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

Thank you, Brigitte. Good morning, and welcome to Lincoln Financial's second quarter earnings call. Before we begin, I have an important reminder. Any comments made during the call regarding future expectations, trends and market conditions, including comments about sales and deposits, expenses, income from operations, share repurchases and liquidity and capital resources are forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from current expectations. These risks and uncertainties are described in the cautionary statement disclosures in our earnings release issued yesterday and our reports on Forms 8-K and 10-Q filed with the SEC. We appreciate your participation today and invite you to visit Lincoln's Web site, 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. Before beginning, I would also like to remind you that we will be hosting our Investor Day on November 16 at Lincoln Financial Field in Philadelphia. We will be sending out invitations this quarter and hope many of you would join us in person. Presenting on today's call are Dennis Glass, President and Chief Executive Officer; and Randy Freitag, Chief Financial Officer. After their prepared remarks, we will move to the question-and-answer portion of the call. I would now like to turn things over to Dennis.

Thank you, Chris. Good morning, everyone. The positive momentum at the start of the year carried into the second quarter, delivering outstanding results, notably operating earnings per share growth of 19%. Several factors contributed to our results. First, sales remained strong as most of our businesses reported double-digit growth compared to the prior year. We continue to focus on restoring variable annuity sales and saw sequential growth accelerate during the quarter. Across the enterprise, new business returns are attractive. We are clearly benefiting from our multichannel distribution model, industry leading shelf space and a broad set of customer solutions, which when combined, differentiate us from competitors and support further growth. Next, the quarter's strength was broad based, as all four businesses delivered revenue and earnings growth. Additionally, the percentage of earnings coming from mortality and morbidity businesses continue to trend higher, which leads to further diversification in our sources of earnings. Lastly, as we have demonstrated for years, our balance sheet is high quality and the businesses generate significant free cash flow, allowing active capital management. This continued in the second quarter with $265 million returned to our shareholders. Capital deployment will remain an important part of the Lincoln story. Looking beyond the quarter, as you know, we have a couple of initiative in place focused on supporting long term growth and profitability. First, an enterprise-wide digital initiative that will improve the customer experience while providing cost savings as well as the potential for revenue enhancements. Also, we have a rigorous focus on in-force, renewal and new business pricing across all the businesses. Importantly, both are progressing as planned and will support our strong track record of financial success. Now turning to the business segments, starting with annuities. Earnings were strong as our high quality in-force business was further strengthened…

Thank you, Dennis. Last night, we reported income from operations of $419 million or $1.85 per share for the second quarter, a 19% increase from the prior year. This quarter's results were very strong, highlighted by record normalized EPS. Underlying trends were solid and all four businesses posted earnings growth. It is also worth noting that while variable investment income was $0.08 better than long-term experience, this was largely offset by higher variable expenses, mainly driven by strong sales production and earnings during the quarter. Now shifting to key performance metrics. Operating revenue increased 7% in the quarter, driven by an 8% increase in average account values and the positive sales trends Dennis noted. Expense discipline continues to be a good story as net G&A expenses, excluding the variable related expenses I just noted, were up less than 1%, providing positive operating leverage. Book value per share excluding AOCI, grew 9% to nearly $60, an all time high. Operating ROE was strong at 12.7%. And year-to-date, normalized ROE is 40 basis points above 2016. Finally, balance sheet strength and solid capital generation enabled us to return $265 million to shareholders or 63% of operating earnings, consistent with guidance for 2017. Net income of $411 million further highlights the strength of the quarter as both credit experience and hedge program performance were excellent with net income representing 98% of operating earnings consistent with last quarter. Now I will turn to segment results starting with annuities. Reported earnings for the quarter were $251 million, up 7% from the prior year quarter. Earnings growth was driven by higher fee income from a 6% increase in average account values as equity market strength over the past year has more than offset negative net flows. Total operating revenue increased 9% as every revenue line showed…

Thank you, Dennis and Randy. We will now begin the question-and-answer portion of the call. As a reminder, we ask that you please limit yourself to one question and only one follow-up and then re-queue if you have additional questions. With that, let me turn it over to Brigitte to begin Q&A.

[Operator Instructions] Our first question comes from the line of Suneet Kamath with Citi. Your line is open.

I was wondering if you could drill into the Athene reinsurance agreement a little bit more. Just specifically what products are included there and then how are the returns given the effect of the reinsurance compared to the in-force block.

Yes, Suneet, it's Dennis. We think this is a very significant relationship that we have just developed with Athene, and it will help both organizations building off of what each of us have to contribute to the relationship. It's predominantly fixed indexed annuity and a fixed indexed annuity accumulation product. And it's predominantly, as I said in my remarks, to help us in the broker/dealer and bank channel.

Got it. And then in terms of some of the newer products that you're offering, I think the Max 6 Select as well as the iShares product, can you just talk a little bit about traction and if you're still confident that flows will be positive in 2018?

