All right. We'll go ahead and get the session started. Thank you, everybody, for joining us, both in person here in the room and also virtually. Towards the end of the session, I will stop a little short of the time just to allow if there are any questions from the audience, whether in person here or virtually, I do have a feed. If there's any questions, keep that in mind. Dennis, thank you for being here. I have Dennis Glass, President and Chief Executive Officer of Lincoln. It's always a pleasure to have you, but thanks again for being here.
Jim, thank you for inviting us. It's a great conference. We're glad to participate.
I thought we'd start with a higher level question about some of the growth initiatives. Maybe you could discuss some of the key areas for Lincoln over the next few years. What are some of the products you're having success with? Where should we be focused right now?
Well, certainly we thought of a target of 8%-10%, EPS growth. The components fall into three categories. Management actions of the 8%-10% +6%. Capital market impacts, which is really also spread compression by fees on assets under management, that's about 1%. Typically, we get about 2% from our share buybacks. That adds up to 10%. The first two are about the same. Because of the accelerated share buybacks related to the Resolution Life, instead of that number being two, we expect it to be 4%. When Ray and I talk about, Colin talk about being slightly ahead of our 8%-10% growth over the next couple of years, part of it is driven by that share buyback. Now I'll go back to management actions inside the 6%.
Typically, you have 4% coming from top-line revenue growth in aggregate for the businesses. It's a little bit south of that because we're rebuilding our sales volumes with new products, new consumer value propositions. As we all know, that's related to the drop in interest rates over the last 36 months. Margin improvements, mostly in the group area, just general improvement across all of the businesses on top of that. When we look at the growth of the individual business lines, in terms of margin improvement, we expect to see the group protection business grow pretty dramatically over the next three years. Retirements, our shares, retirement income businesses, if I could put a phrase, the VA business that's been in both cases. Life insurance a little more challenged because a lot of the spread compression is occurring in that line of business.
We're comfortable with sort of communicating that we expect to be over the 8%-10% growth that we typically talk about or at the higher end of that at least, driven by all those factors, again. By such a significant program, part of it is shares back. I think we're estimating that's a 4%-5% DPS.
Recently, there's a new initiative, the Spark Initiative, that was rolling out. Maybe you could help us think through that initiative. What are some of the things being done there that generate efficiency?
Sure. We've had a series of efficiency programs that have a cost-saving component to them but are much bigger than that. Let me start with the digital program that we set out to improve customer service levels and aimed at not just having better customer service experiences for our clients and partners than for our life insurance competitors, but trying to match what people are seeing from the more digital companies. They can stand on the corner and get an Uber and take it anywhere in the U.S. or wait 45 minutes to change your address on the phone. That project also, though, had a big cost component in it, cost savings component. I think we estimated that at $110 million, maybe $200 million-$300 million of investment. That's coming to an end.
Now we have what we're referring to as SPARK, which is a much more comprehensive program in the sense that it covers digitization as part of the savings. It covers, for example, with virtual distribution, the cost of distribution is going to go down. We don't have people traveling as much. They are, in fact, more effective in certain segments of the sales process virtually than they were in person. That would be a piece of it. There's a lot of small things that are going on, cutting meeting times and providing people with better leadership development. The dollars of savings, which will way more than offset spread compression over the next three years, I think we're talking about $260 million-$300 million pre-tax gross exit in 2024. That's way more than the spread compression that we'll see in those same years.
The majority of this is coming from the big picture, though. A lot of it is coming out of the IT department, going from sort of going from where we are to the cloud that has the savings associated with it and how we run the IT department. Another big part of the $260 million-$300 million is coming out of Group, and that's digitization. The first time around with Project Transition, we're in the midst of an integration, so we delayed the converting paper processes to digital processes. That's a big part that's going to happen. I'll get into that bigger number. We're more excited because it's going to improve customer service. It's going to improve the way we execute at Lincoln. It really is very comprehensive, improving the way we do business, saving money while we do it.
