Good morning, and thank you for joining Lincoln Financial Group's first quarter 2015 earnings conference call. At this time, all lines are in listen-only mode. Later, we will announce the opportunity for questions, 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. At this time, I would like to turn the conference over to the Senior Vice President of Investor Relations, Chris Giovanni. Please go ahead, sir.
Thank you, Liz. Good morning and welcome to Lincoln Financial's first 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/or reports on forms 8-K, 10-Q, and 10-K filed with the SEC.
We appreciate you participating 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 Randal Freitag, Chief Financial Officer. After their prepared remarks, we will move to question and answer portion of the call. I would now like to turn things over to Dennis.
Thank you, Chris, good morning, everyone. Operating earnings per share once again increased over the prior year quarter, albeit slightly, as operating earnings were down due to elevated mortality in individual life and poor group protection results. We acknowledge that the start to the year was lower than analyst projections, we remain comfortable with our financial planning and business targets. Our confidence is grounded on several fronts. First and foremost, our broad and deep distribution franchise consistently gives Lincoln a competitive advantage. This enables momentum in long-term revenue and earnings drivers to continue. We saw this in the first quarter with positive net flows in all of our businesses, sales that benefited from various product introductions and refinements, which resulted in good sales growth as the quarter progressed and has continued in April.
Account value growth in every business with total balances up 6% to a record $222 billion. Next, we have a rigorous approach to expense management. This quarter, we once again saw our expense ratio decrease from the prior year. Also, our balance sheet strength and capital generation enables us to complement organic earnings with capital management, further augmenting earnings per share growth. All of this supports key shareholder metrics, several of which showed impressive growth this quarter, including book value per share, excluding AOCI increased 9% from the prior year, the repurchase of $350 million of Lincoln shares, a post-financial crisis high, and a 25% year-over-year increase in our common stock dividend.
While our ROE was negatively impacted by the earnings items I noted upfront, our ROE in a seasonally weak quarter and in the midst of a continued turnaround in group protection exceeded 11%, which is consistent with returns generated by our peers during 2014. That being said, we clearly expect our ROEs to recover and remain above peers. Let me now turn to our business lines, starting with annuities. Favorable equity markets and positive net flows led to a 7% increase in our average account balances and another solid earnings quarter. Our consistent market presence continues to produce quarterly sales in the $3 billion range and positive net flows. Variable annuity deposits of $2.7 billion decreased 8% from the first quarter of last year, but we are encouraged by the sales momentum we saw over the course of the first quarter.
To provide some context, average daily sales in March were up 15% compared to January and February, and this trajectory has continued in April. As a result, we expect quarterly annuity sales to exceed $3 billion in the next quarter, which should also enhance net flows. We remain focused on pushing the percentage of variable annuity sales from products without living benefits to 30%. This quarter, we reached 27%, up from 19% in the prior year period, making the seventh straight quarter of sequential increases. When factoring in the impact of sales on sales covered by our reinsurance treaty, non-guaranteed products comprised 58% of total VA sales. Our consistent market presence and proven track record of offering valuable customer solutions that also enable Lincoln to achieve good returns and manage risk still holds true today. In a VA marketplace that remains rational, we are confident we are positioned for growth.
Turning to individual life. Total life insurance sales in the quarter were $153 million, a 6% increase from the prior year quarter. With one of the broadest product portfolios in the industry, we continue to deliver growth with a diversified mix of sales and by selling more products without long-term guarantees. This quarter, no single product represented more than 29% of total production, down from 32% last year, and 62% of our sales did not have long-term guarantees, up from 59% in the prior year quarter. Equally important, within each product, we have different features and options that enable our distributors to expand consumer reach, but also give Lincoln another tactic to diversify risk. An example of this is our MoneyGuard product, where roughly half of our sales this quarter were flex pay and the other half single pay. This reduces interest rate sensitivity.
Focusing on individual life insurance, sales decreased 2% in the quarter. However, similar to my prior comments around variable annuity sales, we are encouraged by the sales momentum we saw in March and the carry-through to April. Also of note, most products contributed to this momentum. COLI and BOLI sales were $14 million in the quarter, compared with just $3 million in the prior year quarter. Our outlook and appetite for COLI and BOLI has not changed, as we will remain opportunistic. Overall sales here need to meet the same 12%-15% return hurdle we target for our entire life portfolio. Looking forward, while we did see a bump in mortality, which Randy will speak to later, we expect profitable sales growth in 2015 given the depth and breadth of our distribution relationships and product diversity, combined with prudent underwriting. Turning to group protection.