Let me answer the second question first. Our expectations are, and we're taking a lot of actions, to produce positive flows in 2018. Stepping back, I think the most important parts of your question are, we are focusing both on making enhancements to products that can give us near- term traction, as well as products that can help in the medium and long term sales growth picture. I think the fee-based products in core income would fall into the latter, which is medium to long term and the enhancements that we're making in product, excuse me, this rider that you just talked about, the MAX 6 rider, are going to help immediately and over the near-term.

And just a follow-up on my earlier question on the reinsurance deal. I mean, so we should think about this as helping you in the bank and broker/dealer channel as you mentioned, but no significant impact on returns of the business in terms of what's reinsured?

We expect to get good returns as we are throughout our entire portfolio of products these days, and we'll price accordingly.

Our next question comes from the line of Erik Bass with Autonomous Research. Your line is open.

First question on Group where you had a very strong quarter and you sound confident that the momentum will continue. Does this change the timetable at all for when you expect to get to the 5% to 7% margin target?

Erik, it doesn't really change our overall thesis, which is that this business is a 5% to 7% business. We expect to hit that regularly as we look forward. We hit 7% this quarter. That's obviously at the upper end of that range, so it's a good quarter. But at the end of the day, it's a quarter that is inside of that range. So I don't consider it to be a quarter that's outside of the potential for this business. I think as you look forward and you look at the underlying drivers of the business, we wouldn't expect that 66% or 66.1% as the long-term loss ratio for this business. So that may move up a little bit. But on the other hand, as premiums start to grow, we would expect that the expense ratio would come down a little bit. So all in, I think this quarter was within our normal range and our expectations for what we would expect in the future haven't really changed. And that is we expect to continue to get, and I said this in my script, improvement in the annual margin that we earn in this business.

Got it. Thank you. And can you talk a little bit more about the demand you're seeing for annuities in the marketplace, and whether the June 9 implementation date for DOL had any material impact on sales volumes? I think related, you've grown VA sales on a sequential basis the last two quarters. Do you think this is more market dynamics or share gains?

The enhancements that we've made to our products, the new products that we're adding, are specific to Lincoln and are driving our momentum increase and, again, not only in the near-term, but we think in the long-term with the other products that I mentioned. With respect to the DOL, the June 9 implementation date was very positive in the respect that people had to come forward, our distribution partners came forward with their plans. And in this respect, we're very delighted. 90% of our distribution partners offered at least one, if not more, options for commissions, and that's very helpful. I guess the second thing I would say is coming back to the DOL, as we know there has been more requests or comment. And as we've said all along, we think that the idea, of course doing what's in the best interest of the customer is what's kept us in business for 100 years and it's a good idea. But we've been critical of some of the components of the regulation and based on our interactions with the administration we think there is opportunity to improve the regulation, both for the benefit of the consumer and also to providers like ourselves, who are trying to help people grow their savings and live comfortable in their retirement.

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

Just a follow-up on this Athene deal. Can you provide a little more color on what exactly this is? Is Athene just a reinsurance partner for you? So they're really a capital provider? What kind of sales do you plan on reinsuring to them, a little more the way this is going to work and if this does anything for freeing up capital for you in that aspect as well?

Yes, let me come back to my first comment. We would not have entered into the transaction unless we thought it was significant in the sense of both helping earnings growth, ROE improvement and sales growth. And so we think it is significant. I mentioned in my remarks that it takes advantage of some of the benefits that Athene has from their structure, but it also takes advantage of the tremendous product breadth that we have as well as our distribution. So I think this is one of those programs that will be beneficial to both parties. But we're not going to get into the details other than say that we wouldn't have gone into it if we didn't think it was a significant amount of opportunity.

But Dennis, can I at least ask, is this really a capital efficiency aspect for you? Is it actually helping you expand your sales opportunities, or is it some of both?

It's very clearly some of both. Yes.

Got you. Okay. And then my follow-up is, you've had a few large peers take both a life insurance charge from an actuarial review this quarter, as well as a variable annuity reserve strengthening for another one. And I know your review, I believe is still in 3Q, Randy. It's been pretty benign over the last few years. Is there any reason to believe that things have changed a bit in the environment that we should be focused on for your review this year?

Tom, at this point, I like you am going to speak very much to the environmental factors. I'm not going to front run this process. I say that every year. In fact, I would imagine if I looked out of my calendar, I would start to see the meetings associated with the DAC unlocking occurring a few weeks from now. So I've had zero meetings. But there are some informational points that I'm going to bring into those meetings and really around the environment that this year's unlocking will occur in. So when I think about the major assumptions that have really driven results in the past, I'd start with the interest rate environment. And when we set our assumption last year, we set an assumption that assumes that interest rates would increase over time. And if you look at what's happened over the last year, underlying treasuries are up probably about 60 basis points from where they were at 9.30 of last year, while spreads have come in a little bit. But net-net, rates have increased in line with our assumption we set last year. So that's not the final answer but at least environmentally, I know things have moved somewhat how we thought they would last year. When I think about mortality, we set an assumption last year. And if I think about our discussions over the past year, mortality has largely performed in line with our expectations. So once again, environmentally, there isn't anything that I'm going to go into those meetings worried about. And lastly, I'd point out that when you think about the other big drivers, especially on the VA side, you're talking about policyholder behavior. And as we've talked about, there haven't been any big changes in policyholder behavior relative to the experience we've had over many, many years. So we'll come up to a series of meetings with an understanding that the environment, that the unlocking we'll exist in, seems to be pretty good.

