on life operations as reported earnings was 36 million. $118 million of the $121 million earnings impact I noted upfront from lowering our long-term merger rate assumption sell within the life's business. We now assume an ultimate rate of 5.25%, down from 5.75%.

All the other items that went into the unlocking process resulted in a benefit to earnings of 1 million. Excluding notable items earnings increased 2% over the prior year quarter and notably mortality returned to normal levels following elevated experience in the first half of 2015.

We continue to expect mortality to perform in line with pricing as we look forward. Normalized spreads came in at 165 basis points down 1 basis points from the prior year. Quickly on life earnings drivers.

Average account values increased 4% with total in-force base amount of 3%, consistent with recent performance in our mid-single digit organic growth expectations. In the group protection segment earnings were 17 million more than double the prior year quarter and were consistent with the second quarter.

Our non-medical loss ratio improved to 74.5% from 77.6% in the prior year quarter driven by improvement in all product lines life, disability and dental. A disability loss ratio did increase sequentially which I would attribute to normal quarter-to-quarter volatility.

Of price inactions continue to have a favorable impact on margins, but they have negatively impacted persistency in sales. The result is non-medical earned premiums decreased 1% compared to the prior year quarter. Overall, I believe we have another quarter that validates that we are on a pass to an earnings recovery in group protection.

In retirement planned services we reported earnings of $42 million compared to $40 million in the prior year quarter. This quarter's earnings benefited by $2 million from the annual review of modeled assumptions.

Earnings benefited this quarter from strong investment results including alternative in prepayment income while normalized spreads compressed 10 basis points versus the prior year quarter at the low end of our expectations.

Account values have benefitted from several quarters of positive net flows, when combined with modest negative changes in equity markets over the past year average account values increased 1% to $54 billion.

Year-to-date our ROA is 26 basis points, a level I expects to be a good proxy in the intermediate term as we continue to make investments in the business to position us well to future growth. Before I move into Q&A let me comment on capital. We have a proven ability to generate free cash flow and a track record of returning cash to shareholders.

This quarter we repurchase 200 million of Lincoln shares as we reacted to some weakness in the share price resulting in incremental buyback below book value. Year-to-date we have repurchased $700 million of stock which is consistent with our full year guidance. With that said we expect to remain active in the fourth quarter.

We also announced a 25% increase in our shareholder dividend as we have noted in the past we anticipate growing and maintaining a competitive dividend. As you can see by this quarter's results and more importantly over an extended period of time capital allocation remains a key priority for Lincoln.

Holding company cash ended the quarter at $505 million and statutory surplus stands at 8.3 billion, while we estimate our RBC ratio will end the quarter at approximately 495%.

So to conclude statutory and GAAP balance sheets are both in very solid positions as evidenced by strong RBC and holding company cash positions and our annual assumption review did not compromise steady growth and book value per share ex-AOCI. Organic growth drivers are firmly intact with another quarter of positive net flows across the enterprise.

Mortality returned to normal level following elevated experience earlier in the year. Annuity earnings remained a high quality source of income and proved to be resilient by market volatility and we took advantage of weakness in the share price with incremental buyback of the lower booked value.

With that, let me turn the call over to the operator for questions. .

[Operator Instructions] Our first question comes from Suneet Kamath from UBS. Your line is open. .

I wanted to start with the Department of Labor issue.

I realize that they're still in deliberations in terms of the final proposal but I was wondering, Dennis, if you could give us a sense of how conversations are going with some of your distribution partners related to scenarios for potential outcomes? I guess there's been some talk in the press about your annuity sales maybe being cut in half for some period of time, if the proposal passes as originally proposed.

So I just wanted to get a sense of how you're thinking about either relationship with your distribution partners and the outlook for VAs? Thanks..

Suneet, let me speak to the DOL and the specific issue of having a reasonable regulation to permit the sales of variable annuities on a commission basis into IRAs. That's the biggest area that -- it's the area of focus for Lincoln and the area that we’ve tried and have successfully gotten a correlation of annuity manufacturers to focus on.

