Lincoln National Corp (LNC) 2015 Q2 法說會逐字稿

Good morning, and thank you for joining Lincoln Financial Group's second-quarter 2015 earnings conference call.

(Operator Instructions )

At this time, I would now like to turn the conference over to Senior Vice President of Investor Relations, Chris Giovanni. Please go ahead, sir.

Thank you, Bridgette. Good morning, and welcome to Lincoln Financial Group'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 the most comparable GAAP measures. Presenting on today's call are Dennis Glass, President and Chief Executive Officer; and Randy Freitag, Chief Financial Officer. After the 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 year, 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 core 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 the first quarter, increased 9% or more in all of our businesses, and we continue to benefit from various product introductions and refinements. Importantly, our mix of sales is increasingly diversified and returns on new business remain 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 earnings progress was masked by adverse Individual Life mortality, but our positive outlook for this business has not changed, 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 provided in the first quarter. Recall, we expected 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 attained. This quarter we reached 28%, marking the eighth straight quarter of sequential increases. When factoring in the impact on sales covered by our reinsurance treaty, non-guaranteed products comprised 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 balances 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 recognize there will be a focus 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 results benefit from a large COLI sale. Sales across our Aggregate Life portfolio continue to achieve our 12% to 15% pro-rate for returns. The strength of our distribution, along with product breadth, 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 released in 2014.

Indexed Universal Life sales are growing as the marketplace adapts to new illustration requirements that take place beginning September 1. Growth in these two products is being offset by decline in VUL and term, although we expect new product launches to help drive future sales in these products.

Our outlook for the life insurance business remains positive. Drivers continue to indicate mid-single digit earnings growth as our diversified product portfolio, combined with depth and breadth 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 our sales were employee paid, up slightly year-over-year. So, the bottom line in Group Protection is, we are encouraged by the earnings improvement we saw this quarter, Management action aims at restoring profitability are gaining traction and position us 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, both underlying business drivers remain 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 pick up in first year sales activity. We believe this momentum is driven by investments we are 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 remain 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 is being driven by a number of factors, including strong 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 remains 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 the 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 me 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 below 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 fund 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 place 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 did a 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 recognize 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 the 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 am 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 gaining 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. The bottom line is we continue to see sales grow with very attractive new business returns across our franchise, we are confident future earnings growth 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 $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 claim severity should be noted.

This quarter, we produced positive results in several key performance metrics. The top line 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 flows reaching $224 billion, 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 sheets remains well-positioned, 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 remained 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 four 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 policy holder behavior impacts, further demonstrates the 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 count 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 claim severity. As I noted up front, this negatively impacted earnings by $28 million.

Let me bring you inside Lincoln's to provide 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 indicate the claims severity as the underlying driver of results. On a statistical basis, this quarter was a 99th percentile kind of event, equivalent to a 1 in 100 event, so very uncommon.

Included in this quarter's elevated claims severity was unfavorable experience in the large face segment, meaning policies above $5 million. Within this cohort was an unusual concentration of injury related deaths, which occurred to policyholders in their 40s. It's 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 recapture transactions to be accretive to EPS.

Quickly on life earnings drivers. Average account values increased 5% with in force face amount up 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 is definitely abating.

So overall, adverse mortality results in the quarter, but our analysis points to this being the quarter marked exclusively by volatility. We continue to expect that when viewed over a 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 over a more extended period of time, say 2010 to 2014, we see that it was right on top of our expectations. Our outlook for our 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. 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 expectation for spreads to decline by 10 to 15 basis points annually in the retirement business.

Earnings were negatively impacted a couple billion dollars from expense anomalies that are unlikely to persist. However, 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 in the past two quarters. Loss ratios benefited from the pricing and claims management actions we have been implementing. Our non-medical loss ratio improved from 78.1% in the first quarter to 73.6% this quarter. This marks our lowest loss ratio since the third quarter of 2013.

Sequential progress was driven by improvement in all product lines: life, disability, and dental. Our disability loss ratio improved 7 percentage points over the prior year as LTD incidents and recoveries continue to improve. Caseloads for claim examiner, which were elevated, are likely to reach targeted levels in the third quarter, which would help reduce some of our recent earnings volatility.

Excluding $10 million of accelerated amortization of DAC 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 on 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, while also allocating capital to shareholders. Capital return remains a key focus, and to this point, buybacks 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 retired $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 leverage and capital structure. As you know, our capital structure includes hybrids, which move to floating rate coupons in 2016 and 2017. I would like to point out, though, that we have entered into swaps to lock in 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 in Group Protection is emerging, abnormally high claim severity in 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.

