Good morning, thank you for joining Lincoln Financial Group's fourth quarter 2017 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 given at that time. If you need assistance at any time during the call, please press the star key followed by the zero and someone will assist you. As a reminder, today's conference is being recorded. I would now like to turn the conference over to the Senior Vice President of Investor Relations, Christopher Giovanni. Please go ahead, sir.
Thank you, Chelsea. Good morning and welcome to Lincoln Financial's fourth quarter earnings call. Before we begin, I have an important reminder. Any comments made during the call regarding future expectations, trends, and market conditions, including comments about sales and deposits, expenses, income from operations, share repurchases, and liquidity and capital resources are forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from current expectations. These risks and uncertainties are described in the cautionary statement disclosures in our earnings release issued yesterday and our reports on Forms 8-K and 10-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 and Head of Individual Life. After their prepared remarks, we will move to the question and answer portion of the call. I would now like to turn the call over to Dennis.
Thank you, Chris, good morning, everyone. Fourth quarter results were strong, with operating earnings per share up 12% compared to last year. This capped a record year, which included a 20% increase in EPS, a 13% increase in book value per share, and a 13% ROE. As you know, we have a multiyear track record of strong financial results, importantly, we believe these results are sustainable over time as we continue to build our franchise and stay keenly focused on profitable growth and capital management. Let me briefly touch on the impact of each of these in 2017, as well as some forward-looking thoughts. First, growth. Our powerful retail franchise, which brings together a broad product portfolio with distribution breadth, is driving growth across all four businesses. Each generated sales or deposit gains of 6%-12%.
This includes an increase in annuity sales for the first time since 2013, the highest level of life sales in a decade, back-to-back years of growth in Group Protection sales, and record RPS deposits. The near-term sales outlook is encouraging, and we are also positioning Lincoln to further capitalize on long-term opportunities, including annuities with fee-based compensation options, linked benefit products, smaller fee term insurance, and employee-paid group benefits. When looking at profitability, this year's strong earnings were broad-based as annuities, RPS, and Group all reported increases in operating earnings of at least 15%. Excluding notable items in both periods, life insurance also reported double-digit growth. Given this positive momentum, coupled with the impact of lower tax rates, earnings growth this year should remain robust for each business. Lastly, capital management. In 2017, solid capital generation enabled us to return approximately $1 billion to shareholders.
Buybacks were completed at an average price under $70 per share, more than 20% below the current share price. We also announced a 14% increase in the common stock dividend. Subsequent to year-end, we announced our intention to acquire Liberty's Group business. This transaction provides several strategic and financial benefits and also optimizes the balance sheet by using excess capital and leverage capacity not otherwise available for share repurchases. Looking forward, capital management will remain an important part of the Lincoln story. Now turning to the business lines, starting with Individual Life. Earnings were once again sound, consistent with the prior year quarter, and contributed a solid finish to a strong year. Total life insurance sales in the quarter of $242 million were up 5% from the prior year as results benefited from Executive Benefit sales and gains in VUL and Term, combined with continued strong demand for MoneyGuard.
For the full year, total life insurance sales increased 8% to nearly $800 million, again, the highest level in a decade, as we benefit from a broad product portfolio and distribution breadth, hallmarks of Lincoln. In addition, prior pricing actions and a unique ability to adapt resulted in returns on new business coming in at the top end of our 12%-15% target returns. We continue to focus on balancing sales diversification, risk management, growth, and appropriate returns on new business. To this point, a more favorable macro backdrop is allowing us to improve our competitive position in UL and IUL. This will help with sales diversification and growth while still enabling us to achieve targeted returns. Quickly on the impact of tax reform on life insurance products, we see limited impact.
Our core accumulation and protection products, along with linked benefit solutions, remain critically important to protecting the basic needs of Americans. Life insurance will also remain an important solution for estate planning as the estate tax remains in place, although subject to a larger exclusion, which is scheduled to go away after 2025. Randy will provide some perspectives on the impact to the pricing of new business, which we would expect to result in more sales over time, not less. Bottom line, the outlook for the life insurance business remains strong, and we expect growth to continue, driven by unmatched product diversification and our market leadership position, combined with the depth and breadth of distribution. Turning to Group. Earnings increased significantly over the prior year quarter, driven by favorable loss ratios and a 5% increase in premiums.
