Today, Dennis Glass, President and CEO of Lincoln National. Dennis has been CEO since 2007. Prior to his role at Lincoln, Dennis was President and CEO of Jefferson-Pilot, which merged with Lincoln back in 2006. Under Dennis' leadership, Lincoln has delivered stable double-digit ROEs for the last five years. Not an easy task given the environment, and with significant return of capital to shareholders. I imagine Dennis can also maybe take some credit for the recent Super Bowl victory by the Philadelphia Eagles, who play in Lincoln Financial Field. I imagine there's a couple slides on that. Let me stop here, turn it over to Dennis.
Jay, thank you very much. We are proud of our Eagles. I was kind of amazed. They had 3 million people at the parade to celebrate that in downtown Philadelphia. Now mind you, Philadelphia only has 6 million people in it. Jay, it's great to be back here again. As I was sitting in the room, I was remembering that I have been here I think every year since 1993, so I must be one of the longer tenured participants. I'm always delighted to be here because it's a great conference, and you have great analysts and owners attending it, so we appreciate the attention. I want to point you to the cautionary language in the slide presentation.
What I'm going to do today is try to touch on some of the trigger points and changes that are occurring and how they might affect Lincoln in the context of our business strategy. I'll review some of the numbers that you've seen already, which in 2017 were pretty exciting. As you can see here, operating earnings per share is up 20%, book value per share is up 13%. We had year-over-year sales growth, and all of our businesses, taking out some unusual items, I think had nearly double-digit earnings growth. It's a kind of year you just are excited about. As you'll see on this next slide, it's a continuation of what we've been doing for the last several years. Again, just taking a look at the numbers, the steady revenue growth, 5%.
This gets at the strength of our franchise. I'm going to talk about that a little bit. 12% CAGR in earnings per share, book value growth and ROE expansion. All of this while we're building a much stronger capital base, even though we bought, I think, about a third of our shares back since the financial crisis. We may have a reset. I'm not speculating on where the markets are going to go. Let me talk to you about the effect on this 12% from the combination of equity market growth and low interest rates. About 71% of our earnings come from what we call capital market drivers. Those two things, fees on assets under management and investment spread. These numbers are on the page.
Over this period of time, if you just isolate equity market growth, and of course you know we've had a tremendous bull market over this period of time, but if you isolate equity market growth and you isolate spread compression, only 1% of that 12% has to do with capital market inputs. Don't come away from the Lincoln story thinking that our 12% is all driven by the strong bull market that we've seen because it has not been as interest rate spread compression has offset the majority of that. When I look forward, I think the reset, and again, I'm not trying to speculate about interest rates, as we do our equity market growth. As we look at our planning going forward, we assume that maybe the equity market's growth will settle in at 6% over the long term.
We assume not really interest rates at too much of a higher level than they are today, but somewhat higher than they are. Let me come back to the net. I think the capital market tailwinds net 1% over the last five years, might be 2% better because interest rates will be higher, and that affects us quite dramatically. Again, just isolating equity markets 1% over the last five years, and with the assumption of 6% equity markets going forward and slightly higher interest rates, that one point could go to 2% or maybe slightly bigger than that. That's all there is to say about the effect of interest rates in equity markets. If there's 12% earnings per share growth, then only 1% comes from capital market inputs. What else is going on to drive the other 11%?
That's what I'd like to talk about in general. Some of the fundamental things that we've been doing to build the franchise and to sort of reshape the strategic architecture of the company so that we have a more balanced business mix on a go-forward basis. What are some of the significant things we've done over the last couple of years? We announced several years ago that we wanted to tilt away a little bit from the sale of long-term guarantee products. At the time, our long-term guarantee products, mostly guaranteed lifetime income and guaranteed universal life, were 70% of our sales. We wanted to flip that so that our guaranteed lifetime, or excuse me, our long-duration sales would be 30%, and our shorter duration sales would be 70%. Over time, I think that'll make a big difference in the in-force book, and we've achieved that.
