Good morning, and thank you for joining Lincoln Financial Group's first quarter 2014 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. At this time, I would like to turn the conference over to Senior Vice President of Investor Relations, Jim Shirin. Please go ahead, sir.
Thank you, operator, 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, income from operations, and liquidity and capital resources, are forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from current expectations. These risks and uncertainties are described in the cautionary statement disclosures in our earnings release issued yesterday, and our reports on Forms 8-K, 10-Q, and 10-K filed with the SEC.
We appreciate your participation today and invite you to visit Lincoln's website, www.lincolnfinancial.com, where you can find our press release and statistical supplement, which include a full reconciliation of the non-GAAP measures used in the call, including income from operations and return on equity to their most comparable GAAP measures. Presenting on today's call are Dennis Glass, President and Chief Executive Officer, and Randy Freitag, Chief Financial Officer. After their prepared remarks, we will move to the question-and-answer portion of the call. I would now like to turn the call over to Dennis.
Thank you, Jim, good morning, everyone. Lincoln had a very good first quarter, continuing the operating and earning strength we have seen develop over the last several years. One of the highlights of the quarter was operating revenue reaching $3.2 billion, up 10% from a year ago. The growth achieved reflected continued overall franchise strength, strong sales, positive net flows, and equity markets driving higher account balances. Earnings per share were up 31% year-over-year, resulting in a return on equity of 12% for the first quarter. Earnings per share growth exceeded revenue growth as every line of business showed margin improvement compared to last year. We repurchased 3 million shares during the quarter at a cost of $150 million. We see value in buying back our stock, and it remains a key component of our 2014 capital plan.
We also continue to focus our attention on key strategic actions, including tapping distribution to expand our presence in new and existing markets, repricing essentially our entire product portfolio, which we have completed, and diversifying product risk by balancing sales of products with an emphasis on those without long-term guarantees. We ended the first quarter with two-thirds of total sales coming in the form of shorter duration guarantee products. Over time, this emphasis will meaningfully change our in-force risk profile. Our efforts to increase investment income by adding alternative investments and select new classes in our fixed account showed progress. I'll provide more detail on these results and other actions. Let me now turn to the business lines. Starting with the Life Segment.
The majority of our product repositioning over the last two years has been in the individual life line, with a focus on pricing actions necessitated by low interest rates, while we have simultaneously diversified product risk by primarily reducing long-term guarantee sales. We completed the major repricings in the first quarter with the introduction of a new MoneyGuard product. New business returns across the life portfolio are now comfortably within the 12%-14% range. Sales of our individual life products were up 14% compared to the year ago quarter. Our results benefited from continued strong sales of Indexed UL, Variable Universal Life, and Term. Lower MoneyGuard sales were due to the new product introduction. COLI sales, which are lumpy, declined this quarter. We expect good results for the year.
In addition, we maintain the diverse, profitable solution set that we have been building over time, as evidenced this quarter by no single product accounting for more than 30% of our total life sales. The strength of our well-balanced, profitable product portfolio teams with the depth and breadth of our distribution relationships, position us well to adapt to market dynamics and client needs. It will help us continue the sales momentum started in the first quarter. Turning to our individual annuity business. It was another quarter of outstanding results. Annuity sales of $3.4 billion drove positive net flows of $695 million. Total account values of $117 billion were up 15% from a year ago. Long-term guaranteed sales dropped to about half of total annuity sales, helped by strong Fixed Annuity sales, increased emphasis on VAs without living benefits, and reinsurance.
Total Variable Annuity sales of $2.9 billion were flat over the prior year quarter. We continued to shift our wholesaler focus to be in line with our strategy of reducing reliance on VA living benefits. We would expect to make further progress toward this goal when we launch an investment-focused product later this year. The solution will provide an efficient platform for account value performance and complement our existing products. As I've said before, I like our approach to the annuity business, notably the volume of sales we are getting and the profitability and risk profile of new business in today's environment. The strategic consistency we have demonstrated from pricing and product actions to our best-in-class distribution, industry-leading risk management, effective hedging, I believe gives us a competitive advantage regardless of how the industry evolves over time.
In our group protection business, we remain focused on repricing our employer-paid life and disability business, as well as pivoting toward employee-paid segments. Last quarter, I stated that we had approximately $1 billion of earned premium associated with our employer-paid life and disability business. In the first quarter, we repriced about 25% of that $1 billion and achieved our targeted rate increases. Sales of $64 million in the first quarter were down 10% from the prior year. This is a response to the employer-paid price increases we implemented on new business in the beginning of the year. Our pivot strategy toward the employee-paid segment is performing well, as sales in this segment represented more than 60% of total group protection sales, up from nearly 50% in 2013.