Let me hasten to say that when we put a number like that out, these numbers have been thoroughly vetted. We didn't get to that number until we had spent nine months of vetting the opportunities, putting the investments associated with the opportunities on the piece of paper, and having some person responsible for executing and getting the savings. I think we can say at Lincoln, we'd never miss a cost savings target that we feel comfortable sharing with our investors in a meeting like this. It's an exciting program.
That's helpful. Thanks. Maybe we can move over to group benefits, a lot of focus on mortality and under age 65 individuals recently in particular. I'm just interested in your thoughts on what you're seeing there, any need to reprice the product over time.
Well, it does take the near term. In the fourth quarter, we're seeing some of the same trends, which is deaths in the working age cohorts, which is where our group business is focused with its life insurance products and risk. You have to see how much of a national trend, which is consistent in the fourth quarter, the third quarter in terms of cases and deaths manifest themselves in our numbers. The industry in general is looking for some similar trend in terms of group. With respect to pricing, we've said that we have increased pricing on new business by 5% last year. We'll do another 5% next year. That should cover some lingering COVID experience.
I think the industry and Lincoln will just have to see what's the expression long haul in terms of some people in LTD and STD and fatality that developed out of the 24 months along with COVID. We'll just see how that works.
Maybe group benefits, the growth outlook is another one to touch on. There's some tailwinds, maybe back in terms of employment, wage growth, et cetera. Would be interested in hearing how this year's shaping up in terms of the growth in the open enrollment process.
This is really a very good question because it points out that about 50% of our premiums, 50, I guess this year, 59% of our premiums come from employee paid products inside of the group business. When you ask the question, how's enrollment going, that's very important to us because it's such a big percentage of premiums. On that dimension of sales and premium growth, it's pretty good. To your point, there's more people employed, that helps. More people after the experience of COVID, our market research says people are more interested in the life insurance business products, broadly speaking, financial protection. That's a positive. The segment that still is trailing a little bit in terms of new sales, and we've talked about this, is new business to new customers. We're seeing more quotes for new business on new customers, it's still pretty sticky.
The companies and corporations in America are still a little reluctant to move their group protection to a new carrier, even though there might be a cost advantage. Even though that slows new sales, it protects existing premium for the beneficiary on not having new business taken away from us by competitors.
The next topic I wanted to touch on is some of the statutory dynamics, statutory earnings power. I think investors are increasingly looking at these things. When I think about the statutory earnings power of Lincoln, could you help us think about how much capital the company generates? How much of that is being driven back into growth versus converted into what people categorize as free cash flow?
Statutory earnings can move around a little bit. Let's just focus on Lincoln generates about $2.6 billion of statutory earnings this year, plus or minus last year. That's the number that should grow over time in the same way GAAP earnings grow over time because of our cost savings, growth earnings, because of profitable new business, margin improvement, and things like that. It doesn't have the component, an 80/20 split associated with the capital allocated to share buybacks of all the other components. The $2.6 billion should grow. Today, again, this is round figures, about $1.5 billion-$1.6 billion of the $2.6 billion, that's new product sales. That's why I was very careful about making sure that we get double-digit returns on capital back in our new sales.
If you take the returns at those levels, the $2.6 billion will grow over time, for instance, what I'm talking about. The other part of the $2.6 billion, we talk about $900 million of that $2.6 billion in dividends up to the holding company. We had $300 million worth of dividends, plus or minus about $600 million worth of share buybacks. When people start talking about free cash flow as being equal to dividends plus share buybacks, they're sort of missing the component that by putting that $1.5 billion into the profitable new business and growing the business, growing the $2.6 billion over time is really critical. We could take the $900 million-$1.1 billion by instead of doing $1.5 billion in capital behind new sales of $1.3 billion. We don't think, over the long term, that's a good decision.