Today our sales are 70% non-guaranteed in total and 30% guaranteed, and we like the capital intensive 30% businesses. Diversify and grow sales. I'm going to come back to the annuity sales in a little while because that's another, I think, trigger point that has been important, and I want to spend a little bit more time on it. You know, some of our earnings growth in that 12% comes from a recovery in the group business. What do we do there? We installed a whole new management team. We got the right people in the right place. We repriced the portfolio. We took out expenses.
In a three-year period, we went from margins of about 1% to 5%, now we're building that business again with the acquisition of Liberty Mutual's group business, I'll talk about the effects of that in a minute as well. We want to expand mortality and morbidity, again, to get a better balance of business, that's the Liberty Mutual deal, as I just mentioned. Let me go to the next page. Fundamentally, our franchise is built around the concept of having the best distribution for the products we sell in the United States. By distribution, I mean our wholesaling force and the shelf space that we have with the people who distribute our products.
We match that distribution with a wide product portfolio so that as consumer preferences change and as markets affect the profitability of products, we can pivot from one place to the other. This leadership position in distribution has demonstrated itself a couple of times. Again, back to diversification of sales. At one point, we had 65% of our Life Insurance sales in the Universal Life space. Today that's 16%, we've made a tremendous shift. Again, it's the ability to sell products with a strong distribution force. Annuities, we're doing somewhat similar to that. In the RPS business, we've expanded distribution and added products. Our leverage and leadership position through distribution is pretty powerful.
Again, to get to that 12%, expense management is an important part of it, you saw on this previous slide that the attention to keeping our expenses growing at a slower rate than our revenue, which is our normal way of running the business, then interjecting new ideas where we can take a step down in our expense structure. A couple of those new ideas include the digitization program, I'll talk to that in a minute as well. I want to talk to the issue of best-in-class risk management.
When you see these results and you see that our multiple's a little bit less than the industry average, I think over time there's been some question with when interest rates were lower, there was some question about the effect of interest rates on our growth potential, I think we've proven that we can grow even a low interest rate margin. There was some concern about whether or not their interest rates would affect our balance sheet. We said no, it didn't happen. I think we've taken that off the shelf of worries. The other issue is just some of the competitors have had big hits to their balance sheet from the Variable Annuity business. We have had none. Our hedge program is in very good shape. Let me speak to that for a minute.
You can't have an extremely valuable variable annuity book unless when you started the business 10 years ago, you had a good value proposition and you had all the Greeks hedged. 10 or 12 years ago, we started with a value proposition, which was account value growth matters, and oh, by the way, you have a guarantee too. We never got involved in these guaranteed price wars where people were giving 6%, 7%, 8% roll-up features and compounding and all those things. The value proposition and the way we've been running the business for the last 10 years is why we have such a good business today. Now we've continued to improve on our hedge strategy, and we haven't had any serious economic blow-ups because of the hedge program.
I might say this is new information that despite the volatility that we've seen over the last couple of weeks in the stock market, and in interest rate movements, we've had no material breakage because our hedge program has been improved, and it's doing very well. No breakage. Again, back to sort of fighting some of the competition's challenges. The other thing that has caused balance sheet problems for the competitors is policyholder behavior assumptions that didn't meet with actual results. Now we've had some policyholder behavior assumptions that weren't quite right, taking us down a little bit in terms of the future, but we've had a lot of policyholder behavior assumptions that turned out to be quite better than what we expected. Again, back to the VA program. Start off with a good idea. Account value matters. Oh, by the way, you have a guarantee.
Fully hedged our Greeks. I hate to use the word conservative, but policyholder assumptions that turned out to be pretty close, we haven't had any big benefits. The VA business ought to be taken off the shelf as a reason, in my mind, for our evaluation that's slightly less than what we think it should be. Finally, during this period of time, the VA book has had a 20% return on equity, and we hold equity at levels as high or higher than the competition. It's been very good business. The last point I want to make is, again, as you all know, we generate 50%-55% of our operating earnings as free cash flow up to the holding company. We've had strong dividend increases over the last several years, double-digit dividend increases.