Randy will touch on our operating earnings loss shortly. The lack of earnings improvement is disappointing but does not change our expectations of approaching our target margins toward the end of 2016 to 2017 timeframe. We are beginning to see traction on the actions we have been implementing and are encouraged by the underlying pricing and claims management trends. We remain focused on taking pricing actions aimed at our employer-paid businesses and enhancing claims management to restore profitability. First quarter sales of $56 million were down 13% from the same period last year. Our pricing actions continued to put downward pressure on new business opportunities, particularly in the 1,000-plus market, which historically has been a more competitive segment of the market. Looking forward, we see sales growth remaining pressured as we continue to push for rate increases.
In retirement plan services, earnings were impacted by some spread compression, though we are encouraged by underlying business drivers. Notably, we returned to positive net flows. Flows of $115 million improved significantly when measured against outflows in the fourth quarter and prior year quarter. Positive net flows in the first quarter is consistent with our year-end outlook that called for positive net flows for the first half of 2015. Our optimism and visibility now extends through the third quarter. A few pieces to this outlook. First, our pipeline is strong. This should benefit first-year sales in the next couple of quarters. Also, our expectations around retention remain favorable. We attribute this to our concentrated effort on improving plan sponsor and participant experiences. We remain optimistic in the growth outlook for our retirement business.
Longer term, our core markets are poised to grow faster than the industry, while continued expansion into segments like government and small markets bode well for Lincoln. Turning to distribution, the depth and breadth of our retail, wholesale, and worksite teams continues to differentiate Lincoln. We currently have over 1,400 client-facing professionals, up 4% versus the prior year. The number of producers selling Lincoln products is 63,000 strong, and 26% of them are cross-selling, up from the prior year. As we have discussed in the past, our large distribution force enables our mix shifts. For example, our focus on growing variable annuities without guarantees. We now have almost 13,000 producers selling VAs without guarantees, up 26% from a year ago.
At Lincoln Financial Network, we had 163 experienced advisors choose to affiliate with Lincoln this quarter, which puts our advisor network at more than 8,300, including a 2% increase in registered reps. Spending a minute on investment management. Our new money purchases of $2.8 billion in the first quarter were invested at an average yield of 3.8%, which was down from the 4.3% in the fourth quarter. Primarily driven by the drop in treasury rates as well as an asset mix which fluctuates from quarter to quarter. We delivered a 186 basis point spread on new money over the average 10-year treasury, which is strong and consistent with our historical experience. Our yield enhancing debt program continues to add value to our core investment strategy and added 12 basis point to new money rates in the quarter.
Income from alternative investments was $8 million for the quarter, which was below the prior year's quarter as well as our historical average. This result was driven by headwinds from our energy exposure, which we believe has stabilized. Before wrapping up, I want to briefly discuss the Department of Labor's fiduciary standards proposal. As you have heard from other management teams, this is a voluminous and complex proposal, and like most financial service companies, we are reviewing the proposal to understand all of its potential implications. As with all pertinent regulatory matters, there is a process, and the details are very important. We will be very engaged, express our views, as well as collaborate with various industry trade groups. In the end, there likely will be some change.
We believe companies with scale, a broad set of product offerings, and a strong and diverse distribution franchises with a proven ability to pivot in response to marketplace or regulatory changes will be best positioned to navigate changes. Clearly, we're confident on all these fronts and expects this to once again differentiate Lincoln. In closing, I recognize the year started slower than many expected. However, I do not expect seasonal fluctuations in mortality to define our year. Our franchise remains a competitive advantage, while our sales and flows outlook are strong. Both will enable our long-term revenue and earnings momentum to continue. I will now turn the call over to Randy.
Thank you, Dennis. Last night, we reported income from operations of $352 million or $1.35 per share for the first quarter, up 1% from the prior year. Consistent with first quarter results the past few years, we experienced elevated mortality, which negatively impacted earnings by $30 million compared to $18 million last year. As you know, we do not normalize for mortality as it will fluctuate from quarter to quarter. However, we felt the deviation relative to our expectation was large enough that it should be mentioned. Looking at key performance metrics, the top line continues to show healthy mid-single-digit growth, with operating revenue up 5% for the quarter, driven by another quarter of positive net flows and the benefit of favorable equity markets. We remain focused on managing expenses, which again drove margin expansion as the 4% growth in G&A net of capitalized expenses trailed revenue growth.