(Operator Instructions )

Jimmy Bhullar, JPMorgan.

The first question is, if you think about the DUL standards the way the preliminary proposal was, how do you think it will affect your business, whether it is in annuities or in life insurance or retirement?

Jimmy, it is very difficult to speculate about provisions that are in motion, if you will. They're changing. I think the analysts' observations on this sort of focused 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 whether it's commission or fee for advice.

On that particular point, I'm going to repeat what I said a minute ago. If VA sales were to be affected and decline a little bit, if we would take that capital that would be otherwise employed for the sales and buy shares back and blunt the large majority of that impact, giving us time to pivot, as we have demonstrated in the past, we can pivot. So I am answering the question that I see in a lot of analysts' reports first, not that I think that it's an outcome is certain.

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

Would it affect our ability to sell variable annuities both ( multiple speakers )--

Within qualified plans.

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

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

The other impacts are more opaque. There could be some issues in terms of extra costs in the retirement business. And this is the problem with the Department of Labor's proposal; it unfortunately could. And again, they are willing to move it or they're willing to respond because everybody's goal is to keep costs low and value high for Americans.

And so I think we have to work with the DOL to remove some of the extra paperwork that seems to be required, so that costs 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? And maybe discuss your interest in the 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've been thinking myself the last couple of days across the financial services industry. I guess maybe excluding bank, it's a bit of a rodeo out there -- PNC, healthcare companies. And each of those industries has sort of idiosyncratic reasons why it is occurring.

If you look at the life insurance industry, we've got two important transactions. Of course, the protective transaction in now StanCorp, which reflects new capital coming in to the marketplace. New capital coming into the marketplace is a good thing. As we know, or as has been talked about and it appears, the returns that these companies are being bought at are probably mid-single-digit.

If I look at and hear what is 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 rates seem to be 7% to 8%, even after taking into consideration or taking in consideration synergies and revenue-enhancing opportunities. So 7% to 8% for buying businesses, when you are able to put new business up at 12% to 14%, when you can buy your capital back at 12% to 14%, just seems to be, at the moment, a 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 businesses 8% and you can sell your new product at 12% to 14%, I think at Lincoln, we choose selling new product at 12% to 14%. And if we are generating more capital, as we have been, than what is necessary to support the products we will buy our stock back because we still think we can get that kind of return on it.

I'm sorry; I have gone on a little bit.

No, thank you.

And lastly, how do you see Lincoln as a potential takeout candidate in this environment? Do you have scale in all the businesses that you are in that you could do well on your own? Or do you think you will be better off as part of a larger company? Or are you too large to be acquired? Because the Japanese companies, obviously -- the ones that they bought -- are about the half of your size.

Yes, Jimmy, again, over the time I've been in the business, all the things that you have mentioned have 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 is our potential as a standalone Company? And we think that is great. If there is something else that might be better than that over the long term, obviously we would consider it. But our focus right now has to be, and continues to be as it always has been, building a great franchise that produces earnings growth and grows over time.

Thank you.

Steven Schwartz, Raymond James.

A couple. I don't know if Mark is there or not. This question has to do a little bit, I think, with the DOL and FINRA in this case. Does LFN sell VAs with C-Shares? There seems to be a movement of FINRA trying to forbid this practice, which seems to be contradicting the DOL. So I'm just wondering about LFN.

Steve, we're going to have to get back to you on that. At LFN, we sell products on a variety of commission bases. We don't have in front of us the statistics as to which one dominates. If you don't mind, we will get back to you on that.

Okay. Not a problem. I realize that was a little bit out-of-the-box. Two more though.

Randy, was the takeaway -- I'm just going a little fast -- was the takeaway on the mortality that it was predominantly driven by accidental deaths of 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 $20 million or so, $19 million or $20 million, was located inside of 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 death, I think of things like homicides, accidental deaths, suicides, and that sort of stuff.

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 and well outside of our expectations.

Okay. Good.

And one more for you. You talk a little bit about retirement plan. But I think overall -- prepayments, bond (inaudible), and other variable investment income -- was very low for the quarter, at least relative to what is in the supplement. Is there a way to put a number on this, by any chance?

First, do you agree? And, second, is there a way to put a number on this?

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 average around $25 million. On prepayment, we were at $11 million, which compares to about $30 million over the last two years. So it's a 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 do 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 and where our book is specifically, prepayment income will probably play a part of our earnings for a couple more years.

Thank you, Dennis.

Steven, I might point out in that regard that when you bring it 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 in the life insurance business, I noted that they had roughly $6 million after DAC and tax of benefit from strong prepayment income.