To repeat what I said a minute ago, since the crisis, we've bought back almost one-third of our outstanding shares. That's what we've been doing to help get to that 12%. Let me talk a little bit about the power of our retail franchise and profitable growth. This slide's a little off in that the 700 wholesalers have to do with Lincoln Financial Distributors, which distribute our individual products. Life, annuity, and small case 401(k). It doesn't have in it, and should have in it, another 200 people, reps in our Group business. We're pretty close to 900 to powerful people in the marketplace. Again, we have broad and deep shelf space for all the products that we sell, and we're exclusively independent. That's pretty good. I think we talk about 90,000 independent distributors in a 24-month period sell a Lincoln product.
Behind that 90,000 financial advisors, there's probably each of them, I don't know how many customers they have, but we have this huge base of customers behind the 90,000 financial advisors that we'll need as we pivot. There's this huge market for people as we pivot from one product to the other, for whatever reason, that are there to buy it. It's a pretty good business model. Again, I'll come back to the idea of distribution without product breadth is not that helpful. Strong distribution and product breadth. I'll point out, in terms of distribution, I made the decision a decade ago that we would have a business that's distribution. We have a single business leader that's responsible for all of the individual distribution.
I think that's important because that business leader sits at the table with the rest of the team and can keep us abreast of what's going on in the marketplace, keep abreast of all the strategies that we're thinking about. Most importantly, we can recruit the best salespeople in America because we're the only company that can say you can start out as a sales rep and ultimately sit on the senior management committee, and there's no reason why a distribution guy couldn't, at some point in time, be the CEO. The ability to be able to make that story creates a much more enthusiasm and excitement on the part of salespeople as we try to recruit, and the quality of these people that we're talking about is reflected in that perspective.
As we've said, you can see on this slide, in 2017, we had really good sales growth. The red line, Retirement Plan Services 12, Life Insurance, eight, Group Protection, seven, and Annuities, six. All good growth. Let me focus on Annuities, because you can see over the last five years, there was a 5% decline in sales. How do you go from a 5% decline in sales to a 6% growth in sales? I'll tell you, it's the same playbook that we use all the time, which is build a broader product portfolio and enhance distribution. Just a couple of key points on this. One, some of that decline is a function of guaranteed lifetime income products or variable annuities in the industry sliding south, part in reaction to the Department of Labor fiduciary rule.
Some of it was Lincoln's own loss of market share. It was because we were focusing, I think we held on a little bit too long to the idea that we were a guaranteed lifetime income company as compared to more broadly meeting solutions that annuity products in general solve for consumers. Our product development sort of has two-prong approach today. It started about 18 months ago, which is, yes, we're building products that will create new markets five to seven years from now. We talk about our fee-based ETF product as one of those that will develop sales over the next five to seven years. The 20% growth of that 6% year-over-year comes from other new products.
The other new products is going into the marketplace with products that already have a market and are selling by other competitors and taking share. In addition to taking share, because of the strength of Lincoln's distribution, we're increasing the size of the market. We have new products that are in the marketplace being sold by other competitors. We're taking a little bit of share, but we're also, for the benefit of the entire industry, with the quality of our distribution adding to the size of the market. We're quite pleased with the recovery in Annuities. We said a couple of weeks ago on the earnings call that the Annuity sales will be a little bit lower because of seasonality in the first quarter than they were in the fourth quarter.
The basic strength of these new products, the distribution strength, the DOL sort of off the table for the moment. We continue to believe that the strength that we saw in 2017 will continue in 2018 in the Annuity business. Of course, in the Group Protection, Life Insurance, Retirement Plan Services, we feel as if we'll have good growth as well. By the way, just the other point of this slide is that we don't sell products unless we're getting a return on them. You've seen us have to pivot a couple of times. When interest rates fell dramatically in 2009 or 2010, the returns on our guaranteed UL products dropped from 11% or 12% to 6% or 7%. We got out of the market. I think sales were down 20% or 30%, and we repriced the product.