Further illustrating this shift, the industry data showed that in 2013, we increased our ranking in this space, moving up to eighth from tenth. Efforts to reprice the employer-paid business and strengthen our employee-paid platform will remain our near-term focus. Our retirement plan service business continued its strong performance. Total sales of $1.8 billion in the quarter were up 5% from the prior year, contributing to account value growth of 12%. In the small market segment, we are leveraging the strength of LFD by expanding shelf space with existing partners like Merrill Lynch, growing our sales force by almost 30%, and broadening our product portfolio. All of which led to first-year small market sales being up 31%. We also expanded our presence in the mid-large market, including a push into the government space that started last year.
Our overall mid-large market sales pipeline is strong, with 67% of sales coming from consultants and advisors that have never done business with us before. Net flows were negative in the first quarter due to the lumpy nature of this business as we win and lose large cases. As an example, we started the second quarter off on a strong foot with the implementation of our largest government case to date, a $385 million plan with the Washington Transit Authority. Looking ahead, we will continue to grow our footprint in the small case market through expanded distribution, build out our strategic partnerships among consultants, wirehouses, and independent planning firms, and differentiate ourselves from our competitors through our high-touch value proposition. Moving to distribution. The depth and breadth of our retail, wholesale, and worksite teams enable us to continue to achieve strong and diversified mix of sales by product and channel.
This included our strategic shift to sell more products without long-term guarantees, where, as I mentioned, total sales reached two-thirds in the first quarter. At Lincoln Financial Distributors, our wholesale distribution, the number of producers selling Lincoln products rose 8% year over year, reaching more than 65,000. Simultaneously, productivity increased, with repeat producers and producers selling more than one product, both growing by 17%. Our cross-sell initiative is gaining momentum, as demonstrated by 24% of RPS small market sales coming from referrals of producers selling our annuity products. We expanded our LFD sales force in the quarter to drive our strategies to grow Life and RPS, as well as to shift sales to products without long-term guarantees. The total sales force is now 600 strong. This distribution scale and our broad product portfolio, combined with leading sellers of our products and our cross-sell initiative, is a competitive advantage for us.
Shifting to Lincoln Financial Network. Our retail distribution successfully recruited affiliated advisors, growing the advisor network to more than 8,500, a record high. LFN is a strategic and another competitive advantage, delivering 13% of total sales and again, driving our shift to sell products without long-term guarantees. We are making investments in LFN that will build upon this success and deepen our retail strength. Spending a minute on investment management, you have heard me talk in the past about having the flexibility to broaden our investment strategies, and we continue to enhance returns, specifically in two areas, alternatives and yield-enhancing debt. We are driving strong results due to our proactive actions to grow and expand these programs, as evidenced by a 24% year-over-year growth in our alternatives carrying value, and an incremental 22 basis points contributed to our new money yield during this quarter from yield-enhancing debt.
As we expand these programs, we maintain substantial room to increase our exposures while remaining disciplined in our execution. Our overall portfolio credit quality is A- with only a 5.5% exposure to below investment-grade assets. In the first quarter, our new money yield of 4.6% was 40 basis points above our average new money yield in 2013 and within 60 basis points of our fixed income portfolio yield, further easing the rate of spread compression we have been experiencing. Let me close my comments today briefly by saying once again that we had a very good quarter. The actions we are taking led to strong results that will help set the tone for the remainder of the year. With that, I'll turn it over to Randy. Randy?
Thank you, Dennis. Last night, we reported income from operations of $365 million or $1.34 per share for the first quarter, up 31% from the prior year period. The quarter's results provided a strong and clean start to the year. While there were small pluses and minuses spread across the segments, in total, there were no normalizing earnings adjustments that I would spike out for you. Similar to the first quarter of prior years, we did experience elevated mortality in the individual life business that I will discuss in more detail during the segment discussion. In addition to strong earnings, the quarter featured strong performance across most financial measures, including robust top-line performance, as noted by Dennis, with operating revenue growing 10%, expense discipline with G&A net of capitalized expenses up 4%.
Coupled with the strong revenue result, we saw G&A as a percent of revenues decline 70 basis points year-over-year, and book value per share, excluding AOCI, continuing to grow nicely, up 9% to $45.63, while return on equity came in at 12.2%. Share repurchase for the quarter totaled $150 million. As always, we'll look to meet or exceed our annual target of $500 million-$550 million, depending on how the year develops. Remaining authority under our existing share repurchase authorization is now down to $208 million. Consistent with past practice, we do expect to go to the board in a few weeks to ask for an increase to the authorization.
We had very good results from the investment portfolio, with realized losses related to investments coming in at $17 million for the quarter, with most of the losses coming from a few assets that get marked to market and that do move around from quarter to quarter. Despite a fair amount of volatility in the capital markets, the hedge program had another strong quarter with $14 million of breakage, which is well within our pricing expectations. I will point out that we did include a new page in the stat supplement that breaks out our earnings on a pre-tax basis by their source. We're providing this information as a supplement to existing disclosures in order to provide more clarity on the underlying sources of earnings versus what's disclosed in the traditional segment reporting.