It is also worth noting the elevated expenses, which I attributed to seasonality in the fourth quarter, did normalize. Book value per share, excluding AOCI, grew 9% to $49.70, an all-time high. As Dennis noted, operating return on equity came in at 11.2%, negatively impacted by the adverse mortality and poor results in group protection. Our balance sheet remains an important source of strength, which gives us significant financial flexibility. Net income results for the quarter were negatively impacted by $28 million from variable annuity net derivative losses and $10 million of losses within our general account. I will turn to segment results and start with annuities. Reported earnings for the quarter were $239 million, an 11% increase over last year.
Operating revenues increased 9% from the first quarter of 2014 as positive net flows continued, and we benefited from further tailwinds in equity markets, which combined drove a 7% increase in average account values that reached $123 billion at the end of the quarter. Return metrics, whether measured by ROA or ROE, remain strong. ROA increased three basis points versus the prior year and stands at 78 basis points, while ROE came in at 25%, consistent with the fourth quarter. We continue to expect profitable growth in deposits and net flows, which will add to our record asset levels and drive further upside to annuities earnings. In retirement plan services, we reported earnings of $35 million. First quarter revenue growth was up 1% year-over-year. Account values benefited from positive net flows in the first quarter along with favorable equity market performance.
As a result, account values increased sequentially and ended the quarter at $55 billion, up 5% versus the prior year. Normalized spreads compressed 13 basis points versus the prior year quarter, consistent with our expectations for spreads to decline by 10-15 basis points annually in the retirement business. Our return on assets was 26 basis points for the first quarter, within the 25-30 basis point range we have discussed in the past. Turning to our life insurance segment, earnings of $111 million were down as a result of the fluctuations in mortality. $26 million of the quarter's adverse mortality hit the life insurance segment versus $18 million in the prior year quarter. As we have discussed in the past, our focus on retaining more mortality exposure, combined with the business recaptured at year-end, should lead to some increase in quarterly volatility.
In looking at mortality experience in the current quarter and understanding that we don't yet have complete information, we do believe the severe winter weather and flu season likely played a part in our experience, consistent with comments made from others in the industry. It is worth noting that we typically have seen seasonally high mortality in the first quarter, only to see mortality improve over the course of the year. To provide some context, Individual Life's first quarter earnings for the past couple of years have averaged 20% of full-year earnings. While Life's first quarter results were once again negatively impacted by elevated mortality, we expect that when viewed over a more extended period of time, experience will be in line with our longer-term expectations. It is also worth mentioning that our outlook for the business we recaptured at year-end has not changed.
Notably, it will have a modest negative impact on Individual Life earnings and slightly increase our quarterly earnings volatility, but be accretive to EPS, given the benefit of incremental share buybacks. Turning quickly to the life earnings drivers. Average account values were up 5%, with average in-force face amount up 4%, both consistent with recent performance. Normalized spreads came in around 166 basis points, down five basis points from the prior year, once again in line with our expectations. group protection fell short of expectations as we reported a loss from operations of $6 million in the first quarter, compared to a gain of $20 million in the prior year. The earnings do mask significant sequential improvement in key metrics. Our non-medical loss ratio improved from 81% in the fourth quarter of last year to 78% this quarter. Importantly, our disability loss ratio declined nearly 10 percentage points to 80%.
The decrease is largely driven by improvements in our claims management process and is evenly split between a decrease in claim incidents and higher recoveries, with both improving by approximately 10%. These positive earnings drivers were offset by a few negative items, including accelerated amortization of DAC and a portion of the elevated mortality I noted upfront. In terms of the accelerated amortization of DAC, this was primarily due to our extensive repricing of policy renewals. This reduced earnings by approximately $10 million when compared to the fourth quarter. With the first quarter our heaviest renewal period, the amortization impact is greatest in this period. Looking forward, although we expect amortization to be up versus prior year quarters, we do not anticipate the $10 million I noted for this quarter to recur in subsequent periods of 2015.
Bottom line, we do expect earnings to improve, but continue to caution that the improvement will not be linear. Before moving to Q&A, let me comment on a few other items of note. Given our strong year-end capital position and the benefit from the reinsurance recapture, we accelerated capital management in the quarter with $350 million in buybacks. We continue to view share repurchases as an excellent use of capital and expect to exceed the $650 million we put to work in 2014. Returning capital to shareholders remains a priority. As a result, we expect to go to the board in a few weeks to ask for an increase in our share repurchase authorization, consistent with our past practices.