I don't want to sell a lot of business where we weren't getting the kind of returns that we needed. When we got out of the guaranteed universal life market, we used that capital that would otherwise been used for product sales support, and we bought our shares back. Similarly, with the VA business, we've had a pop in the ability to buy more shares as the markets declined. Active capital management and a focus on getting the appropriate returns on new business is just sort of part of our DNA. That's the kind of thing that we do on an ongoing basis.
I just got to say again, I don't believe there's a more powerful aggregate distribution organization in the U.S. in the insurance business than Lincoln. I know that there is no broader set of solutions properly priced than what Lincoln brings to the marketplace in the entire insurance industry. Let me talk for a minute about the digital program. This gets back to a couple of things. One, let me just make the broad statement for the industry. Lincoln being part of the industry. From a customer experience, every industry is competing with the born digital companies. The service expectations that we have in the Life Insurance business aren't being compared against Met or AXA. They're being compared against Amazon and Uber. Those are what I mean by the born digital companies.
Every company that's going to be successful over the long term has to elevate the customer experience to the same level as the born digital companies. That's sort of the first strategic thrust of our digital program. Interestingly, though, you can, in today's age, with robots and optical character recognition, not only increase the customer experience digitally or chatbots , things like that, but you can lower your costs. In the old days, if you wanted to increase the customer experience, you had to raise your staffing ratios, which means extra cost. Today, you can elevate the customer experience and simultaneously reduce your cost because of automation and things like that. We've talked about the numbers. We think through digitization, over the next 3 or 4 years, we'll generate $90 million-$150 million in savings. Of course, that comes with an investment.
Our experience for every dollar of run rate takes about one to one and a half dollars of initial investment, Randy will keep you posted on the progress. Again, it's a combination of elevating the customer experience over the next 5 years to the born digital company's level and taking cost out as we go along. Let me spend a couple of minutes on the Liberty Mutual acquisition. We had an hour on this a couple of weeks ago when we announced the deal. I think it's a very exciting deal for Lincoln. You've heard Lincoln talk about wanting to increase, as you see on this next slide, the amount of mortality, or excuse me, underwriting profits.
I think over time, shifting a little bit away or tilting a little bit away from earnings that are driven by capital market inputs, even though, as I just talked about, it's not been a big deal from an earnings growth perspective. Just sort of more stability in the earnings over cycles. We wanted to get to 33%. I looked at every deal that came to the market in the group space over the last 4 or 5 years. I can tell you, my team and I looked at every deal. I can tell you that in terms of the things that we were looking for, hands down, without question, the Liberty Mutual fit our strategic goals.
A couple of things is when you're in a small market and you buy a small market company, the top-line dyssynergies often overwhelm the cost saves that you might get. We had complete saturation of our sales force in the small market business, we didn't need to do an acquisition there. The idea that we're now both in the small market and the large market, and that we will be providing ancillary group products to small companies and large companies across America, is sort of the driving force behind that. Of course, there will be consolidation savings that we've talked about, and we'll see earnings boost from that. I think we talk about this deal being generally accretive over the next couple of years.
Importantly, as I've talked to analysts, we sort of got stuck on the Life Insurance business and the Annuity business, and we had these two other businesses, and they were good businesses, but they needed to be bigger, or at least the group business needed to be bigger to be a meaningful part of the story. That's what the Liberty transaction does for us as well. Now when you look at our franchise, and I say this with some confidence, I think we have the best U.S.-based insurance franchise in America. Great distribution, great product breadth. Three of our businesses have top five market positions. Why is top five important? It's not important for bragging rights. It's important because you have to have scale so that your distribution organization makes a difference in the marketplace.