The data is going to fluctuate from quarter to quarter. Annual results will provide a cleaner picture on the trends in our mix and progress towards our long-term goal of increasing the contribution for mortality and morbidity margins. Turning to segment results and starting with annuities. Reported earnings for the quarter were $216 million, a 36% increase over the prior year. Operating revenues increased 17% from the first quarter of 2013, as positive net flows and strong equity markets drove a 16% increase in average account values that at the end of the quarter reached a record $117 billion. The ROE in the annuity business remained in line with the outperformance of the segment, coming in at 26.8% for the quarter. Strong earnings, revenues, and returns, another quarter of great financial performance for the annuity segment. In retirement plan services, we reported earnings of $39 million.
Year-over-year revenue growth of 4% benefited from a 10% increase in fee income from assets under management. Account values increased 12% from the prior year period and ended the quarter at a record $52 billion. The pace of spread compression in the retirement segment has slowed as normalized spreads came in eight basis points lower compared to a year ago and one basis point lower compared to the prior quarter. Return on assets for the quarter of 30 basis points and pre-tax profit margin of 35%, a commonly used industry metric, both came in at the high end of our expectations. A really good all-around quarter for the retirement business. I'm especially encouraged to see strong earnings growth despite the headwind of spread compression. The life insurance segment reported earnings in the quarter of $120 million.
Earnings drivers were strong in the quarter, with average account balances up 7% and life insurance in force of $623 billion, up nearly 5%. As I mentioned earlier, we did experience elevated mortality, and that negatively impacted the quarter by $18 million, split between expected seasonal mortality that we often experience during the first quarter and additional mortality above our expectations. Strong performance from the alternative investment portfolio offset about one-third of the mortality experience. I would also note that the reserve financings that we have been doing in the life segment do serve as a headwind to segment earnings growth. As you may recall, we did complete a reserve financing in 2013, and I'd estimate that it negatively impacted life's earnings by $5 million or so compared to the first quarter of 2013.
Of course, we have been able to deploy much of the capital freed up by these transactions, which has benefited earnings per share and return on equity. The group protection segment reported earnings of $20 million in the quarter, a 43% improvement from last year's first quarter. The non-medical loss ratio of 74.8% was flat with the prior year quarter and remains just outside the high end of our target range. Earnings benefited from improved margins in all product lines, with the exception of long-term disability. LTD incidents did come in above the prior year period. For the quarter was offset by lower average reserves on new disability claims. As Dennis noted, we have begun to take the pricing actions outlined on last quarter's call. That process will continue over the next seven or eight quarters.
As I mentioned last quarter, we expect approximately $300 million of our 2014 earned premiums to be repriced. We remain on pace to achieve this target. The quarter's results are more representative of the earnings power of the business. With the pricing actions underway, we are encouraged by the fact that earnings for the quarter did come in at the top end of the guidance. However, I do remain somewhat cautious as we have yet to see an established trend in our experience, which will be an important step towards more consistent earnings performance. Turning to capital activities. As noted earlier, we repurchased $150 million of our shares during the quarter. Additionally, we did have strong statutory performance with statutory surplus ending the quarter at $8.2 billion, while RBC came in north of 500%. During the quarter, we sent $150 million of dividends to the holding company.
Those dividends, $500 million of debt maturities during the quarter, the share buybacks, and other holding company cash flows left us with $562 million of cash at the holding company at the end of the quarter. The quarter's results are a great way to start off 2014. Strong top-line growth of 10%, disciplined expense management with solid improvement in expense ratios, continued capital deployment through share buybacks, consistent growth and strength in the balance sheet with book value per share up 9%. Strong returns with return on equity in excess of 12%. These metrics all speak to the strength of the current quarter. When coupled with the strong new business returns noted by Dennis, leave us with a great deal of confidence about quarters to come.
Before I turn the call over to the operator for Q&A, I do have an announcement to make, one of those happy-unsad announcements. After more than 30 years of serving the company, 11 years in the role of head of IR, Jim Shirin has decided to retire from Lincoln. At the end of the year, Jim is going to be hanging up his spurs, unfortunately. Jim's going to continue to be your main contact as we go about the process of undergoing a search for Jim's replacement. On behalf of Dennis and the entire senior management team and myself, who've had the pleasure of working with Jim for some time, I would like to thank him for his many years of dedicated service. We obviously wish him nothing but success in his next life. With that, let's move to Q&A.
Thank you. Ladies and gentlemen, if you wish to ask a question at this time, please press the star 1 key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. We ask that you please limit yourself to one question and one follow-up. Our first question is from Seth Weiss of Bank of America Merrill Lynch. You may begin.