Statutory surplus stands at $8.5 billion, and we estimate our RBC ratio will end the quarter at approximately 515%, down from year-end, as we paid $400 million in dividends to the holding company. Holding company cash ended the quarter at nearly $800 million. Finally, in March, we completed a $300 million debt offering, the proceeds which will be used to retire the $250 million of debt due in June. We remain comfortable with our leverage and capital structure. Wrapping things up, earnings came up a bit short to start the year, but we remain very confident looking forward. In addition to the strong franchise highlighted by Dennis, we are encouraged by our belief that elevated mortality in the first quarter is driven by seasonality, consistent with our past experience in prior years, and that we will see better mortality and Individual Life results over the remainder of the year.
The improvements we saw in underlying disability trends that led to a meaningful sequential decrease in our disability loss ratio. Finally, the strength of our balance sheet and strong capital generation, which allows us to continue actively deploying capital. With that, let me turn the call over to the operator for questions.
Ladies and gentlemen, if you'd like to ask a question at this time, please press the star, then the number 1 key on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, you may press the pound key. Again, to ask a question, please press the star, then the number 1. We ask that you limit yourself to one question and one follow-up. Our first question comes from the line of Suneet Kamath with UBS. Your line is now open.
Thanks. Good morning. First question on the DOL fiduciary standards. I appreciate that it's still early days, but I just wanted to get a high-level sense, maybe from Dennis, how you think this could impact your annuities and RPS business, and specifically related to annuities, could this start to move you and/or the industry back towards offering more living benefit guarantees in order to improve the value proposition of the variable annuity? Thanks.
Yes. Suneet, I think it is complicated, and there's lot yet to be revealed in terms of the final changes here. I do think, if you don't mind, I'll repeat what I said in my remarks, and that is that we believe there will be some change. We think that Lincoln, because of our scale, broad set of product offerings, and strong and diverse distribution franchises with a proven ability to pivot in response to market or regulated changes, we'll therefore be able to navigate through whatever comes down the road. Having said that, let me dig a little bit deeper into your question. First talk about annuities. One of the big issues, one of the overarching issues in this document is how agents get paid fees versus commissions. It's worth noting, we currently offer fee-based products that meet the fiduciary standard of providing investment advice.
As an example, our VA products are already set up to be sold as fee-based advisory products. We already have taken action and will continue to respond to changes, be it through law or needs and preferences from our distribution partners. That's important. Sticking with annuities, we've always been known more for our non-qualified competitive positioning due to our patented i4LIFE income feature. Specifically, VA, 58% of what we sell is non-qualified and 42% are qualified. We think this is probably a little better than the industry average. With respect to non-living benefits, we don't think there's going to be any reduction in the pace of our growth in that product. That's a specific answer on that as well. Finally, on RPS, there's a lot of issues that I think the bigger retirement companies have touched on them.
I think our bottom line is we think that we'll be able to respond to changes and we may have to make some changes in the way we do business. We don't see this as a significant hurdle for continuing to grow that business. Let me just stop there.
Okay. That's helpful. I did want to ask another one on captives. Just in terms of what you're hearing around regulatory review of variable annuity captives, if you can update us on that, and then also, maybe for Randy, if you can remind us what kind of assets do you have in the captive, letters of credit exposure, those kinds of things. Thanks.
Yeah. Let me start by reminding all of us that we just finished, we being the industry and the regulators, a long, thoughtful process around captive regulations for AXXX and Triple-X. That turned out pretty good, both from a regulatory standpoint and from the perspective of the industry. I'm kind of encouraged by the fact that we just went through this with them. Once again, Lincoln is taking sort of a leading role in the discussions with respect to VA captives. Once again, good news in terms of the process. Similar to what the regulators did on Triple-X, they're hiring a couple of outside consultants to bring more perspective and help to them as they look at this issue.
In this case, a VA captive, the difficulty is that you have a regulatory regime that is more on a book value basis, and you have economics of the policy more on the basis of fair market and sort of more GAAP economics. The companies have to choose, and we've talked about balance sheet risk. You have to choose between hedging to protect yourself or to build assets to pay future claims. You can, at the same time, protect against some potential swings in statutory capital calls related to extreme economic scenarios. I'm optimistic that maybe we'll be able to craft a solution with the regulators that sort of mitigates this tug and pull between asset economics, and maybe, this is being a bit optimistic, maybe we won't need VA captives if we can get that at all, if we can get that problem solved.
Process is underway. I'm encouraged with what I hear being said by the regulators and what they've already accomplished, and we'll see where it turns out.