On that issue, we continue -- I'm not updating anything from what I've said in the past, but we continue to feel optimistic based on discussions -- direct discussions with DOL staff, that they are giving consideration to permit this to occur.

So on that's specification issue we remain pretty optimistic and if that were to happen, I think the idea of VA sales being cut by 50% for IRAs over the qualified market would be way overshot, so that's that.

With respect to our other distributors, we keep repeating, we have a large number of distributors, every one of those distributors is looking at DOL, if it impacts them and trying to anticipate for the rules were or might be and what reaction they might have to take.

So we're in discussions with them, we are aware of the issues, we are developing backup plans, some of our distributors modestly changed their business models and that's as much as we know today..

Thanks, I guess one for Randy. On the Alternative investment income, I was a little surprised that it was so strong in the quarter just given the choppy capital markets.

Can you give us a sense of, one, where the strength came from and then two, is there any kind of lag that we need to think about in terms of how this alternative investment income actually flows through?.

Well, thanks for the question. It was a strong quarter for alternatives as I mentioned, it was 11 million after tax and DAC above expectations.

When you view it over a longer term, if you look at for instance the full-year, this year, we're actually right on top of our expectations of a 10% yield to that portfolio and that's by and large the case over the last couple of years also, so I don't think of the performance of the alternatives over an extended period of time of being out of bounds with our expectations, in terms of where that performance came this year, I think consistent with what you have in alternatives, it's oftentimes depends on where you're positioned, are you in the hedge fund that didn't too bad or didn't too good, are you in PE that has a particularly good quarter? I think we experienced that this quarter, we had upper tick PEs that just had good quarters and they had valuation events which led to strong evaluations which led to the strong results.

In terms of predicting the future, I’m going to stay out of that game, I will stick to what I say and when I say, that over an extended period of time, we'll expect to see and I think we'll see a 10% return from out of this book of business, predicting what you're going to have in any particular quarter is difficult to gain that -- I will choose not to endeavor in it..

I understood, I was more asking about if third quarter results are a true reflection of the capital markets environment in the third quarter or was there a little bit of a spillover from the second quarter because of some sort of a lag in terms of how alternatives are reported to you?.

I think third quarter was reflective of what you see in this business, it's a small piece of the portfolio, it’s a limited number holding.

This quarter we had some of those that really performed strong and that's what you’re going to have, so you get some pieces of that didn't perform so well but we have a certain number of pieces that really performed stronger, and that's what you are going to see in this sort of business.

With that over time you will continue to see the result in this business perform in line with our expectations..

Our next question comes from John Nadel from Piper Jefferies. Your line is open..

Really a question about the mix of Annuity sales. And I'm sorry if, Dennis, you addressed it in your prepared remarks because I hopped on just a little bit late.

I was curious about the year-over-year and the quarter-over-quarter decline in variable Annuity sales but obviously a very significant pickup in the pace of what you characterized as fixed annuities. I'm sure it was more driven by or I'm suspecting it's more driven by index.

Whether you believe that that's an indication of distributors shifting in response to DOL or whether you think that was really much more about just shifting preferences during a period of heightened market volatility?.

We think it more of the later, we think in general whether it’s BA or its mutual fund, spikes in volatility kill sales of those products and consumers get more conservative. We think that’s by BA sales were dampened a little bit against volatility, it’s also why we think in a part indexed annuities picked up a little share.

What we continue to point to is that we have the shelf space and the products to be able to sell as consumer preferences shift. And this is a good example of that.

We’re continuing to focus throughout the businesses improving products, adding a better distribution, well improving products from a return standpoint by having greater diversification and breath of product. So we can be successful as consumer preferences and market condition change.

So its answer to the first part, is there a hint of the DOL in these sales, it is hard to say..

Okay.

It's hard to say..