The other thing I'll say about the $2.6 billion and the $1.5 billion spent behind new business is products that we're selling today have less capital associated with them than the products that we were selling two or three years ago. The $1.5 billion for the same dollar amount of sales is going to be roughly 5%-6% less than forward because the products that we're selling now don't use as much capital.
Maybe along those lines, I think you recently announced a flow reinsurance agreement. Maybe you could talk about how that all plays into the capital efficiency of the new business as well?
Yes. The deal was worth in sales an aggregate of $1.6 billion over the next two years. The reinsurer reinsured the living benefit risk, and using the same math that we used. They took the responsibility for that and the capital associated with the reinsurance, excuse me, with the living benefits riders. We kept the base contract, the income, which is the majority of the earnings that will come off of the business because our rider fees are just a little bit stronger than our expenses associated with claims and so on and so forth. I think we improved our ROE on the capital behind that $1.6 billion. Companies don't have a rider risk and the associated living benefit risk and the associated capital of 400 basis points. It's a good deal. We're happy to see some living benefit risk.
As we manage where we want to put our capital, ROEs, everything, these reinsurance deals can be a very good tool. Over time, we'll continue to do them.
I thought we could also touch on the Retirement Plan Services business. I think I found that increasingly companies are talking about scale, companies are talking about reducing unit costs and so forth. I just thought I would ask, do you feel like you have scale in this business? Is this a business you need to be a consolidator in to win?
Yeah. Scale is an important issue in most businesses. There's a couple of different definitions. When I think about scale, unless you have a very specific metric, cost per participant. Our cost per participant, because we concentrate just in three principal market segments, government, health, and education, where we have good market position. Our cost per participant is pretty close to average, and based on the Spark Initiative, it will get better than average. From a scale perspective, we're fine. You also see that manifested in the ROAs that we run the business, which run in the low 20s, which is competitive with any one of, if not in excess of, the large-scale consolidators. We're very comfortable with the business. It's more of a return business, just growth business. We've had seven years of positive net cash flows. A lot of the consolidators can't say that.
It's a good business. I think we got two or three awards again for superior technology. That too, Project Transition and our investment in digital. It's a really good business. We run it really well. We get the appropriate returns, and scale is not an issue. I'll make one more comment about scale. The other thing you have to have is efficient distribution. The way we price distribution in the insurance industry is today, zero. You don't want your cost of distribution being bigger than your allowable that you have in your pricing. We achieve that very easily. Because a large part of our business, we talked those three segments that I talked about are in small case 401(k), independent financial distributors, which sell annuities and life insurance and retirement products across all channels.
We have scale on the distribution side from businesses that we do for the segments that we go after, particularly the small case. For example, Merrill Lynch was looking for a new small case carrier, this was about six or seven years ago when I was at Lincoln, not because they needed another 401(k) player, but they needed somebody like Lincoln to help them with their cross-selling initiatives. They got so many VA people working with small business people. They were selling VA products, life insurance products to small businesses, and that's where the cross-sell comes. Financial advisors working with CEO of a small business. If she wants to sell them an insurance product, the scale of Lincoln helped Merrill grow their total sales, that's what it brought us to the platform.
That's interesting. The next topic I have for you is a fun one too. Accounting changes for 2023. I think a lot of people are grappling with what the comparing earnings impacts are, and I'm sure you're not ready to provide quantitative disclosures, but thought maybe you could comment on it and maybe specifically on the variable annuity aspect of it with these market risk benefits and the impacts.
Alex, let's go to the highest level and just talk about LDTI in total. LDTI is a GAAP accounting change, and it has no consequence to Lincoln whatsoever on 2 important pieces of the business. That is how we generate cash flow, financial leverage. It's not a problem from the perspective of some fundamental economic impact on the company. For Lincoln, all this is about is lowering the discount rate at Lincoln. Lowering the discount rate on future benefits. From what we're using now is lowering your present value, future benefit match at a lower discount rate. The liability goes up, and that's all that's happening with LDTI, again, at Lincoln. If you think about the other places in the balance sheet where you have interest rate adjustments that move to the cost to the side, AOCI.