There's probably a little bit of benefit in the retirement business last year in the second quarter. But I specifically spiked out last year $6 million for the Life Insurance business that they did not have this year.

Okay, thanks.

You bet.

Suneet Kamath, UBS.

First on the mortality. Dennis, you had referenced you had two sequential quarters with bad mortality. As we sit here ahead of the third-quarter DAC review, how should we think about how these two quarters are going to inform whether or not you may need to take some action on the Life back in the third quarter review?

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

I will take that, Suneet.

Obviously, when we look at our assumptions, especially a long-term assumption like mortality, it's a lot more data than the last two quarters. While it may have some small impact over the ADEs we would project going forward, it is relatively small when you think about the longer-term context of the amount of mortality experience we have as a Company.

I would point out on this mortality, I talked about this particular quarter. The count experience was 2% favorable and the amount experience was 14% unfavorable. But if you look at those same statistics over a more expanded period of time, they're right on top of our expectations. I talked about the five-year period: 2010 to 2014. Both of those numbers are exactly at 100% of our expectation.

Now, year by year, you would see it 1% higher or 1% lower or 2% higher or 2% lower. But over that more expanded period of time, right on top of our expectations. So I really see these two quarters as outliers. And I would not expect them to have a significant impact on the third quarter unlocking.

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

No. More 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. I think things like lapses. If you think over the last four, five, six years, it's just been a very strong story, hasn't had much impact at all on the results. And then, I would not imagine or I don't expect really, much impact from the last year of experience.

Then you've got unelective policyholder behavior; that's mortality. And we just talked about mortality. And then you have the market-driven inputs. You have the J-curve, the long-term integration assumption, and the long-term growth rate of the separate accounts. We will look at both of those.

We have another year of information; we have another year of low rates, and that will impact, somewhat, our analysis. I'm not going to front run the results. But we will definitely take a hard look at those market driven inputs.

Got it.

And 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've 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, is that based on the conversations that you are actually having in DC? Or is it based on, you know, just kind of the general commentary in the media? The reason I asked the question is as 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 on his statement, public statement in a hearing. Now, whether or not he has drifted from that, I cannot tell you.

What I do know is you are right. There is a lot of rumor, and you hear rumors actually on both sides of the question. So we just collectively have to continue to work for a good outcome for Americans and a good outcome mostly for Americans.

And 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 them. I think all of the industry and trade association comments have been, come on, let's understand a little better, practically, what these things will do and the way they affect American consumers' retirement products.

Okay, thanks.

Thank you.

Our next question is from Bob Glasspiegel, Janney.

Good morning, Lincoln. Question on Group Protection.

Are you still sticking with sort of the timing of late 2016, early 2017 for where you are going to get to your targeted margins?

Yes. I said that in my comments, but I'll say it again. Yes.

Okay. Just wanted to make sure because it looks like a good run rate to get there from the Q2 to Q1 improvement.

So on the Life side, you are saying, I think, that the first quarter was a frequency blip; and the second quarter was a severity blip. So no need to adjust underwriting in pricing actions?

No, Bob. None 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.

Right.

It was actually a little better than our expectations for the number of claims we would have. So the second quarter was definitely a severity-driven event, which was very different. The first quarter, if you remember, was 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 the focus 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 in line with our expectations.

Nice to hear your confidence. Thank you, Randy.

You bet.

Colin Devine, Jefferies.

Dennis, I was wondering if I could just delve 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?

Again, I think that is a good question. It's fairly specific, and I think I would rather answer it in general terms.

What we've been conveying through the Department of 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 the VA living benefit guarantees or VAs are a little bit expensive for the consumer in total. The response is, the total fee isn't what matters; it's what are the benefits.

So 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 changes in one or two of the line items of expenses. But it takes a certain amount of fees and expenses to deliver good products. And I suspect that given the demand or living benefit products, there will be an industry way to accomplish that.

All right. If I hear what you're saying then, you are feeling confident that you could replace what the 25 is, like the 12b-1 fees you are collecting now and what I assume is another 25 basis points or so of marketing allowances from the fund companies inside your VAs?

I'm saying that's a level of detail that is hard to respond to specifically. And so I want to just take us up a 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 the DOL, we'll 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've moved a bunch of assets into managed risks funds; you've moved a bunch of them into indexed 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 IRAs if this thing goes down pretty much as it's laid out?

As we have discussed, and if I can go to the Life side for just a second, I believe, if I recall correctly, we used to sell 65% of our business in Guaranteed Universal Life. 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. We really made good progress in diversifying what we sell in the Life portfolio.