For the full year, margins were within our 5%-7% margin target a year ahead of plan. Fourth quarter sales of $265 million were up modestly, and full-year sales grew 7% as all product lines and both employer and employee-paid sales contributed to the growth. We are also encouraged by persistency trends, which improved four percentage points in 2017, driven by stronger renewal trends in core life and disability products. As I noted a couple of weeks ago, we are very pleased with the agreement to acquire Liberty's group business. By combining forces, we meaningfully increase our scale, further broaden our customer base and distribution channels, and expand our capabilities. Going forward, I expect this transaction will accelerate the already strong, positive momentum in the group business. Turning to annuities.
We posted strong operating results in the fourth quarter as earnings increased 10%, and for the full year, exceeding $1 billion, driven by our high quality and predictable in-force business, combined with equity market tailwinds. Total annuity sales were strong in the fourth quarter, up 54% to $2.8 billion, as we experienced significant gains in both variable and fixed annuities. Recall, we laid out our strategy last year to restore sales in the annuity business. This plan focuses on our ongoing playbook of combining product actions and distribution effectiveness. After seeing encouraging trends early in the year, momentum accelerated post-summer as wholesalers effectively leveraged an expanded product portfolio to regain market share. When combined with an improved sales backdrop post the DOL delay, we experienced the best sales quarter in two years.
Notably, the sales strength was broad-based, with growth across all product categories, all distribution channels, and both qualified and non-qualified markets. Digging deeper into product categories, sales of Variable Annuities with living benefit guarantees were up 62% compared to the prior year quarter and represented just over half of total annuity sales. VAs with risk-managed funds remain the largest contributor to annuity sales, but newer products which provide more investment flexibility and payout options are enabling us to reach more customers and advisors while also diversifying our sales mix. VA sales without living benefits increased 35% year-over-year and were consistently strong throughout 2017, as the value propositions for tax deferral and legacy planning continue to resonate with consumers.
Fixed annuity sales increased 57% versus the prior year quarter as the reinsurance arrangement with Athene improved our competitive position in the bank and broker-dealer channels where we have a distribution advantage. A strong quarter for the annuity business as the annuity sales action plan took a big step forward and resulted in full-year sales increasing for the first time since 2013. Looking ahead, we'll be adding even more products and distribution in 2018. We expect to see some seasonality, remain confident in the ability to meaningfully increase sales this year and build on an impressive track record of growth and profitability. In retirement plan services, earnings increased significantly in the fourth quarter and for the full year. Total deposits for the quarter were $2.4 billion. This capped a very strong year, with total deposits up 12% to a record $8.6 billion.
The solid gain in deposits was due to a 29% increase in first-year sales as both small and mid-large markets delivered strong results, and recurring deposits continued to grow. Net flows for the quarter were $412 million and marked the eighth consecutive quarter of positive flows. For the full year, net flows totaled $1.3 billion, more than double the prior year, and marked the first time annual net flows exceeded $1 billion. Strategies to improve wholesaler productivity, initiatives to increase employee contributions, and investments into our customer experience remain the key drivers of the solid momentum. Looking ahead to 2018, we expect another year of strong flows. RPS had a great year, 2017, with a double-digit growth in deposits, net flows, assets, and earnings.
These results highlight the strength of our business model, which is positioned to effectively compete in our target markets and leverage distribution strength to further accelerate growth. Briefly on investment results, the alternative investments portfolio had positive performance for the quarter from both private equity and hedge funds, although below our target return. For the full year, we achieved a 12% pre-tax annualized return above our 10% target and grew the portfolio to $1.5 billion. We invested new money at an average yield of 3.9% in the quarter. For the full year, we put new money to work at 4%, 25 basis points above 2016 and consistent with projections from Investor Day, where we noted spread compression will continue to abate. Overall, the investment portfolio remains in great shape, broadly diversified and high quality, with an average crediting rate of A-minus.