We have $14 billion worth of book value that nobody pays any attention to in the difference between book value to assets that carry it at book to market prices at end of day. I can say we haven't qualified the numbers, but I can tell you the LDTI impact coming from the reduction in interest rates is significantly lower than the amount of AOCI benefit we'd have if we were to add that back. We're not going to go into any more detail other than significantly lower because it still is complex to have to figure out which liabilities are actually covered under the GAAP guidance. My bottom line is it's non-economic and if you compare it to AOCI, it's considerably smaller impact based on today's interest rate levels and equity market levels.
That's very helpful. Thank you. Another topic that's a little more nuanced I wanted to talk about is, you have this reinsurance arrangement, and you have Barbados going into ADSR. It's actually provided healthy amount of dividends to the holding company over the last few years. I'd just be interested in anything you can comment on there in terms of capitalization and dividend capacity.
Let's stay with LDTI. LDTI is an issue for LIMRA. This is scary. I'll tell you why in a second. Back to your point, we've had LIMRA in place forever, really. It's a real subsidiary. It's real capital, and it pays real dividends up to the holding company, or it's The Lincoln National Life Insurance Company, and then up to the holding company. I forget what the route is. The reason it's a part of LDTI is because Barbados defines regulatory capital equal to GAAP equity. We need to work through, we have several options, to deal with that change. We're not concerned about it. It's just back to a very high level. If we collapsed LIMRA into Lincoln today, we have no material plus or minus on RBC. That could be a little bit different in different capital market conditions.
We've said over the years that we could collapse it without any impact. That's an option that we could use. I suspect that we will keep Barbados. We'll work through this statutory equaling, excuse me, regulatory capital equaling equity. We'll work our way through that. In terms of Barbados as a significant source of distributable earnings, we manage Barbados as part of the overall capital of the company. I don't get too hung up on whether the capital's coming from The Lincoln National Life Insurance Company or it's coming from Barbados because of this management to our overall capital needs. I don't foresee things like that.
Understood. Something I wanted to ask about is, through the market views and any views you have on misconceptions in the market around the way that some of these companies are valued, and I know you guys have taken some action, right? You've taken some action on certain course folks over time to help the earnings of the company in response to some of that. What are your views on that? What are the biggest misconceptions out there?
We debate this management team. We debate it with the board. We debate it with you. We debate it with our investors. My view right now is sort of this focus on the VA business, which is 50% of our GAAP earnings, and it has a lower multiple. That lower multiple comes from 2 reasons, I think. Reason number 1 is despite the fact that we've never had a blow-up in that business, despite the fact that we have a 20% return on capital. North of 20%-21% return on capital. Other companies have had blow-ups. I think there's a little guilt by association, even though we have had none. I think it's been a 20% business for decades. A decade at least, as far as my memory goes back.
I don't think we get enough credit for the quality of that book of business, the consistency of earnings from that business, no hiccups around policyholder assumptions and things like that, where other companies have had those problems. Some of them, not all of them. You have that guilt by association. The other issue is that with the VA business, it's a little hard to get into tail risk and understand the tail risk as an investor. Lincoln needs to do a good job to have the tail risk covered. There's some risk that if you run the general account and only invest in AAA government securities, you're not going to be able to do anything. If you run your ALM as if you were only invested in AAA securities and didn't take some risk, then it wouldn't be as profitable as it is.
I think the VA issue, you get a little discounted, I think, again, after decades of no problems and excellent returns and growth, that you get more credit even though some of this is stuff that troubles not everybody, but some people. The second thing that I think is missed is the overall diversification of our business. We have three sources of income, spread compression, fees on assets under management, and mortality and morbidity. Mortality and morbidity business is the life insurance business and group protection business. They're very good businesses overall. The VA business that we talked about and then RPS, which we've talked about. I think if people would step back and say, well, yeah, the VA business is a little hard to figure out the tail risk.