Suneet, hey. This is Randy. We remain very well-positioned from an asset standpoint in the VA captive. I believe at the end of the quarter, our assets exceeded our hedge target by roughly $1.5 billion. I think that's a story that continues to differentiate us as a company, very well-positioned from where we sit. As you remember, and Dennis sort of described it in his discussion, the main risk around this is the difference that can emerge between statutory liabilities and economic liabilities in certain economic environments. It's really only that odd economic environment, which is primarily a big spike in interest rates, which would cause us to use anything but the hard assets that we currently use today. What makes up our current hedge assets?
It's the value of the derivative assets we hold, some bonds that we hold in there, but we're currently using no what you would describe as soft assets.
Got it. One last one for Dennis. In terms of your regulatory discussions, I think on Triple-X and A-Triple-X, the regulators took a view of sort of a prospective approach to this as opposed to retroactive. Is that your sense, in terms of how they're going to approach VA captives, or is it too early to tell on that? Thanks.
All the conversation is around perspective. I think if you look back historically in the insurance industry, the regulatory framework, very seldomly do you make things retroactive. Clearly, in the specific case of A-Triple-X, Triple-X, there was no retroactivity. I would hope that it would be forward-looking, but I can't say definitively if it will or won't be, because we're not that far down the road.
Okay. Thank you.
Our next question comes from the line of Ryan Krueger with KBW. Your line is now open.
Thanks. Good morning. One quick follow-up. Randy, you mentioned the $1.5 billion of net assets in the captive. Can you tell us what the RBC impact would be if you did consolidate the captive at this point?
Yeah. It's not something we look at on a regular basis, but it continues to be the same story, which is no negative impact on our LNL RBC or our life insurance company-reported RBC if we were to bring our captives back in.
Okay. Got it. I wanted to move capital management. In the past, you've talked about an interest in group benefits M&A. Would you feel comfortable making an acquisition in that space right now if the right opportunity presented itself, given the challenges that you're working through in your own business?
Great question. What we've said in the past is the following, our attitude hasn't changed, which is we'd like to increase morbidity earnings at the right time and probably with an acquisition. We're not ruling out an acquisition now. Because of the difficulty we're having with our core business, it makes it harder to get over the hurdle of doing an acquisition. Finally, quite clearly, anything we do in terms of acquisitions has to be measured against other sources of capital, such as buying our shares back. Open-minded, but at the moment there's some impediments.
And then-
Yeah. Not saying that we wouldn't do something, but it'd be harder to do it.
Okay. This last one. I guess where do you feel like you could bring your RBC ratio down to in an M&A if you were to do a larger M&A transaction? Is around 450 still the right way to think about where you might be able to bring that to?
Ryan, I think it's the nature of the M&A deal you do. If it was a group deal, I think that's probably a reasonable estimate. I think the way we've talked about this in the past is sort of on our balance sheet, we probably have capacity to do $750 million or so of M&A with existing capital from the balance sheet.
Again, I want to reinforce this issue that the continuing to focus on share buybacks is a high priority for us, and that when we talk about excess capital, it's different as to whether you use that excess capital for share buybacks or for acquisitions in terms of the split. When you do an acquisition, the capital stays in the company, whereas share buybacks, the capital goes out. The excess capital can't all be used for share buybacks, whereas more of it could be used for acquisitions.
Very helpful. Thank you.
Our next question comes from the line of Seth Weiss with Bank of America Merrill Lynch. Your line is now open.
Hi, thank you. Clarification question on the $30 million adverse mortality hit. Just want to make sure this is relative to expectations for a seasonally higher one Q. Is that correct?
That's sort of relative to our baseline expectations for a full year. If you were to look at an average quarter during the year, $30 million would be what's over and above that number. It's really sort of consistent with what we've experienced in the past. If I look at the A to E in the first quarter of this year, it's really no different than the A to E from the first quarter of last year. We didn't see anything abnormal in the seasonality. We just continue to grow and retain more business, I think that's why the number is bigger than last year's.
Okay, thank you. If I could move on to group, and maybe a little bit more granularity here. If I were to normalize for the accelerated amortization and maybe add in a couple million more for mortality attributed there, we get to modest profitability, but still under $5 million, so under a 1% margin. Last quarter, you spoke about new claims management causing some pressure on incidents and recoveries, but expectations to improve those claims management issues within the next six to 12 months. Could you speak about what claims management pressures you may have felt this quarter, and how progress on shoring up those issues is going?