[Operator Instructions] Our next question comes from the line of John Barnidge with Sandler O'Neill. Your line is open.

Maybe just a housekeeping question as my model not occurred at this level in a really long time. But when was the last time RPS net inflows were as high as they were in 2Q '17?

We'll have to get back to you on that. It's been a little while.

Okay. And then SEC Commissioner Piwowar put out a comment letter last week. What are your view of efforts by the DOL and SEC to work together on a joint fiduciary standard?

What was the question? What's our view? Excuse me, our view is absolutely we think harmonizing a fiduciary rule across all the regulators, including the life Insurance regulators by the way, is the best thing in the world for the consumer. It's the best thing in the world for all the companies. Again, we're trying to help consumers build for retirement and live comfortably in retirement.

And our next question comes from the line of Sean Dargan with Wells Fargo.

I don't mean to beat a dead horse with Athene, but what does the reinsurance agreement allow you to do in the bank and broker/dealer channels that you couldn't do on your own? Is it just grow faster because of the capital efficiency?

Everybody knows what Athene's model is and it's slightly different than ours in terms of the location of their entity and the benefits they get from that. They have a little different investment philosophy than we do. On the other hand, I think generally not just as compared to Athene but as compared to all of our competitors, we have a much stronger distribution capability, again not just compared to Athene but across the industry. So it's trying to take advantage of what each of us brings to the table and I'll come back to it and say that it's a good outcome for both of us and we're excited about it.

Okay. Thanks. Then in the past, I think you've said that a goal is to reach 30% to 35% of total enterprise earnings coming from mortality and morbidity businesses. If the group margins kind of hit your target range, will you be able to do that organically? Or is reaching that goal something that would require an acquisition?

Sean, we've been pretty consistent on this that organically, we can grow the contribution. As the group earnings were depressed over the last couple of years, that contribution had fallen to the low-20's for mortality, morbidity. But just organically as group earnings recover, as life earnings continue to grow, that we could grow that into the mid-20's range, so 25%, 27% or so. But to fill that gap between there and the 30% to 33% long-term strategic target we would like to hit, would take some level of inorganic activity.

All right. And can you give us an update on what your capacity for inorganic activity is? Has anything changed in the last quarter?

No, nothing has changed. Last quarter, we spiked out the potential to get up as high as $2 billion. That was a mixture of capital on our balance sheet, $500 million to $750 million, some capacity to issue some debt supporting a strategic acquisition, and then the ability and the knowledge that we have been allocating a significant amount of capital to things like buybacks. So as you announced and then go through the process of waiting for a transaction to close, you have the ability to build up some capital that way also.

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

Just staying on group protection. So if I were to think about getting to that 5% to 7% after-tax margin, do you feel like you can kind of do that with a loss ratio kind of at the, maybe low-70s or maybe kind of high 60s to low 70s, without materially growing the base of your premiums? Or does the 5% to 7% margin target would contemplate some kind of mix shift or better underwriting kind of trending below the high 60%, but maybe a little bit above the 66% this quarter?

Humphrey, we have seen a shift in the mix of our business. There's more of a voluntary component than there was four, five years ago. Four, five years ago, our targeted range around loss ratios would have been 70% to 74%. So you have seen some mix and I would say that the target has moved down somewhat. So once again, 66.1% is below our long-term expectations, but I don't think that when you look at a long-term that we would expect a long-term target to be above 70%. I think it's, as you mentioned, it's more in the high-60s, 68%, 69%, somewhere in there. And then offsetting that, as I mentioned, we would expect our expense ratio tick down over time as that business continues to grow its premium base.

Okay, understood. And then in terms of capital deployment. So it seems like variable annuity sales are starting to kind of pick up back a little bit and I think at the beginning of the year, you talked about the capital return would probably be kind of similar to your last year level or at least somewhat elevated because of a slowdown in sales. But if we were to continue to see VA sales continue to pick up, how should we think about the pace of buyback in the balance of the year?

Humphrey, we said for this year that we would be 60% to 65%. This quarter we were at 63%. Year-to-date, we're at 62%. You couldn't be much closer to the middle of that target range we gave. So the implication for that is that the expectation latter half of the year isn't too different than it was in the first half of the year. We fully expect to end the year between 60% to 65% of operating earnings.

I'm not showing any further questions, so I'll now turn the call back over to Chris Giovanni for closing remarks.

Thank you, Brigitte. Just following up on John Barnidge's question, as Randy noted in the script, that's quarter of net flows in the earlier decade, first quarter of 2009 for RPS. So thank you all for joining us this morning. As always, we will take your questions on our investor relations line at 800-237-2920 or via email at investorrelations@lfg.com. Thank you all, and have a good day.

Ladies and gentlemen, this does conclude the program. You may now disconnect. Speakers, please standby.