And then sort of along those same lines, if you could choose to -- the next $1 billion of annuity sales manufactured by Lincoln and I gave you the choice between its 100% variable annuities or 100% indexed annuities, what's your choice?.

Surely what the consumer's choice is more than my choice?.

I get that. It's a hypothetical. But I'm more interested around capital allocation, return potential, mix of business, that sort of thing..

Then I’ll just fall back on our guidance on strategy in terms of mix. We are very comfortable with 78% of our sales going into BA products that’s have one or the other degree of living benefits.

I mentioned we offered a product or just started offering the product, has a little bit more investment flexibility but a little bit less income because we don’t have roll up in it and I think that is a pretty good addition to the portfolio -- BA portfolio that we have inside that 78% guarantee, it diversifies risk as the little bit, and it also helps in the market place, all the financial advisors be it little bit more crisp for their clients in discussing investment only, no guarantee of products, products with a stronger guarantee and now a middle of the road products.

So we think that’s a pretty good addition, I still think the two ends of that spectrum are going to see the most attraction, but we do expect that middle segment to get good sales.

Let me just finish up, so that’s VA on the fixed annuity side just part of the 30% and we're comfortable with that, I think the returns are a little bit less then what we’ve seen on the variable annuities. So we want manage that mix a little bit..

Okay. Got it. And then just one quick follow-up also related to the VA block and that is, obviously we saw a period of very heightened market volatility.

I'm just curious how you feel about how the self-hedging or the internal hedging, I forget the exact term, funds performed this quarter and how you can relate that to -- I know your overall hedge program had a little bit more breakage than I think is typical -- to the volatility managed fund? Thank you..

Let me speak, the risk managed funds in general across the industry whether it's in the mutual fund business or in VA business, did it perform as well in this period of heightened volatility. So there was couple of questions about risk management funds performance across all industries, not just the VA industry.

Overtime these are designed with a long-term to provide a smoother path of returns for the consumers and we think that’s a good thing. So I wouldn’t react too much for the fact in a sixty day period, they didn’t perform as well.

And randy you want to speak too?.

Sure John, on the hedge program performance, there was more breakage this quarter than we have been experienced or that we typically inexperience in the quarter. Couple of comments, it was a quarter with significant amount of volatility in the capital markets to scale that, I think over half the days you saw intraday movements of greater than 1%.

When you have that you're going to have some level of breakage and you also -- what you see when you have those sorts of days as you also actually have your trading costs go up which sort of manifests itself as breakage also, as you just trading a lot, as you're chasing the liability around.

So I am not surprised in a quarter with that sort of volatility to have some level of breakage. I think what exacerbated it little bit this quarter is the fact that we had our funds underperform in their indexes also.

I’ll just remind you the fund basis risk is what you call overtime if you look at the last decade that’s a number that summed up essentially to zero for us. So you know that’s the number that can come and go, so I wouldn’t be surprised to see that come back at some point in time.

But it's when you get both those sort of items, a very volatile quarter on the capital markets, you combine it with that fund basis risk and you have a quarter like we did this quarter with a little more breakage.

I would point out when viewed over more extended period of time, I think last time I looked at this I looked at it over the last six years breakage and the hedge program was a 1% to 2% impact on the overall ROE.

I think the whole overall ROE over that period was 22% and if you included the below the line items it was just 1% to 2% reduction from that, so still very, very confident in performance in the hedge program over more extended period of time, but understand that this quarter did have a little more breakage than usual..

Okay, understand. Thank you so much for the color and the answers..

Our next question comes from Tom Gallagher, Credit Suisse. Your line is open..

Randy, wanted to start with the lowering of the long-term separate account return assumptions down to 7.6. Can you take us underneath the covers a little bit, explain how that affected the balance sheet review? You didn't have any charge associated with that.

What would have been some of the offsetting adjustments?.

Sure, well it's primarily an item, essentially all the impact shows up in the annuity business. You get a little bit in the life business and a real little bit in the RPS business. It's primarily an item that impacts the annuity business.