Hi. Thank you for taking the question. My question is on the annuity segment and the run rate of earnings. If we look at where the earnings are on an adjusted basis, earnings are about 35% or so up from the first quarter of last year. That's about double the increase in the pace of the account values. I know there's an element of operating leverage there, but obviously, there's beneficial mix shift that's going on as well. Perhaps you could comment on just the sustainability of this earnings run rate and how we should think about earnings growth going forward, if it will more closely match growth and account value. Thanks.
Yeah, sure, Seth. I'm going to throw out some numbers here, so apologize for that. The growth actually, if you use the sensitivities that we provide and factor in things like net flows, actually makes a lot of sense. Last year in the first quarter, we made $159 million. Markets, on average, were up 21% from the first quarter of 2013. We have a sensitivity that we provide which talks about $7 million or so for each percent movement in the S&P. That translates into $35 million-$40 million of quarterly earnings. You add that to the $159, and you're up to the $195-$200 range. You factor in that we had roughly $5 billion of positive net flows over that period in time, $4 billion-$5 billion. You're talking about another $7 million or so of earnings.
Now you're up to the $200-$207 or $8 million range. Factor in some expense leverage. We're doing a good job managing expenses. You're up to somewhere between $210 million-$215 million. I find the number during the quarter-- and you can do that same sort of analysis compared to the fourth quarter also. I find the number quite rational when compared to what we've earned in the past and feel very good about the dollars of earnings we're making in the annuity business.
Okay. That's very comprehensive. Thank you. If we think about mix shift of business, and what I'm thinking about there is new cohorts on hedging costs being less, given less rich products. I guess that's a de minimis amount then if we do the math that you just did for us?
I think you're seeing the profitability that we've been talking about on our new business in a number of different places. You're seeing it in the earnings growth. You're also seeing it to use the new earnings by source analysis we provided. You see our profitability via riders up a little greater % than the fees on AUM, and that is reflective of the strong profitability that we're getting on new sales, which is reflected in a cost of hedging that is lower, while at the same time we've raised fees on those products.
That's very helpful. Thanks for your comments.
You bet, Seth.
Thank you. Our next question is from Jimmy Bhoola of JPMorgan. You may begin.
Hi. Good morning. The first question, just on retirement flows. Overall, you mentioned the large cases in the first quarter. You reported a couple of negative quarters now in a row in terms of flows, and both quarters had high withdrawals. I'm not sure if Chuck's on the call, but to what extent is this just a normal volatility, or are you seeing losses of cases in a certain market segment or in a certain part of the industry? Secondly, for Dennis, maybe if you could talk about how your preference for, or your view on share buybacks versus other uses of capital, such as dividends or acquisitions, has changed given the increase in the stock price over the past year.
Let me take the first one on RPS. We don't see any systemic issue with the fourth quarter negative flows and the first quarter negative flows in RPS. Predominantly, it's been the ebb and flow of large cases. As I mentioned, we're starting the second quarter of 2014 on a very positive note with plus $350 million from that one case. I'd really say that that's just the ebb and flow of large case activities and nothing systemic. If you see the continued positive growth in sales, expansion of the wholesaler market or the wholesalers, the addition of new consultants, I think the pipeline, it paints a very good story for the underpinnings for growth in that business. With respect to share buybacks, Randy's more the expert, but I'll start off on that.
We continue to think, as I said in my remarks, that buying the stock back at this price is a great investment. Obviously, to your point, the return on investment at today's price is a little bit less than it was a year ago when we were selling at a deeper discount to book. Nonetheless, in terms of the free cash flow that's being generated and has, by the way, consistently been generated over the last several years, we talk about this $600 million or so up at the holding company coming out of the subsidiaries up to the holding company. As Randy has said in the past, that's sort of our target amount for both dividends and share buybacks.
I'd also point out that we ended the quarter with RBC at 550%, which is a little higher than we've probably managed to north of 500% than we've managed to. Bottom line, we have the capacity both from the generation of free cash flow, we have some capacity given our RBC position. We think the purchase of the stock is a good value. Let me go now to dividends. Dividends have been increasing at pretty substantial % increases over the last couple of years. Growth in the dividend is something that we believe in. Obviously, it's the board of directors' decision, we'd like to continue to see that growth over time. Those are those two. Now, alternative use of capital. Let's put it in 3 buckets. 1, share repurchases and dividends, which I've already talked about.
2 is new business, 3 is M&A. It's quite remarkable that the industry has moved from, generally speaking, has moved over the past 24 months from putting business out 10-plus, to now putting business out in the 12%-15% range. I can't tell you what every other competitor is getting in terms of internal rate of returns, I can tell you that everybody has moved up, we have very rational pricing. Putting new business out at these, across our businesses, I mentioned we repriced all the business that had to be repriced, we're in this 12%-15% range across our businesses on a pricing expectation. A little bit north of that on the VA business, maybe Fixed Annuities have dropped below the 12%, the bulk of what we're selling has very good returns on the capital that we're deploying.