Sure, Seth. You remember the original issues around the whole claims management process arose when we installed a new system in the middle of next year, that caused average case loads per examiner to go up, some of the new process changes that went in place really caused sort of a backup. We had some things we needed to fix. As we said, it would be something that we'd fix as we came into the second half of this year. We thought we'd be where we needed to be. I think we made significant improvement in this quarter, that really drove the significant improvement you saw in the disability loss ratio. As I mentioned, it improved nearly 10 points with a lot of that improvement directly attributable, I believe, to some of the improvements that we made in the claims management process.
We still have a ways to go. Specifically, I think we have more work to do on bringing average caseloads down per examiner. I think that's still to come. We made a lot of the process improvements, bringing in support for our claims examiners, for instance, whether that's nursing support, whether that's support at the managerial level, whatever it is. We made a lot of process and support improvements, we still have more to go, I think, before we get to where we need to be.
Okay, thank you. If I could just do one quick one on capital. Absent M&A, how should we think about bringing that RBC ratio down over time, which at 515, I think is still quite high relative to peers?
Yeah, I think it's still high. I think as we've said in the past, the way we've been deploying capital, we expect it to come down. There have been some items which have been favorable, whether it was the impact of the reinsurance recapture in the fourth quarter or some favorable experience we had last year, in the RMBS rerating process, for instance. There have been a number of things that have been favorable, but the way we're distributing capital, we continue to expect it to come down 10-15, 10-20 points a year, somewhere in that range.
Okay, thank you.
You bet.
Ladies and gentlemen, we ask that you limit yourself to one question and one follow-up. Our next question comes from the line of Thomas Gallagher with Credit Suisse. Your line is now open.
Good morning. First question is just on the adverse mortality this quarter. Can you comment on whether or what impact you saw from the recapture block this quarter? Did that contribute to the weakness? If so, how much?
Hey, Tom. Yeah, it contributed overall to the elevated mortality experience. As we mentioned in bringing in that book of business, we expected similar to experience to the rest of our book, and we saw that. As I mentioned, overall, we had an actual to expected experience in this quarter that was very similar to the first quarter of 2014. There was no big impact from that. Doing the recapture increased the average face size of our policy and was going to create a little more volatility. In a quarter where you have bad experience that increased volatility, means you're going to have more claims, more bad experience, and we have that, the $30 million versus the $18 million we had last year. There's really no differentiated impact from the recaptured business compared to what we've experienced in prior years' first quarters.
Got you. Randy essentially contributed its fair share as a % of the total block, but nothing beyond that. Is that a fair characterization?
That's a very fair characterization.
Okay. One follow-up on, Dennis, the comment you made on living or VA sales without living benefit guarantees. I guess my question there is what % of those sales are coming from qualified sources? Is it similar to your overall mix in the low 40% range, and would you see those sales as potentially vulnerable or potentially getting overhauled, just considering the value proposition that may be harder to prove under a fiduciary standards threshold?
Yeah, Tom, let me repeat the question. What % of our non-guaranteed business is coming from qualified plans?
That's right, yes.
Yeah. The answer to that is about 25% is coming from qualified plans and 75% from non-qualified plans.
Got you. Do you think that 25%, just considering what's happening here and understanding the technicalities of the proposal are yet to be determined, but if you think about the spirit of what's being proposed here, would you expect that 25% potentially going away?
Tom, that's a very specific question, and it is actually a question that is probably more appropriate for the broad distribution organizations. We have such different alternatives to sell product, different distribution systems and channels, as you know. We don't think that there's a serious risk to that 25%, but it may end up coming from different channels than it's coming from today. I fall back on our comment, broad, diversified distribution and our proven ability to pivot, whether it's for customer preferences, pricing issues, or regulatory reasons, and that we'll find a way with this distribution organization to continue to grow our sales.
Okay, thanks, Dennis.
Our next question comes from the line of Steven Schwartz with Raymond James. Your line is now open.
Hey, good morning, everybody. Excuse me. To follow up a little bit on Tom's question, I'm interested in, Dennis, if you know what percentage of your VA sales are upfront commission as opposed to fee-based. Let's put it that way simply. Today, in today's world, how are they sold?
I'm trying to get an answer for that. Vast majority are sold on an upfront commission basis.
Okay. All right. Dennis, you talked a little bit about sales and how they picked up
Could I come back to that?
Sure
reinforce the fact of how you pay the agents is really determined by our distribution channels. As I said in my prepared remarks, we are prepared already to sell these same VA products on a fee basis rather than front-end commission. I want to reemphasize another point which we've made in the past. Living benefit products are an important part of the retirement planning for Americans, and I don't see the demand for that product going away, even though companies and distribution organizations may have to adjust the way they get it to the consumer.