Investment grade assets represent nearly 96% of the fixed income portfolio, up one percentage point from the prior year quarter. I am pleased with our solid fourth quarter results and record operating EPS in 2017. We enter the new year with a lot of positive momentum. Notably, organic growth drivers are strong as annuity sales momentum accelerated in the fourth quarter and the other businesses once again produced solid results. Given our leading distribution and broad set of customer solutions, we expect these trends to continue. When combined with expense discipline, these key drivers of financial success remain well within our control. We also expect to benefit from our recently announced acquisition of Liberty's Group business, which will enable us to increase earnings in an attractive market and add more balance to total earnings.
Lastly, external factors have started the year as tailwinds, equity markets are strong, and interest rates are higher. Furthermore, we expect an ongoing benefit from tax reform. In closing, we are very proud of our long-term financial performance, and I am confident that our key strategic objectives and initiatives will enable this to continue. I will now turn the call over to Randy.
Thank you, Dennis. Last night, we reported income from operations of $440 million or $1.98 per share for the fourth quarter, a 12% increase from the prior year. Net income totaled $816 million, or $3.67 per share, as results included a couple of non-recurring items. The largest item was a $1.3 billion increase in our book value from the impact on our deferred tax liability as a result of tax reform. Partially offsetting this benefit was a $905 million non-cash impairment of goodwill in the life business. This is directly attributable to the tax reform-driven increase in our book value, which is an immediate undiscounted impact, whereas the increase in fair value is a discounted impact. Additionally, you may be aware that the FASB is eliminating step 2 of the goodwill impairment test beginning in 2020.
While we again comfortably passed step 2 of our goodwill impairment test, we wanted to give you the most complete picture of the balance sheet post-tax reform, we early adopted the accounting change. Let me touch on the performance of key financial metrics. For the full year, reported operating EPS of $7.79 was a record and up 20%. Our EPS excluding notable items was also a record, up 16%. Book value per share excluding AOCI grew 13% to $64.62. Operating return on equity was strong at nearly 13% in the quarter. For the full year, ROE increased 110 basis points to 13.1%. Sales growth in all segments helped drive a 5% increase in operating revenues. Positive consolidated net flows, combined with equity market strength, led to record account values of $253 billion.
Our capital generation and balance sheet remain important sources of strength and enabled us to return nearly $1 billion of capital to shareholders for the full year. Year-end cash flow testing continues to point to significant statutory reserve adequacy, we do not anticipate any reserve deficiencies. Further highlighting the strength of our balance sheet, all of the rating agencies recently affirmed our credit ratings following the announced acquisition of Liberty's group business. Before shifting to segment results, let me spend a few minutes discussing the implications of tax reform on our financials, as well as provide some additional perspectives. As I already noted, there were the one-time impacts to our GAAP deferred tax liability and goodwill. Tax reform will provide an ongoing benefit to Lincoln. We estimate our GAAP effective tax rate will be in the 15%-17% range over the near term.
This includes a range of 14%-16% for annuities, 15%-17% for RPS, 19%-21% for life insurance, and 21% for group protection. Shifting to statutory. We estimate we will end the year with an RBC ratio of 488%, which includes an approximate 15 percentage point impact from a reduction in the statutory deferred tax asset. Our overall capital position is strong, as statutory surplus stands at $9.2 billion, up $400 million from the prior year. Our RBC ratio next year could be affected by an increase in required capital due to the change in tax rates on after-tax RBC factors. We estimate this could impact the RBC ratio by about 60 percentage points.
I would note that this is contingent on NAIC action to change RBC factors to reflect the reduction in net tax rates, and we also believe the NAIC would consider taking a more holistic view and make refinements to calculations which could reduce the RBC impact. The last financial item I want to cover is free cash flow. Based on 2017 earnings, our long-term free cash flow target of 50%-55% implies approximately $850 million-$950 million in annual capital generation. We do not anticipate any material change to our absolute free cash flow generation or capital management strategy as a result of tax reform. Finally, let me provide some viewpoints on in-force profitability and new business pricing. As you know, all of our earnings are generated in the U.S., and the majority comes from capital-intensive, long-duration liabilities.