Really the driver of the reduction, Tom, I would really point to what drove us to lower our ultimate earned rate assumption, essentially a reflection that risk free rates are going to be a little lower when you look forward and that said through to our thoughts on what overall capital markets returns would be.

So as I mentioned we ended up lowering the separate account return assumption by a similar amount to what we lowered that J-curve assumption. In terms of the impact as I mentioned is primarily in the Annuity business.

It was definitely a negative item, not going to get into sizing of the dollar amount, but it was definitely negative, it was offset inside of annuities by all the other assumptions that go into the process, lapses, fee income, all those other items that go into the process add it up to be a positive number that offsets the negative number that was caused by lowering the separate account return assumption..

Okay.

And then what's the size of the reversion to mean equity cushion as of the end of this quarter?.

In total it’s in the range of $165 million, 130 million of that in the annuity business with small pieces in life and RPS..

Got you. And then Randy, after making that change, any impact on earnings? I presume there's going to be some change in DAC amortization after you change the separate account return assumptions.

But should we think about any go-forward operating earnings impact that's meaningful at all?.

Tom both the J-curve and the separate account return assumption have modest negative impacts on run rate earnings, it's not a number I’m going to spike out and say that, I would see significant changes to your models. Both of them have modest negative impacts on run rate..

Okay. And then last question.

Just in lieu of what's happened in the Life business including the adjustment this quarter, any impact on goodwill testing that we should think about for next quarter or is there still enough margin there?.

Yes and once again you know we do this analysis in the fourth quarter, so I’m not going to get ahead of all that analysis and I am going to look to the items I have talked about in the past when it comes to goodwill testing.

The big drivers, first off we have two business that have typically gone to step two of a goodwill analysis, Life Insurance and Group Protection. The big drivers of goodwill for those businesses are the level of sales, the profitability on those sales, the discount rates you apply to those sales.

When you look at those three metrics, I think they continue to run strong.

Life sales continue to grow, group sales while down are still very strong relative to the size of that book to business, profitability on life sales remain strong, profitability on group business we’ve talked about remains strong and discount rates are nowhere but down compared to where they were in past year.

So the big three items that I think about, when I'm open to think about what might be coming on good will, seemed to be pointed in a favorable direction, so we’ll go ahead and do the analysis in the fourth quarter. .

Okay. And if I could just sneak in one last one on, I saw the RBC $495 million still pretty strong despite the pickup in buybacks.

How about if you looked at consolidated capitalization of the Company, any meaningful changes to Hodlco cash during the quarter?.

Hodlco cash came down a little bit, I think it came down from maybe in the 540 to the 505 range, so it came down a little bit, but it still in excess of our targeted amount 500 million, it’s very comfortable there. Overall RBC at 495 as you mentioned remains very strong and very supportive of continued capital deployment as you’ve seen in the past..

Our next question comes from Seth Weiss from Bank of America. Your line is open..

Randy, last quarter I think you commented on expectations to perhaps do a reserve financing transaction in the back half of the year.

Could you just provide an update on that, please?.

Yes, so thanks for the question. We do expect to do a reserve financing transaction in the fourth quarter, it’s around term business that we've written over the last couple of years, so I’d expect to see that come to as a positive item on capital in the fourth quarter..

Okay.

And are you able to size that for us or too early to say?.

In the range and we've typically talked about a couple of $100 million being fairly typical, in that area, maybe a little better but in that area..

Great. Thanks. And Dennis, if I could just return to the DOL topic for a moment. The comments today I think are pretty consistent with what you said at the industry conference last month in terms of DOL staff giving consideration to permit commissioned sales to occur.

From what we're hearing here, our impression was that avenue was through the best interest contract which has obviously gotten pushback from the VA manufacturer community.

So I'm just curious, when you say that your discussions have yielded this cautious optimism, are you hearing anything different when it comes to maybe a separate VA carve-out or inclusion in the 8424 exemption?.