Yeah. No, it's a good point. It's not really your issue. You can do it. It's a question of whether broker-dealers and brokers want to sell that way or not, and maybe they'll have to. That's all out there. That's why I asked the question.
Yeah.
During your prepared remarks, you talked about how sales, both in annuities and life insurance, picked up in the quarter and continue to pick up. I think you referenced maybe new products or revisions to older products. If you can fill that out, please.
Yeah. I think the pickup is just related to better productivity. There's been some product changes. I wouldn't attribute the pickup to any specific product. There's nothing dramatic in the way of product improvements that would have led to that 15% pickup. I just think we got off to a slower start. We are now back to where we think we have levels of sales that are more consistent with our expectations. A higher level of sales.
Okay. Last one for Randy. I think maybe Seth asked this question. The adverse mortality that you're pointing to is relative to what you'd expect on average for the year. I get that. We know the first quarter is always going to have bad weather. We know the first quarter is always going to have the flu season. We've got the Christmas effect. Do you have a sense, Randy, of generally speaking, what you would consider to be, call it normal adverse mortality in the first quarter relative to your baseline?
Steven, obviously it's a tough number estimate. If you asked me to sort of take a stab at it.
Sure
Maybe half of the $30 million was sort of over and above a normal seasonal first quarter.
Okay.
Put a big confidence interval around that number.
Okay, fair enough. Thank you, guys.
Our next question comes from the line of Erik Bass with Citigroup. Your line is now open
Hi, thank you. I guess first, just wanted to follow up on, I think what Seth was asking on the group side. Have recent results changed your view at all on how long it will take group results to recover and get back to, I think, the 5%-6% margin you've targeted on a run rate basis? Or do you think we're just seeing more negative noise related to DAC and mortality and other factors, but kind of the timing of getting to the end goal hasn't changed?
I did say in my remarks that our expectations with respect to getting back to good margins haven't changed. It's sort of late 2016, early 2017. That hasn't changed.
Got it. That's on a run rate basis?
Right.
Okay. Dennis, if I can ask just one on variable annuities. Have you seen much impact from increased competition as other insurers have rolled out both new guarantee features as well as products without living benefits? Is your sense that the overall industry demand for VAs just ticked down a little bit in the first quarter?
I think it ticked down a little bit in the first quarter, as you say. We continue to have what I would refer to as rational competition in this market right now. Different companies have different value propositions, different features, and at any point in time, you can see one get ahead of the other for whatever reason. We're a strong, consistent player. We'll continue to get our fair share. Overall, our costs and benefits are consistent with what other carriers are offering, and then we have the benefit of the best wholesaling force, we think, in the country. We'll continue to get our fair share on our terms.
Got it. Thank you.
Our next question comes from the line of Humphrey Lee with Dowling & Partners. Your line is now open.
Thank you. Good morning. Just want to follow up on the group protection in terms of the DAC amortization. Can you just remind us on, in any given years, what is the pattern for your renewal cycle? What percentage of business in any given year go through the January 1 renewal cycle versus the July 1 cycle?
Let's start out with your typical group contract is about a three-year guarantee. Maybe about a third of your business is going through in any particular year. Inside of that, roughly 60% or so is in the, half to 60%, is in the first quarter of the year. Our second biggest would be the third quarter. Our July renewals.
Okay. Then how should we kind of compare the July renewal to the rest of the pattern?
I think, as I said, 50%-60% is the first quarter, the third quarter is the next biggest. Look, the bulk of it is in the first quarter of the year, I'll just stop right there.
Okay. Got it. Then in terms of your retirement plan services, Lincoln's always been a strong player in the 403 market. Can you remind us what % of your retirement plan services is in the 403 market?
What % of sales are in the 403 market?
Maybe an account value as well.
About 50%.
Okay. Basically, those would not be affected by the fiduciary proposal. The remaining 50% could potentially be affected.
Again, in the retirement business and in our other businesses, we think we can continue to sell through regulatory changes. Some of the regulatory changes, by the way, that are being proposed, we've been advocates of for some time. Yes, I understand there's a lot of questions about it. There's going to be change. Good companies will react to the change. Both the living benefit products and retirement products are in big demand. It's more about the changes you have to make in the selling process, commissions and so forth, to be able to meet the demands of the marketplace, which will continue to be strong.
Okay, thank you.
Our next question comes from the line of Randy Binner with FBR. Your line is now open.