As a result, the vast majority of the increase in after-tax earnings should persist for the foreseeable future. We would expect to gradually pass through the lower tax rate into new business pricing. However, the annual impact to earnings should be modest. As we discussed on the Liberty acquisition call a couple of weeks back, shorter duration products, like group benefits, are likely to be impacted sooner, while life and annuity products will be very gradual given our strong and persistent in-force. It is also important to recognize that more favorable pricing would make all of our customer solutions even more attractive. This should accelerate top and ultimately bottom-line growth. Now, turning to segments and starting with life insurance. Earnings of $152 million in the quarter were strong, consistent with the prior year quarter. Both periods included favorable mortality results.
For the full year, we experienced good mortality, with actual to expected coming in at 99%, mirroring the prior year. Base spreads, excluding variable investment income, compressed nine basis points for the full year, within the 5-10 basis point range we have discussed. Earnings drivers remained solid for the quarter, with average account balances up 7% and life insurance in-force up 4%. Overall, this year's earnings were solid, up 4% on a reported basis or 11% excluding the impact of notable items. Strong sales results and steady driver growth continue to support earnings momentum. Group protection reported $20 million in earnings compared to $16 million in the prior year quarter. Overall, business momentum remains solid, with favorable risk results and accelerating top-line growth leading to a 25% increase in earnings.
Notably, this strong growth was held back by a few items, including higher variable costs, which reflect both seasonality and performance-based expenses, combined with slightly higher amortization. In total, I estimate this negatively impacted group protection by $7 million. The non-medical loss ratio was 67.1% in the quarter, a 380 basis point improvement from the prior year, attributable to better loss experience in long-term disability, driven by lower incidence and lower new claim severity. For the full year, loss ratios were steady or better than the prior year in every product line, which contributed to a 50% increase in annual earnings. Premium growth is also aiding the group business, as premiums increased 5% from the prior year quarter, with leading indicators such as sales and persistency trending in a positive direction. Overall, an excellent year for the group business.
We expect this positive momentum to continue in 2018 as we close and begin to integrate Liberty's group business. In annuities, earnings for the quarter were $265 million, up 10% from the prior year quarter. Earnings growth was driven by higher fee income from a 9% increase in average account values as equity market strength over the past year has more than offset negative net flows. Operating leverage was strong in the quarter as solid double-digit revenue growth resulted in the expense ratio improving nearly 100 basis points. Return metrics remained strong. ROA in the quarter was 78 basis points, while ROE came in at 21%, both consistent with the prior year quarter. Notably, return on equity has averaged 20% for a decade, and net amount at risk remains low across all vintages and well below most competitors, all of which highlights our differentiated and high-quality annuity book.
The annuity business had another strong year, with reported earnings up 15% and 8% excluding notable items in both periods. The year culminated with a significant improvement in annuity sales, and we expect to carry this momentum into 2018. In retirement plan services, we reported earnings of $41 million compared to $34 million in the prior year quarter. The increase in earnings was primarily due to growth in fee income from higher account values and expense management. Positive net flows of $1.3 billion for the full year, combined with favorable equity markets, drove average account values to $66 billion, a 15% increase. Base spreads excluding variable investment income compressed 10 basis points for the year at the low end of our guidance range. Fourth quarter revenue increased 6%, while G&A expenses net of amounts capitalized were up just 1%. ROA was 25 basis points for the fourth quarter.
2017 was a great year for the retirement business, highlighted by consistently strong earnings and returns. The combination of good top-line momentum and disciplined expense management leaves RPS well-positioned for future earnings growth. To conclude, 2017 was an excellent year. Operating EPS was a record and up 20%. Book value per share stands at nearly $65, an all-time high and up 13%, and ROE exceeded 13%. This year's strong performance follows a five-year period where EPS has increased at an annual rate of 11%, book value per share has increased at a 10% rate, and our ROE has expanded 70 basis points. As we look forward, earnings momentum is strong and tax reform provides an ongoing earnings benefit and should also enable us to make products more attractive to consumers. The balance sheet remains strong and our ability to generate capital is firmly intact.
Bottom line, we are well-positioned to continue delivering strong financial results. With that, let me turn the call back over to Chris.
Thank you, Dennis and Randy. We will now begin the question and answer portion of the call. As a reminder, we ask that you please limit yourself to one question and only one follow-up and re-queue for additional questions. With that, let me turn it over to Chelsea.