You've touched on the two big paths to the right answer, and if you look at the letter that was signed by eight or nine of these annuity companies of both -- our first choice would be to put VAs backs in 8424, the way 8424 exist.

It was that way for 30 years, it was that way in 2010 initial proposal and it’s only in this later proposal -- I think it was 2010 as knowing this later proposal what was moved into best interest contract exemption. But if remains -- I guess if I had to -- it’s more uphill on 8424.

But if it's in the best interest, contracting exemption has the be provided a framework for in our letters, I think they’ll still give consideration to separating out annuities from mutual funds because it's just different. So that’s more detailed to just go and take a look at our letter, it's pretty consistent with what I've just said..

Our next question comes from Michael Kovac from Goldman Sachs. Your line is open..

Great. Thanks. This is maybe for Dennis. You talked about the risked managed funds and I guess I was a little surprised that they underperformed in this period given I imagine that a consumer is really buying them to outperform exactly in the kind of market that we saw in the third quarter.

As you spoke to, this is not really a Lincoln specific, but more of an industry issue. I guess I'm wondering what are your thoughts going forward on the consumer appetites for this kind of product, particularly in VA, if it is underperforming in a volatile and sort of a rising market as well..

I think that the -- I’m going to speak very generally here, these overlays are intended to operate over a long period of time and they should perform well over a long period of time, all the back testing and that's done in the development of the products suggest that.

I would characterize the last 90 days as unusual in the sense that you has so many V shaped patterns to the S&P market in such a short period of time, Randy addressed that in the discussion of the hedging program and why that volatility lead to some more breakage, similarly I discussed volatility just as a chilling effect on equity based product in general, mutual funds and VAs.

And the other point I would say is that even though the risk management overlay and the performance is improved a little bit by the way in the last 30 days again, this is industry wide.

Remember that this is at the end of the spectrum of product design where people pay a lot of attention to the guarantee and the guarantee is working for them just as it should, the roll ups working, the payout down the road is still what the expectations are.

So I think it would be hard to say based on 90 days, the consumers are cooling over the long-term or not again I think, you have to take control of the expectations by the consumer both in terms of fund performance as well as guarantee on these products, remember the only way you can get the high income guarantee in the industry with maybe one exception is through the use of risk managed funds, does that helpful?.

Yes, that's helpful. And then if I could, one more on VA here? It sounded like you added an additional $2 billion to your reinsurance capacity for this product.

What do you see as the appetite from reinsurers to this type of risk? Do you see more participants in the market or any changing terms that you got on this transaction versus prior?.

Randy, could you take that please?.

Yes, Michael the extension was with the same company that we have the reinsurer’s treaty with previously. I would describe the overall environment is still relatively modest from the number of people who are -- I think you see a little more interest.

I think the very fact that the company we did our deal with, did the deal, raised some interest and has caused some people to look at it. But I don't think it’s the huge number of participants you get out there in the marketplace.

We'll continue to work, I think, we obviously have a lot of connections anybody who would be interested in doing reinsurance is naturally going to be in discussion with us and we'll continue those sorts of discussions, but I wouldn't describe the marketplace as robust. .

Our next question comes from Jimmy Bhullar from J.P. Morgan. Your line is open. .

So Randy, I had a question on just your repricing of the disability book. If you could describe how much you're done or will be done by the end of this year and what's the environment like in terms of clients absorbing price hikes? Your sales I think this quarter were down 35%.

As we look at year-end renewing cycles, should we expect a similar decline in sales and then obviously weaker revenues next year?.

I think, I will take that. At the highest, so we start at the high level answer to that question.

About 78% of the business that we have to reprice because it was poorly priced a couple of years ago --the business that was poorly priced a couple of years ago, we're about 78% of the way through and so we have a little bit more to do, but a good example by the way on that business is year-to-date on the premium that we retain we’ve gotten really high middle single digit improvements in margins, our pricing activities are proving out to be successful and that earnings will flow into the income statement over time.