That leaves M&A. The M&A market is episodic. We never include M&A as part of our growth strategy. If something comes along that would accelerate our growth strategy or our objectives, such as increasing mortality and morbidity, we'd take a look at that. That's my broad view.
Thank you.
Thank you. Our next question is from Joanne Smith of Scotia Capital. You may begin.
Good morning. I have a couple of questions just on the VA market overall. Everybody's been talking about the fact that it's a hard market out there, and that the returns on the business that they've been writing for the past couple of years are very attractive. In the past, that's always attracted additional capital to the market, and competition has heated up over time. I'm wondering if you've seen any change in the environment, or if you expect that to change over the near term, and if there are any particular competitors out there that are being aggressive?
Well, let's back up to last year, because there's some repositioning in people reducing the volumes that they were interested in selling, and there were new entrants into the market. That movement sort of affected the amount of business that we were getting. I think most of that individual company movement has settled down now, and when we look at the list of competitors in the marketplace today and the dispersion, if you will, of the business among those competitors, our view is it's as solid a group of competitors as we have seen for a long time. Although there are pricing movements at the margin, we don't see, nor do we expect to see, any overly aggressive pricing in order to capture market share.
Just stepping back to the way I answered that comment before, the life business has been repriced, and good competitors in a good, healthy environment. The VA business has been repriced. Good competitors, a good, healthy environment. We're pretty comfortable with both of those businesses in terms of competition, not getting crazy. Now, from time to time, someone's going to come in, possibly in either one of the markets, and try to establish a position, and for a short period of time they may underprice a product intentionally to create market share. The value propositions that we have across our businesses, selling business on our terms, isn't going to be affected by an occasional outlier for good reasons or bad reasons. The strength of our distribution adds a lot of comfort to our ability to pivot as we've talked about.
I'm pretty optimistic, really, about the competitive environment and where we stand.
Okay. Dennis, all of the de-risking that's taken place in the products, a lot of product is being sold without a living benefit rider anymore. What exactly is the value proposition that you offer to the customer? I'm wondering if we're going to start to see a reprisal of those articles that were predominant in the press about the fact that Variable Annuities are a rip-off and blah. It seemed to me that the addition of the living benefit guarantees was the differentiating factor between buying a Variable Annuity and buying a mutual fund and a life insurance policy.
Yeah. Over the last 10 to 15 years the value proposition changed, and I think it's moving back a little bit. 15 years ago, the value proposition was a mutual fund in a tax-deferred wrapper. That's how the industry, and that's how Lincoln sold the product. For a lot of reasons, that value proposition evolved, as you pointed out, to more of an income guarantee. I think the income guarantee, from a consumer perspective, it will drive a lot of sales in the industry, and it will drive a lot of sales at Lincoln. Even though we're de-emphasizing, I've said this several times, but the long-term guarantee business that we sell, we sell on our terms at risk levels that's acceptable to Lincoln and at returns that are acceptable to Lincoln.
The business that we are selling, we're quite comfortable with across our portfolio in long-dated guarantees. Now let me go to present state environment. There's a little bit of a shift, both from the consumer and the manufacturers, to the old mutual fund in a tax-deferred wrapper. In part, I think I said this last quarter, if you look at the marginal tax rates in your own tax returns this year, they've gone up dramatically as there's been a reduction in the benefit for tax deductions at the individual levels. There really is a reason why people might come back into the objective of a mutual fund inside a tax-deferred wrapper. That's exactly what we're doing with this product that we're introducing in the next couple of weeks, actually. Is that helpful?
Yeah, that's a good point. Thanks very much.
Okay.
Thank you. Our next question is from Thomas Gallagher of Credit Suisse. You may begin.
Good morning. First, good luck to Jim Shirin. Been great working with you. My question is, if I have the numbers right, Randy, I think you said life earnings were down $5 million due to reserve financing. Was that the right adjustment on a year-over-year basis?
Yes, that is correct, Tom.
Randy, how big of a financing was that related to? Was that $200 million, $300 million?
Last year, I think we ended up with $450 million or so of reserve financing capital generation.
Got it. If I annualize it, $20 million of costs related to $450 million of capital freed up. That's the right math?
Yeah, that's roughly the right math.
From your standpoint, now the stock's done well, when you consider buyback versus the cost of reserve financing, I assume that trade-off is still reasonably accretive. Is that something that you guys track pretty closely?
Yeah, it is. It's very accretive. You really can see it in the ROE when you get inside the overall company and inside the life business, which if you didn't do this reserve financing, the life business would get dragged down over time. Yeah, we definitely look at the cost versus the reward of doing reserve financings, and it truly is a layup that it makes sense to do these reserve financings.