Thank you. Ladies and gentlemen, if you have a question at this time, please press the star and then the 1 key on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. For optimal sound quality, please use your handset instead of your speakerphone. To prevent any background noise, we do ask that you please place your line on mute once your question has been stated. Thank you. Our first question comes from the line of Erik Bass with Autonomous Research. Your line is open.
Hi, thank you. Just first, just wanted to clarify your comments about projected capital generation following tax reform. Should we take your comment as the 50%-55% ratio of GAAP earnings is unchanged, or that the absolute dollar amount of capital generation should be consistent with prior expectations?
It's the latter, Erik. The dollar amount of capital generation, $850 million-$950 million, is what I would focus in on. Just as a reminder, we've done a little better than that the last couple years. As we state, we have a target and then we do everything we can to exceed that. We've had some things we've been able to leverage the last couple years to go a little better, but I'd focus in on the dollar amount.
Thanks. Given the timing differences between cash and GAAP taxes, does that change over time?
No. I think you pointed out there is a difference between cash taxes and GAAP taxes. There's a small impact on our cash taxes, but not enough where I would say it really has any impact on our ability to generate the numbers I talked about, that $850 million-$950 million.
Thanks. Finally, just given the strong sales momentum you have in life and now in annuities, do you expect to allocate more capital to growth than you have in recent years? Should we assume more capital, I guess, going to growth and less to buybacks than has been the case recently?
I think as we mentioned in the past, one of the items we leveraged over the last couple of years was a reduction in annuity sales. We put that capital to work. As sales go up, there will naturally be a little more capital allocated. Once again, not to the point where I would change the dollar amount of free cash flow that I expect us to generate. I'd point out in all our products also, we've done everything we can over the last five years or so to make them as efficient as possible from a capital required standpoint. You especially see this on the life business with the mix of sales we have today, much lower GUL sales, for instance, having brought the amount of capital required to issue that business down pretty substantially over the past five years.
All right. Thank you.
You bet.
Thank you. Our next question comes from the line of Jimmy Bhoola with JP Morgan. Your line is open.
Hi, good morning. First, you might have noticed just the announcement by MetLife on issues related to benefits payments in its group annuity business. Have you looked at your business, and do you have any comments on whether or not you've identified similar issues in your group or payout annuity business?
Yeah, Jimmy, I see no connection to that issue in Lincoln. We're primarily in the business of accumulation annuities. Any payment issues we would have had were dealt with a few years ago when we went through the unclaimed property process. We've invested significantly in our ability to make sure that everybody's getting the dollars they're owed by Lincoln. I have no expectations of an impact here.
Okay. Just on the Liberty Mutual business, you expect, obviously, margins to go up in, I guess, in the next two to three years as you reprice the book. How should we think about, or how much business are you, in your planning, are you assuming that you will lose as you raise prices just due to an expected decline in persistency or sales?
Jimmy, as we mentioned on the call, as we priced that deal, one of the things that was so attractive to us was that there's a very little overlap between where we sell at Lincoln and where Liberty sells. In terms of sales, we think there'll be a little bit of noise, but the synergies you would typically see in a transaction, we just don't see. From persistency standpoint, we also priced in a little bit of persistency noise, but once again, not much. The persistency in that large case market is typically higher than the small to mid where Lincoln is specialized. We did price in some impacts. I would say that those synergies were modest compared to what we would have priced in in prior deals we'd looked at.
Okay. Just lastly, if I could ask one more. Just on annuity flows, you've seen a significant improvement in your sales. Are you expecting net flows in the annuity business to be positive in 2018 as a whole or by the end of the year?
The improvements give us more confidence in getting to break even net flows sooner than we had thought. We're still watching the sales and as 2018 develops, we'll be more firm in our expectations.
Thank you.
Thank you. Our next question comes from the line of Joshua Shanker with Deutsche Bank. Your line is open.
Yeah. Good morning, everybody. At the investor meeting that you guys conducted at the end of last year, you talked about getting into the index variable annuity market. I'm wondering what the market outlook for that, when you plan to launch it, and is there a risk that it cannibalizes other items that you might be selling, what the P&L impact of selling that product versus something else you sell is?
Yeah. The answer is we expect to be in the market, I think, in May. We think the value proposition of an index variable annuity is very different from the other products, both variable and fixed, that we have in the marketplace. We view that predominantly as an addition, not a replacement of existing sales.