As I mentioned in my remarks, the pipeline of sales is above and that's a good indicator of premium growth or sales momentum. With respect to the retention rate of business as we go through the next 60 to 90 days of re-pricing based on what we're doing, we would think the retention might be a little bit better than 60%, but will have to see..

And then on the legal loss, you've had higher legal expenses for the past couple of quarters.

I think partly this is related to your Life Insurance business but to what extent do you expect them to sustain or are the issues behind you now?.

We have a pretty good review of aggregate litigation issues in our SEC filings and so I'm not going to get into very specific answer to this question, I’ve watched this over the last decade, litigation, ebbs and flows for all companies, insurance companies, financial services companies as well, I think there is no exceptional to that, sort of the aggregate amount of cases that you have and the severity of those cases at any one point in time ebb and flow, we’ll continue to see that.

I do not expect that particularly this quarter would be any indication of a normal level of legal expense.

Our next question comes from Ryan Krueger from KBW. Your line is open..

Hey, thanks. Good morning. I had a follow-up for Randy.

I know you mentioned that mortality was in line but can you give us any more detail on either actual-to-expected mortality or another metric that you look at and maybe how it compared to the year ago quarter?.

Yes, I think compared to the year ago quarter, I described both quarters as in line with our expectations. So our expectations are for a number that typically travels in the 80% and we’re right in that range. So I don’t think there was anything abnormal about either quarter.

Of course the first-half there we had elevated experience, I would have loved to see it coming below expectations, but it doesn’t, it came in sort of right in line with our expectations, very similar to where we were last year in the third quarter..

Okay. Thanks. And then in the annuity business, the normalized ROA was 83 basis points which was up a bit from the second quarter despite the weaker market.

Do you think that the 83 basis points is a good run rate going forward or should we be thinking about anything else there?.

As we mentioned, I think both Dennis and I mentioned we're very happy with the resilience of annuity results despite the drag of the markets. In terms of what we would expect, I mentioned that the business had 5 million of items primarily favorable tax item little bit 1 million or so from the unlocking process.

We also mentioned that Alternative Investment income added 11 million across the enterprise most of that was in Life, but annuity got a little bit of it, couple of million and then the prepayment income. If you look at last quarter prepayment income was actually very low, whereas this quarter it was strong.

Which is sort of reflective of the nature of prepayment income. Quarter-to-quarter is going to hop around, but over the last three years if you look over a calendar year period, it’s been very very steady in the amounts that we’ve received, in fact was very similar to the amount we received this quarter.

So I think the fact that it hopped up had to do with, one, first and foremost the resilient for the business and secondly, strong performance in the investment portfolio..

Got it. And then just last one real quick.

Do you have an update on the assets and liabilities in the VA assets?.

They continue to run very strong, so assets exceed the hedge target by $1.4 billion I believe at the end of the quarter, so it's still a very comfortable margin and they also exceed the statutory reserve credit by a significant amount $800 million, $900 million, in excess of statutory reserve credit needed.

So in a very good position on assets, of course they had hedge performance in the quarter, heard that little bit, but once again look at hedge performance over an expanded period of time, I wouldn’t expect to see this sort of quarter repeated..

Our next question comes from Yaron Kinar from Deutsche Bank. Your line is open..

Hi, good morning. All my questions have been answered. Thank you..

Our next question comes from Humphrey Lee from Dowling & Partners. Your line is open..

Just have a question about the latest NAIC proposal about eliminating -- potentially eliminating the use of VA captives.

Any color or comments from the proposal?.

Yes, the -- let me explain what the problem is to begin with, and that is that statutory accounting is on a book value basis and hedging typically is on an economic basis and in entail situations those two things can different. And so it could create some temporary capital calls and severe capital market conditions.

I think the regulators understand the idea that a regulated company having prepared against one risk and because of it’s the exact opposite of the other risk, not being able to protect that other risk is not in good regulatory situation.

So the industry and the regulators are striving to achieve a regulatory framework that permits all of us to probably hedge the risk that we undertake.