If I move to the individual annuity portfolio, and I know you know this, so 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 are almost at 70% on a guaranteed basis, just raw sales. And so we moved the dial on diversification of the 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 is our intention to continue to diversify products. And that would include diversifying what we sell into the variable annuity market. And we look at this very carefully, and we see some opportunities. And as we come forward with more ideas on that, and are actionable ideas, we will convey that to our investors and the people on this phone.

Colin, let me add. We've actually done very little of, I think, what you referenced, and I think what you are referencing, I think like VA buyouts and that sort of stuff. And I think as ( multiple speakers ) --

No, I was talking about the funds market, where you did a fairly significant move, I believe last year into index funds. The FCC approved it, obviously, as well as into managed [trust] 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 buyout, high-quality hedge program like ours, I really don't see the inability to do things like that would have any impact on us at all because there is really not a need to do anything like that.

Okay. Thank you.

You're welcome.

Michael Kovac, Goldman Sachs.

Question on variable annuities. It looked like sales were strong and rebounded in the quarter, and the ROE looked stable. But I noticed the equity in this business was up about 20% versus a year ago, while the account values were up maybe closer to the single digits.

And given the mix shift, I would expect more or less capital-intensive products, and you might see sort of an inverse of that. Can you let us know what's going on there?

Yes, we have seen in the annuity business is we have some floors on our capital. We allocate to the business another link to account value. We have floors because the VA with guaranteed business is the type of business, especially in up markets, where your stochastic models will really tell you that you can take capital out of the business; and you end up in a bad risk position. Most floors have kicked in over the last year, 18 months, and pushed the capital up.

Now, despite that, I would point out, Michael, that we have continued to report ROEs in the mid-20s. So while capital has definitely went up, driven by the very conservative approach we have to allocating capital, which is the greater of these account value-linked floors and the stochastic approach, we continue to report very strong returns.

Yes, 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, you know, where are we on that basis? And what are you seeing in the competitive in environment in terms of the ability to push through that much pricing?

If you go back to the beginning of this, we talked about $1 billion of business to reprice. And I think we are roughly 55% of the way or so through that. By the end of this year, we will be 75% to 80% of the way through that; and the balance will come over the remainder of 2016. So we are working our way through it.

In terms of the other big earnings drivers, it would be the things that we've done in 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 question just a little bit and just give you a couple of high-level statistics.

We had year-to-date premium renewal of 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 so somewhat because getting price increases needs to -- that's one piece of it; the other piece is how much are you retaining? What is the margin on what you are retaining, and what is the margin on what's leaving? The 7% increase on margin captures all of that. And it's a pretty good indication that the pricing actions that we are taking are getting traction.

Thanks. I appreciate the answers.

We do have time for one more question. Jay Gelb, Barclays.

Sorry if it was already covered, but the $150 million buyback pace in Q2, should we view that as a reasonable run rate for the rest of the year?

Jay, where I don't get into specifics around this, I'll go back to the words I said at the beginning of the year really. We expect to exceed last year's buyback total of $650 million. We are at $500 million through the first two quarters of the year. I would point out that cash at 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, very strong with 505% RBC ratio.

The other thing I would point out is that I would expect, over the last half of the year, to likely do a reserve 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 buybacks at a 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?

Let's be specific about the answer to this question. In terms of my specific remarks that were that if you remove notable items and look at EPS growth second quarter 2014 versus second quarter 2015, that that was middle single digits.

I would direct you, for our longer-term view, 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 my comment is specifically quarter over quarter after notable adjustments. And there is no reason for us to think that that chart and the statistics in that chart are any different today than they were when we put it there.

Great. So 8% to 10% long-term EPS growth potential.

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 sort of a run rate in that business is closer to $125 million? Or might it be higher?

No. I think if you just, mathematically, took $105 million and added the $28 million in mortality that I noted, you would be in the mid-$130 millions, which is more in line with my expectations. You can get there a number of different ways.

If you go back to last year's second quarter, when we made $148 million and you back off the prepayment income of $6 million that I mentioned, you back off there was a $5 million normalizing item, you would be sort of in that mid-$130 million 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 it and you back off the spread compression and the capital ex that we talked about, you would once again get in the mid-$130 million range.

When I think about the business, I continue to think about it right in that range, with mid-$130 millions, and with the 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 will now turn the call over to Mr. Christopher Giovanni.

Thank you again, Bridgette.

Thank you all for joining us this morning. As always, we will be around to take questions at the investor relations line (800) 237-2920 or via e-mail 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.