Is the customer who's purchasing it as a suite with other things they're buying, or is it a different kind of customer?
It's probably both. There'll be new customers that are attracted to the value proposition. Yes, they'll compare it to other products and value propositions that are in the marketplace. Again, it's a very vibrant market already. Us participating in a market with our distribution and capability should broaden the market and possibly we'll take some share.
How long would you think it would take to get ramped up to where it has an effect on your earnings?
I think that we actually think that this is going to ramp up pretty significantly over the next 24 months. Any incremental contributions to earnings might be out a little way.
All right. Well, thank you very much. Good luck.
Thank you.
Thank you. Our next question comes from the line of Thomas Gallagher with Evercore. Your line is open.
Good morning. First question. Randy, the $90 million per year contributions that you've been making to your New York subsidiary for SGUL, I believe 2017 was the last year that those contributions were supposed to run through. Just wanted to see if that's right or if there's still going to be some tail on those contributions, and if so, does that mean you're now able to generate an extra $90 million a year of capital?
Yes, 2017 is the final year, Erik. The answer to the second question is no. If you remember, we did a reinsurance transaction a couple years ago in Lincoln of New York, and that reinsurance transaction has taken away that strain. While we've been putting up the $90 million in reserves, it's been going out as part of this reinsurance transaction.
Got you. No financial implications, maybe other than the cost of that reinsurance, no longer needing to use that for additional strain.
Correct.
Okay. My follow-up is, I just want to be clear I understand this, the co-insurance deal you have with Athene looks like for the quarter that generated something like $200 million-$250 million of sales for you all. A, is that right? Is that the right number? B, does that mean the aggregate sales that are being generated is more like $500 million and you're keeping half of that as part of co-insurance, or do I not have that right?
The total, it's not half of the total of sales, it's the total sales. As you recall, Tom, the profitability on what we retain is over time almost as much as if we sold the full amount without the reinsurance.
Got you. Dennis, the total amount of the sale would be that $200 million-$250 million. Is that directionally correct?
It's about $300 million, Tom.
$300, okay.
Yeah. Again, the profitability on our portion of about half of that $300 million is nearly as much as what we'd have made if we had in a traditional non-reinsured basis, sold the $300.
Dennis, would you say the $300 million, is that a decent run rate? Is it accelerating? Because I know it's relatively new.
Yeah. Tom, I'm reluctant to talk about a specific product and run rates. If I could back us up sort of at the top line, as Randy and I both reported, we've sold about $2.8 billion in the fourth quarter. About $500 million, $550 million or 20% of that is from new products that we've introduced either late in 2016 or in the middle of 2017. As I've mentioned, we have additional product introductions coming this year. I would take confidence personally that strength of distribution, I know you guys hear us say this a lot, but the breadth of our distribution, new product introductions, being on top of the market will consistently help us grow sales.
Okay, thanks.
Thank you. Our next question comes from the line of Ryan Krueger with KBW. Your line is open. Mr. Krueger, your line is now open. Due to no response, we'll go to the next question. Our next question comes from the line of Suneet Kamath with Citi. Your line is open.
Thanks. On last quarter's call, Dennis, you gave us kind of a look into what you were seeing in the fourth quarter with respect to Variable Annuity sales. It was good to see that come through. Has that momentum continued into 2018?
Let's first talk about seasonality. Fourth quarter is typically higher sales for most of our product lines than the first quarter. Adjusting out for that fact, I would say that all of the things that we have in place continue to encourage us that our annuity sales in total will continue to show growth in 2018.
Got it. Then just on the group protection, I guess, can you help us think through, I think on the Liberty Mutual call, you had talked about price adjusting for lower tax rates. Can you just give us a sense of what your expectation is in terms of how much pricing would come down because of the tax rate change?
I don't have that precise of an answer with respect to tax at the moment, but I would like to come back to Randy's statement, which is that over time, we expect to get to our 5%-7% margins, and there'll be a number of factors that combine to get us to the 5%-7%.
Okay. Just maybe last one, just on the tax rate. Other companies are talking about accelerating investment spending and things like that. It doesn't seem like you're guiding to anything like that in terms of your comments. I just wanted to confirm that.