Got it. Would you expect this year there's still that opportunity? Would you expect a similar sized amount?
Yeah, I don't know that we'll do one this year. As I mentioned, $450 million last year is above our expectations. What I'd note, though, is that if you look at the last couple of years, back in 2012, we had stat operating earnings of about $800 million, we did $200 million in reserve financings for a total of $1 billion of the combination of the two. Last year, we had stat operating earnings of about $750 million. They were down a little bit because of some of the strain we had before we pulled out of N.Y. selling guaranteed universal life. We had the extra reserve financing. The sum of the two was about $1.2 billion. If you look here in the first quarter, you think that we've exited GUL in N.Y.
GUL sales as a percentage of our total sales are down dramatically. You saw some of that benefit with stat operating earnings in the first quarter at $350 million. I don't expect that to be $350 million each and every quarter. I think we had a pretty good quarter. My point is that I expect operating earnings and total deployable, whether it comes from financing or from operating earnings, to continue to be in that billion-dollar range. It gives us all the capacity we need to continue to support the deployment that we've done over the last three years. If you want to expand your question beyond what you asked, just do I think we can continue to deploy capital at the same rate we have been deploying it for the last three years? Absolutely.
Absolutely based upon what the actual facts that have happened over the last few years.
Yeah, appreciate it. That was helpful. I guess the only other question I had related to RBC and your strategy is, Dennis, I know you had mentioned you continue to move along in terms of the yield enhancement strategy, including alternatives, and I presume other higher-yielding securities. How big should we expect that program to be? Is that going to consume some RBC as well?
The alternatives program near term, the account balances today are about $1 billion. We try to get to about $1.2 billion, which is obviously 20%, but in the context of an $80 billion general account portfolio, not that big. That does grab some RBC, but it's not been a meaningful amount in terms of our RBC planning. The second piece, which is some of these higher-yielding strategies within the fixed income portfolio, don't necessarily have incremental RBC. For example, BBB private gives much better, 20 or 30 basis points more yield than a BBB public. Yet from an RBC standpoint, the RBC calculation is the same. Yes, there would be some utilization of RBC, but it's not significant enough to affect what Randy was just talking about in terms of overall statutory or free cash flow generation.
Okay, thanks.
Thanks, Tom.
Thank you. Our next question is from Suneet Kamath of UBS. You may begin.
Thanks, good morning. Maybe just a request. Dennis, you're breaking up on my phone. Might just be my phone, but if there's any way that you could maybe move closer to the speaker, that would be great.
Sorry.
No, it's okay. I wanted to ask about the mortality in the life insurance business. First of all, can you give some perspectives in terms of what it was driven by? We're hearing from some other companies that it's older aged, large cases. Any color in terms of frequency, severity, in terms of what you saw in the quarter would be helpful.
Yes, Suneet. Normal first quarter experience, which is the seasonality that we and other companies talk about. It's typically related to, you see a lot of respiratory, circulatory-related deaths, which is often linked to flu, pneumonia, that sort of stuff. That's definitely in there. Over and above that, the experience, I think, relates partly to the fact that this was a colder, more severe than normal winter. I think there's some of that in there. In terms of digging into the claims by age, by duration, by cohort, we didn't really see any trend other than that the larger claims, the million-plus claims, were a little above, had a disproportionate piece of the $18 million impact. That's not surprising. We sell big cases. We're a big case provider, I'm not really surprised by that.
Inside of the claims, we didn't see any trend other than the fact that it appears to be the normal sort of claims that you see in the winter months, which is flu, pneumonia, that sort of stuff related.
Okay. All else equal, when you're giving us this $18 million number, is basically what you're saying that we would expect to kind of get that back in 2Q? Again, there's always going to be some fluctuation, but that's how we should think about the $18 million. Is that right?
It's above our expectations. Whether it comes back or not, I guess we'll know in the second quarter, but it is above our expectations.
Got it.
$18 million above our expectations. In terms of mortality for the organization, I would point out that relative to the first quarter of 2013, in total, if you think about total Lincoln, it's about the same numbers we had last year. We had $19 million actually last year in the first quarter, $12 million in individual, and $7 million in group. We had good group experience this time. In total, mortality across Lincoln was about the same as last year. It just happened to be a little disproportionately represented in the individual business.
Got it. You had also mentioned about a third of the 18 was offset by higher alternative investment income. You're also talking about maybe expanding that asset class as you've done in the past. Is the $6 billion, is that something that we should really think about as one-time, or it just so happens that alternatives were higher because you've been growing the book, and that may not necessarily go away?