Hey, thanks. Mostly asked and answered, so I'm going to ask a DOL fiduciary follow-up for Dennis. There's different pieces of the conversation here that have talked about kind of a potential, I'd call it bifurcation of regulation, whereas if a product is affected by ERISA, it would have a certain set of rules, and then if it's not, it wouldn't. So whether it was Humphrey Lee's question or I think Thomas Gallagher's before that, on qualified, non-qualified. I guess my question for you, Dennis, is your perspective on it, if that would be feasible in the market that you would have kind of dramatically different rules based on whether it kind of hit the ERISA format or not, or if there'd be kind of a lowest common denominator effect in the market and everything would kind of migrate towards whatever the new rules are pushed by DOL.
Yeah, I think that's hard to predict.
Okay. Thought I'd take a try at that. The one other follow-up I had just on the group piece was after this first quarter renewal. How much of the book has been repriced since you started the last major repricing initiative? I think it was 30% at the fourth quarter. Do you have a figure of how much has been repriced at this point?
Yeah. As we mentioned earlier, it was 30% went through the pipe last year, and I think by the end of this year, we'll be at about 80%. As we mentioned, 50%-60% of this year's goes through in the first quarter. If you do the math there.
Yep
it would imply that roughly 50% of the premium has went through the pipeline.
Halfway done. Okay. That's all I have. Thanks.
You bet.
Our next question comes from the line of Eric Berg with RBC Capital. Your line is now open.
Thanks very much. I'd like to return to the two topics that have sort of been dominant in this call, namely the individual mortality and the group insurance. On the individual side, I just want to sort of sharpen my understanding once and for all of what happened here. Randy, you said that actual to expecteds were similar this year to last year. I guess what I'd like to know is, were they both above 100% this year and last year?
No, they're not above 100%. Typically for a year, our actual to expected is going to be in the 80s. What we've seen over the past few years in the first quarter is that it's roughly 10 points higher than that in the first quarter, and that's what we experienced again this year.
Okay. I'll have to circle back because I don't understand how you could, I'll circle back to Chris, how you could expect something to be below your expectations. I can't get my mind around it.
Well, Eric, let me describe that a little bit, just to maybe inform you. It's because of how we calculate it. For all the business we've sold in the last 15 years or so, we use the exact pricing expectations. We need to expect to be roughly in the 100% range. For all the old historic business, we use sort of a standard industry table. All right? That number typically comes out somewhere below 100%. For everything that we've sold recently, everything we have really good data and records for, we use the exact pricing experience. Then for all the older business, we use more of an industry table. That's why you end up with this blended number, which ends up below 100%.
If I could ask you now about the group insurance. It's still not apparent to me, again, I'd like to sharpen my understanding, having listened closely to the last questions about what is not going well here in the following sense. You've described the results as poor, and I think, Randy, you described them as poor. What we know is that there's been a significant improvement in incidents. There's been a significant improvement in recovery. You've raised prices sharply. This has led to, I guess, lapsation, which in turn has triggered a non-cash charge for the accelerated amortization of DAC. Given all that, you're losing customers as you expected. You're getting a better claims experience as you expected. What is not happening that you would like to have seen happen by now? Where are you behind?
Yeah, Eric, I think now we're getting into a little bit of semantics. Our comment is simply we're disappointed in a negative quarter in the absolute. That's not a comment with respect to expectations of some of these things that you're talking about. We're just disappointed that we've had a lost quarter.
Okay.
Go ahead.
Yep. As we've said all along, the progress that we're going to make here is not going to be linear. I apologize for repeating this. There's nothing happened at this quarter that we haven't seen, excuse me, that changes our expectations as to getting closer to our margins late 2016, 2017. I think it's fair to say, I know that we've been talking about price increases now for a couple of quarters. I think it's fair to say that we have gotten much more aggressive in the last six months with our price increases than we did in the first six months. It's not that we're seeing the progress, but we're even getting better increases, but those aren't going to show up for a little bit. Don't forget that it's hard to remember that these price increases are going to flow in over time.
You're not getting them all at one time. I understand the question. There's a lot of variables, and I guess we just fall back on we're making good progress and our expectations remain the same.
That answers my question. Thank you very much.
Yep.
Ladies and gentlemen, we are at the top of the hour. I'd like to turn the call back to Chris Giovanni for closing remarks.
Thank you so much. Thank you all for joining us this morning. As always, we're around to take your questions on the investor relations line at 800-237-2920 or through email at investorrelations@lfg.com. Again, thank you all for joining. Have a great day.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone, have a great day.