It's interesting. We talk about tax reform, essentially what's happening is that you have lower costs. It happens to be, in this case, from tax reform, the one that we're talking about. As we've discussed, our digital program is expected to lower our costs significantly as well. We're not focused on any one specific cost reduction program, but ongoing cost reduction, both from, again, tax reform as well as other things that we have in mind, and we'll balance the need for further investment. Right now, the amount of investment that we're putting into digital is our major program, announced well before tax reform. There's nothing at this moment, there could be, is of that magnitude from an incremental perspective.
Got it. Thanks.
Thank you. Our next question comes from the line of Alex Scott with Goldman Sachs. Your line is open.
Thanks. One more just on the group repricing. With tax reform happening pretty late in the year and a lot of the repricing occurring kind of near the end of the year, is it fair to say that most of that won't really be going through for 2018 pricing, but it'll be more around the conversations kind of at the end of next year?
Let's just talk about short-duration liabilities and group protection. A lot of the business has guaranteed rates for a couple of years, and so those aren't repriced. New business, of course, is a different story. As Randy said, there's an expectation that over time, the expense reduction due to tax reform on shorter duration liabilities will in part be put into the product. I think that's great. The consumers get a much better value proposition, and we see benefits to the shareholder through increased sales.
Got it. One more just on the NAIC's group capital calculation that they're sort of coming up with. It sounds like some of the life captive reinsurance transactions maybe aren't grandfathered the way they are in AG 48. Do you see that as any risk at all? Do the rating agencies even sort of care about that ratio, or will they care about that ratio?
Well, the captives are taken into consideration by the rating agencies. The rating agencies are not guided by the NAIC and what policy changes they'll make. With respect to the group calculation that the NAIC is working on, there continues to be a lot of discussion about what it's going to be and what it's going to be used for. It's an evolving situation. I don't expect it's going to be a major issue for the industry.
Okay. Thank you.
Thank you. Our next question comes from the line of John Barnidge with Sandler O'Neill. Your line is open.
Thank you. If you could talk about your mortality experience maybe in December. Headlines are suggesting that the flu season thus far is one of the worst in decades, and maybe anything you could say about what you've seen so far this year to date.
Well, John, we're not going to talk about any specifics about what we've seen in 2018. In terms of the fourth quarter, it was a good quarter for mortality. I think it was very similar to the fourth quarter of 2016. I think it gave us, in 2017, a very stereotypical year, which is we had elevated mortality in the first quarter of the year, and we got it back in the third and fourth quarter. It all led to a 99% ADE for the year, right in line with 2016. It was almost the same pattern. We had good mortality throughout the fourth quarter. History would tell us that we'll have elevated mortality in the first quarter. That's what we've seen typically. In terms of any specifics, I read the same articles that you do.
I think I even know some people who've had the flu. Other than that's all we're going to say. History would tell us we'll have elevated mortality in the first quarter, and the reality is that we had really good mortality in the fourth quarter.
I definitely appreciate that. My follow-up is, do you feel like you're seeing a massive influx in demand for across-the-board products or benefits products, maybe particular post-tax reform?
What kind of products, John?
Benefits, Group Protection products
Yeah, I've got sort of a big view on this, which is from an individual perspective, individual tax reform change, I think it's going to take a while for people to understand what it really means. We all know that the effective tax rate across income brackets is going to go down, short-term, or excuse me, this year, I guess beginning in February, people see more cash in their paychecks. When you get to April, what the effect of the elimination of certain deductions adds to that or subtracts for that is yet to be seen. We're paying attention to our financial advisors and what they're hearing from their customers. I think the whole individual tax rate is not settled in at this point, and consumers are not taking action just yet.
That makes sense. Thank you.
Thank you. Our next question comes from the line of Humphrey Lee with Dowling & Partners. Your line is open.
Good morning. Thank you for taking my question. Just a question on life insurance. I think last year on the same call, you talked about the quarterly run rate being $125 million a quarter on average. Obviously, you have some good sales in 2017 and spread compression improved. Looking at the earnings growth is still a lot stronger than the 2%-4% that you highlighted at the investor day. How should we think about the, first of all, what will be the new quarterly run rate as we move into 2018? How should we think about the near-term growth process as you talk about being pretty robust in 2018?