There was some impact because the book has grown, as Dennis mentioned, about $1 billion at the end of the quarter. The return on the portfolio was strong during the quarter. $6 million inside the life book. There were some small favorable impacts across the other businesses. I would estimate the total favorable impact relative to sort of a 10% expected return out of the alternative book at about $9 million after DAC and tax in total across the whole organization, so roughly $0.03, if you want to think about it that way.
Okay. Just the last one, just maybe a follow-up to Tom's question about the reserve financings. What's the rationale in terms of not doing one this year? Is it just that you don't have enough life insurance business warehoused, or terms have changed? It sounded like it's a pretty easy trade-off for you, I guess, to do the deal versus buyback, a layup, I think in your terms, in your words. Why not pursue one this year?
Just availability. It's availability of financeable reserves at the company. We did a lot last year, $450 million, as I mentioned. It takes us a couple of years of sales on the term book to build up the numbers to make a reserve financing make sense, i.e., we get up to about $200 million of excess reserves or so. We did a big term deal last year. Takes a couple of years to build up for the next one. On the GUL side, we're just not selling as much as we were before. It's become a relatively small piece of the overall sales, so it takes a longer period of time to build up a GUL financing. It just has to do with what we're selling today and the fact that we did a nice financing late in the year last year.
Got it. All right, thanks a lot.
Thank you. Our next question comes from Steven Schwartz of Raymond James & Associates. You may begin.
Thank you. Good morning, everybody. Congratulations to Jim as well. It's been an amazing ride. Appreciate all your hard work. I want to touch back on the adverse mortality in the quarter and then a couple of other things. Randy, when you're talking about above expectations, you're looking at some A to E for the year. Would that be an accurate statement?
Yeah. Basically looking at what we price for. What are the assumptions that go into a product that we price and comparing the actual results to that. That's our E for business that we've sold over the last 15 to 20 years. For older business, where we may not have the pricing expectation, we use a standard industry table as the expectation. But for everything we've sold over the last 15 years or so, we're just using the pricing expectation.
Okay. If you were to look at the $18 million, as you pointed out, there's always some adverse mortality relative to pricing expectation in the first quarter, whether it be the flu or the Christmas effect or whatever it is. How would that $18 million, what would you take out of that $18 million?
Yeah. I would say that about $6 million-$7 million, I would think of as seasonality, and the rest of it, I would think, is experience above that normal seasonality.
Okay, great. Thank you. Then, there are a couple of others. There was a statement you made that you saw higher incidents in disability, but you put up lower reserves per claim. Why was that?
Well, the average reserve that you put up for each policy isn't necessarily driven by the incidents.
Right.
Digging into those numbers a little bit, we had incidents in the quarter of just a little over four, which is within our range. It was right in line with the experience we had last year. It was just a little above last year's experience. I'm not overly concerned about it, but I just wanted to point out that it was a tick above where we were in the first quarter of last year. In terms of the average reserve we put up for each claim, that's driven by all sorts of assumptions that go into the reserve, the termination expectation, the type of claim, the average salary of the individual that went on claim. Just when you wrap all of those assumptions together, the average reserve for each policy we put up was just a little lower this year. It was at about $57,000 versus $60,000 last year.
Okay. On the reserve financing, that $5 million, that was after tax?
Yes, that's the after-tax impact.
All right. That's 2.9% after-tax cost to that. That's a no-brainer to go back and buy shares. Okay. Yeah, that's what I had. Thank you very much. Jim, all the very best.
Thank you.
Thank you. Our next question is from Chris Giovanni of Goldman Sachs. You may begin.
Thanks so much. Good morning. Congrats to Jim as well. Dennis, I guess first question for you. We've heard from some distributors that the high end of the market is seeing the premium finance market come back into play in a pretty big way given the low interest rate environment. Wondering if this is something you're seeing at Lincoln, as you know, Lincoln is a big case provider, or is it something you're seeing in the marketplace more broadly?
We're not seeing it.
Okay. Then, federal oversight. I guess, how are you thinking about this for Lincoln? I guess the reason I ask, I went to this ACLI conference a few months back. ACLI president and CEO, Dirk Kempthorne, talked about how over half the premium volume of ACLI members are going to be subject to capital standards that differ from the states, believe that if they're going to be regulated differently, that the remainder of the industry at some point is likely to face new standards as well. Any thoughts in terms of how you're thinking about it at this point?
Let me distinguish between the primary regulator, the states, and the secondary regulator, whether it be the Fed, the Treasury, or some international body. The states regulate at the subsidiary level. These others regulate at the holding company level. That's a pretty important distinction. The industry effort is first and foremost to get the secondary regulators to use insurance-centric metrics for setting standards for solvency and what makes a strong company. We're working together to accomplish that because it's the right thing for the industry. That's what's being talked about. With respect to Lincoln
We have no expectation that we'll fall under any of the secondary regulators at all. I've said this publicly a couple of times, the gatekeepers for what might be additional capital requirements are the rating agencies. To my knowledge, the rating agencies are indifferent to what's going on at the secondary regulator basis. I don't see secondary regulation in any foreseeable future affecting Lincoln.