When you look at the diversification of the company, the 8%-10% growth that we've achieved over time, some of the best ROEs in the industry. If you add it all up and not just focus on one little barrel piece, there should be more benefit from looking at the whole diversification.
One of the other trends that we've seen in the industry is greater partnerships between life insurance companies and asset managers. You saw with AIG and Brookfield, you saw it most recently with AIG selling the retirement business to Blackstone.
Yes.
Just given that asset management isn't part of the business that you guys have chosen to focus on, would a partnership make sense at some point for you all?
Yeah. We decided we have a retail business model, that means that we deliver products into the hands of everyday Americans to create financial peace of mind. In order to do that, you need great distribution. You need good investment results. You need great product. You need great overall risk management. We decided years ago that we didn't need to be in the business of selecting individual securities. Ellen runs the investment department. She has a great team underneath her. We focus on asset liability management. We focus on total construction in general. We focus on aggregate credit risk. We source out the general account investment-grade assets to asset managers to pick the individual assets. Our alternatives we source out to the best alternative investment managers, private equity firms, because they have sourcing.
We have access to all kinds of asset segments and access because we hire managers to pick the individual securities to a much greater extent than most insurance companies. Most insurance companies rely on their own employees to produce assets, they can't have as broad of a range as we do because you just can't. Even at a private equity company, they specialize in different segments within private equity, as an example. We start off in a much better position because of the way we run our investment portfolio, we have access to these asset managers that our competitors don't necessarily have. Now, having said that, because of the AIG situation, T. Rowe Price is going to get a higher percentage of management of the general account, as I understand it, at the spinoff company.
We could do something like that, if it was good for Lincoln, it was good for our shareholders, it was good for the asset management company, we're taking a look at things like that could work out very well. Again, I start from the position because we have a manager selecting the individual assets to have access to the best in every asset segment already. There's no asset class that we don't have access to through our model. Is there some way to take a particular asset manager who brings unique capabilities to the table, we could allocate more to them. It might work out for them. It might work out for us. It could work out for our shareholders.
Okay.
At this point, I'll take any questions in the audience if anyone has any.
Maybe I'll ask one more. I think you guys frequently get questions on interest rate risk and universal life insurance, I think is frequently where it goes with concerns around interest rate risk. Just interested for you to talk about that product and I think you guys have talked a lot about the statutory impacts and so forth. What gives you comfort in your individual life booking the UL in the face of low rates?
The UL business was put on by a lot of insurance companies. I think back in the late 1990s, early 2000s, guaranteed universal life probably represented 80%-90%, probably a little bit high, but the direction is correct, of aggregate life insurance sales in the U.S. We were a big life insurance company. We participate in that business. Turns out that collectively, for the industry and for Lincoln, that the industry assumptions used in pricing were higher than what we're experiencing today. On GUL, that manifests itself in part by spread compression. As I've just discussed, becoming 8%-10% earnings growth can have an effect of overcoming spread compression on the whole company, including in the life insurance business and the GUL component. That's part of that. That's an issue, and there's no easy answer to that.
Again, there's some questions in the industry about how older tax assumptions. People are concerned that people will pay more premium for longer than what the pricing is assuming. We don't think so, but we'll have to see how that plays out over time. It's a big part of our life business. Again, in the aggregate spread compression is the near-term issue, and we're going to overcome that. Over time, we'll have to see how GAAP earnings are affected by this spread compression. The other thing I want to mention quickly, though, is from a statutory perspective, we've said, and it continues to be the case, that there's modest statutory capital incremental reserve requirements even with the 10-year GAAP basis test. It's not a drag on capital based on assumptions right now, even down to a 10. Excuse me, a basis of a 10-year.
All right. Well, we're out of time. Thank you very much for being here. Really appreciate it. It was a great conversation.
Great. Thank you. Thank you all for coming here.