Humphrey, thanks for the question. I think the last time I talked about this was a little more than a year ago, when we talked about the life business at $125 million, and I think we've improved since then. We've seen growth, as you noted, over the last couple of years in the 4%-6% range. We've had some spread compression, which has taken away some of that, which has netted to 2% or 3% a year. When you roll 2%-3% onto that $125 million over a couple of years, I think you get largely in line with what we would expect, which is somewhere in that $130 million-$135 million range right now. If you look at the fourth quarter, we made $152 million. We had good mortality. We typically have some seasonally strong results in the fourth quarter.
Expenses were a little higher, so you'd end up in that range, maybe probably at the upper end of that range. If you look at the full year, we made $536 million, $551 million normalized. As Dennis mentioned, the year featured some pretty strong results in the alternative portfolio. Life's a primary beneficiary of that. Once again, I think you would end up in that $130 million-$135 million range, probably towards the upper end of that.
Got it. Thank you.
Once again, that's before tax reform. Now you have to look at those tax rates ranges that we provided and adjust your models for tax reform.
Okay. On group protection, specifically related to Liberty Mutual, back at Investor Day, you talked about the voluntary benefits participation among your customers is about 30%, and you're targeting to get to 35%. My understanding is the Liberty Mutual block, they don't really have a lot of voluntary benefits. As you try to kind of cross sell to that 10 million insured individuals, what do you expect in terms of the voluntary benefits participation could come through in the near term? Ultimately, is the 35% still a good longer-term target?
Yeah, let me respond to that in general. First, maybe a little correction on the percentage of employee-paid sales. Today in Lincoln standalone business, it's 50%. I'll also remind you that we have new products coming out, I think in the next six months or so, going on sale next year, that are ancillary employee purchase products. Momentum existing 50% and more momentum. In terms of Liberty, I want to come back to Liberty for just a moment. Liberty is a high-quality organization with really good products across the businesses. We're so delighted that we're able to purchase the group business, which the quality of business, the quality of the service capabilities is just really very good. Quality of people is really very good. It's really, as Randy pointed out, very complementary, different markets. It's a good acquisition.
The second thing I would say, specifically in response to your question, is that the penetration on the employee-paid side at Liberty is less than what we see here at Lincoln, it's a great opportunity, we think, for further revenue development as we go down the road. As we said when we discussed the transaction and the pricing of the transaction, we did not include any revenue opportunities.
Thank you for the call.
Thank you. Our next question comes from the line of Ryan Krueger with KBW. Your line is open.
Hi. Thanks. Good morning. Sorry about that earlier. On the RBC ratio, you had previously guided to 460% after the Liberty deal. Is that still a good number, or does that change at all from the 15-point DTA impact in the fourth quarter?
Using about $600 million of cap off the balance sheet, the impact of that is roughly 30 points. We ended the year at just a little below 490. I think we're right in line, almost exactly in line with what we talked about earlier.
Got it. I guess any thoughts at this point in terms of if the RBC denominator is changed by the NAIC, how the rating agencies may react to that, and if you may need to rebuild that over time or just reset to a lower number?
Yeah, look, I think that tax reform didn't happen that long ago, I'm sure they're still formulating their thoughts. I'm also equally sure that when they were taking a look at Lincoln as we took the Liberty acquisition to them, they thought about our ratings and how we were financing the transaction, they ultimately affirmed our ratings. I'm sure they were thinking about all of the things that could be going along to capital levels. The majority of them have their own capital models already. We have ratings consistent with the capital strength that we show on their models. Our double A ratings already reflect their capital models, which are different from anything the NAIC has. Very comfortable that the rating agencies have thought about this, but I'm sure they have some more thinking to do, as we all do.
Yeah. I would just add to that, we're very pleased that Moody's has in fact sought in their release, indicated it as a credit improvement, the addition. Is that what it's called?
Credit positive.
A credit positive. Listed many of the same reasons for that statement as we saw as we were exploring the opportunity.
Thank you.
Thank you. I'm showing no further questions at this time. I would now like to turn the call back to Christopher Giovanni for closing remarks.
Perfect. 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 through email at investorrelations@lfg.com. Thank you all and have a great day.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.