The NAIC is hired Oliver Wyman as a consultant, Oliver Wyman has put out his first report and although much needs to be -- there is a lot of detailing into it, the initial report seems to get at solving this problem.

So at this point we’re encouraged, there is a long way to go and Lincoln is active as we typically are in working with regulators on this issue. But I met regularly with the regulators. I think there's a pretty good sense of let's get to a good answer for the regulators and let's get a good answer for the industry..

I think at least from my understanding there will be some -- obviously some positives and negatives and to the extent that the capital requirement may turn out to be lower or maybe more on an economic base as opposed to a prescribed model and at the same time you may get some benefits from better ignition of the attached assets.

So those would potentially to provide some offsets if there's some challenges to the use of captives.

Would that be a fair statement?.

You said a lot of -- you gave us a lot of issues in there and I’ll just fall back to, the issue is to get a regulation that makes sense with the industry and to the regulators, again the situation now in book value versus economic creating a problem, we are making progress on that issue and some of the things that you've mentioned are helpful on that specific issues, some of them I wasn’t quite sure of where they are in discussions right now, but again overall it's positive and we’re all regulators and the industry is hopeful that we can get to a solution that makes sense for everyone..

Thanks. And then just one last question for Randy. So you talked about fourth quarter in terms of buybacks will remain active and then you also mentioned about the potential reserve financing in the fourth quarter.

Should we think about the buyback were largely driven by reserve financing or do you still have some kind of free cash flow generation capacity that would add onto the reserve financing?.

When you think about overall buybacks we’re 700 million year-to-date, so that's over tax full year guidance, we came into the year and that’s reflective of a number of things including strong capital generation, continued strong performance from the company.

When you look to the fourth quarters specifically I think I would describe my expectations coming in the quarter as sort of as a normal quarter, alright.

We've been running in that 150 range on the 2,550 range, so I don’t go into the quarter with any expectations for anything outside, but we continue to have a very strong balance sheet and we continue to have the capability to step in when we see dislocations in the marketplace as we did in the third quarter when we stepped in and hopped the buyback amount, when we saw the share price dip below book value..

Our next question comes from Steven Schwartz from Raymond James. Your line is open..

A couple of quickies. Dennis, you mentioned the loss of a large case of retirement plan in the fourth quarter.

I was hoping that maybe you could size it for us and give us a little background? And then for Randy, I would follow up Tom's question and ask about the actuarial assumption review and what kind of effect that might have on a go forward basis for the life business?.

The case was about 600 million to 675 million in that range.

And Randy you want to take the rest of that?.

Sure, Steven, I'm not going to go beyond what I said earlier, which is both assumption changes and the primary one that impacts the Life business happens to be the change in the J-curve ultimate earned rate, we have modest negative impacts on run rate or so there will be a modest negative impact on Life earnings.

I don't think of it as a number that would significantly change your models or your expectations. The business continues to grow also, as I mentioned. Drivers in that business continue to grow 3%, 4%.

So while there will be a modest negative impact for a period of time, it's not a number that I can consider to be as such that I'm going to spike anything out. .

Okay. Thanks, Randy. I thought you were just referring to Annuities at the time. .

But Steven just back for the question on the outflow, I do around want to reinforce and repeat what I said earlier which is. We expect flows to be positive in RPS to the year, which is quite an improvement over where we were last year..

Dennis, what's the background of that loss? Is it a merger? Is it pricing? Can you fill that out?.

Pricing and again losing businesses -- a good thing but the minimum guarantee in that contract was pretty high and still we weren’t making a lot of money on it and so weren’t as competitive as some other were to get the business..

At this time I'm showing no further question. I would like to turn the call back over to Mr. Chris Giovanni for closing remarks..

Thank you all for joining us this morning. Apologizes I'm running a few minutes over. But as always, we are around to take your questions at the Investor Relations line at (800) 237-2920 or through email at investorrelations@lfg.com. Thank you and have a good day..

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