Okay. One last quick one just for Randy in terms of financial leverage. You had the $500 million of short-term debt roll-off. Your supplement shows a leverage ratio of about 18.5%. Curious how that compares to the rating agency's view of this ratio, how much debt capacity you may have, and how we should be thinking about potentially relevering, or are you still focused on keeping it where you are or de-levering?
It's the same message we've had for some time now, Chris. We're very comfortable with the leverage we're at today. Don't see a need to go out and add to that, but don't see the explicit need to continue to bring leverage down, which we had done over the past three to four years. Very comfortable with where we are today. In terms of the rating agencies, they all have their own particular measure or definition of leverage. You get a fairly wide dispersion among all the agencies. We are in line with all of their expectations for a double A-rated company.
Thanks so much for the thoughts.
Yeah.
Thank you. Our next question comes from John Nadel of Strategas. You may begin.
Hey, good morning, everybody. To Jim, I'm entirely jealous. A couple of questions. I think you mentioned a new money yield of 4.6% for the quarter. I'm just curious more than anything, obviously rates continue to fall. Just wondering today in round numbers, what the new money yield might look like relative to that 4.6?
4.5.
Okay. That's helpful. On the annuity side, on the Variable Annuity reinsurance agreement, just wondering where the capacity stands at the end of the quarter, given the sales.
$3 billion out of the $4 billion remains.
Terrific. Then in the annuity, I think you run the broker-dealer business results through the annuity segment. I'm just curious whether the broker-dealer is actually contributing any earnings or is that still a slight money loser? How that business is progressing. We've seen some great results from some others.
I'll let Randy answer it specifically. We don't run any businesses as a money loser for very long.
I appreciate that comment, Dennis.
It's a good story, John. The broker-dealer is contributing an amount of earnings that is consistent with the capital that we allocate to. Basically, what we're asking our broker-dealer to do is return a reasonable return on the capital that we've invested in it. It's a few million dollars a quarter.
Okay. Just on the group side. Maybe Randy, I just was having trouble keeping up. If you could just go through the, I think individual life mortality was worse than pricing by $18 million after tax. Was group life mortality better than pricing by, I think I got a calculation about $5 million after tax.
No, group was right in line with our expectations for the quarter. What I said when I was combining the two a little earlier is that if you go back to the.
Yeah. Thank you.
If you go back to the first quarter of 2013, we talked about $19 million of mortality over and above our expectations. That was $12 million in individual, $7 million in group. That's last year. This year, we have $18 million of mortality above our expectations. It's just all in individual. We have a similar dollar amount. The business unit that appears in it a little different this year.
Got it. Perfect. Thank you so much.
You bet.
Thank you. Our next question is from Ryan Krueger of KBW. You may begin.
Hey, good morning, congrats to Jim as well. Dennis, you've laid out an objective to increase the mortality and morbidity contribution from the mid-20s to 33% over time. Do you think you can achieve that organically or would that likely require some M&A at some point?
Likely require some M&A.
Okay. Is there any sort of timeframe you have in mind on the objective or is it just a longer-term one?
There really is no near-term objective. I think that what we're trying to do is to see our share price perform better over cycles. In the short term, the drivers of our earnings are all very positive and the mix that we have will continue to drive very acceptable returns. There's no urgency with this objective. I think over time, that better diversification of earnings will provide more stability in the stock in periods of high volatility in the markets and so forth.
On the dividend, your payout ratio is around 12%. Some of your peers have been increasing the payout into the 20%-25% range. Just wondering how you're thinking about your dividend payout ratio over time compared to peers.
Yeah. We think about the dividend. One of the earlier questions was how much capital that we have available to deploy, what's the generation of free cash flow at the holding company, and expectation of growth. Those are the criteria that drive the recommendations to the board. I know the criteria of payout as a percentage of earnings is commonly understood and commonly used, but we're not focused on that as much as what's sustainable, what's the right increase, how much free cash flow we want to hold back for share buybacks or for dividends. Those are alternative decisions. You can make decisions between those two.
Okay.
Grow the dividend on a logical and sustainable basis.
Got it. Thanks a lot.
Thank you. I'm showing no further questions at this time. I would like to turn the conference back over to Jim Shirin for closing remarks.
Okay. Thank you, operator. I want to thank Randy and others for their kind words and all of my colleagues here at Lincoln for a great run. I really appreciate everything over the 30-plus years. With that, we want to thank all of you for joining us on today's call. If you have any follow-up questions, please contact me or send us an email at lincolnfinancial.com. Thank you. Have a good day.
Ladies and gentlemen, this concludes today's conference. Thank you for-