As people want to get into new markets, they know our distribution is so strong that we can help them. A Merrill Lynch brings us onto the 401 platform, not because they need another 401 platform, but because we have 250 wholesalers that can help cross-sell and make it a bigger deal for Merrill Lynch. That's important. Again, it's a great acquisition for us, and we expect it to be important. Let me come back to that. You say, "Dennis, you're top three in three business, and then you have the 401 business in the second part of the story, or you have the retirement business where you're not top five." The reason that business makes so much sense for us on a go-forward basis is because it fits our strength.
Particularly, back to small case sales, our distribution is so strong in the distribution channels that sell small case 401, that it has a meaningful impact on our overall sales volumes. The strength of our distribution in predominantly the wire channels where these things are sold is big enough to drive the top line in RPS. Whereas if we were three times the size, it wouldn't be as important. It wouldn't be as meaningful in terms of growth. The second thing is, back to the idea, what does scale mean? We're big enough in the retirement business to drive our cost down to competitive cost. Really across the board, we can compete on cost with anybody. Scale, distribution power, and enough scale to bring your costs down.
Finally, enough excitement in the businesses to be able to attract the best people to Lincoln. Oops. I was expecting my pages to change when I press the clicker, but I guess that doesn't happen. I think this last bit is just, again, the Liberty acquisition's a great acquisition, the best one that we could have done of all the things that we've looked at over the years. Some work to do on repricing and integration. We're pros at that. You've just seen us do it with our own business. We're very confident that we can reach the kind of numbers that we've talked about with respect to the acquisition. I'll just finish by saying I think we've done a good job. I know we've done a good job over the last five years. It's not because of the strength of the equity market.
It's because of the strength of our franchise, the balance of our earnings, and on a go-forward basis, that balance is improving. The strength of our distribution will improve. The breadth of our products will improve. Active share buybacks will continue after this first couple of quarters where we're using some of that capital to finance the Liberty acquisition. On a go-forward basis, very powerful franchise, continued active share repurchases as part of our strategic plan. We're quite excited about being able to produce good results. Thank you. Jay?
Yeah. If there's a question, just raise your hand and wait for a mic. Let me throw out at least one or two. Dennis, as you mentioned, interest rates have been a headwind for you and everyone else.
The 10-years back up to a four or five-year high right now.
Yeah.
At what point does it become no longer a headwind?
The portfolio yield is 470, I guess we get 130 to 150 basis points of credit spread. 470 from 150, 320, which is not that far from where we are, and spread compression goes away. I'd only qualify that by saying there might be a year where higher earning assets are falling off, and so there might be a little bit of noise in that. Generally, 30 basis points higher than we are, 30 to 40 basis points higher than we are, and that 3% goes away completely. You heard me say that I thought some of the 3%, the headwind from spread compression, would go away at these levels, but it goes completely away with another 30 to 40 basis points.
The net, again, with a 6% equity assumption and interest rates at 330, Capital market input would give us a 3% earnings boost. I really want to come back to that because the power of our franchise is the diversity of our earnings. Again, equity market drivers are important, but they've been offset. We think going forward with a fairly modest growth assumption of 6%, that the combined effect would be more positive going forward of rising interest rates and 6% equity market growth than what it's been over the last five years.
Question over here.
I know it's an equity conference, there was an announcement of a recent debt deal. Could you talk a little bit about that?
Yeah. We raised $1 billion. Pardon? $1.1 billion, to be exact. The proceeds were used, I think $500 million of it was part of the anticipated financing of the Liberty Mutual Group. The other $600 million was replacing debt that was outstanding. The good news is I think the total interest cost on the $1.1 billion is about the same interest cost that was on the $600 million that we're replacing because we issued that in the depths of the financial crisis and would've had an 8.75% or so coupon on. I'd also say that we got very good execution on it. I think the spread over the treasuries was about 98 basis points, and the deal was six times oversubscribed. It's a powerful statement, I think, from the capital markets about the strength from a bond perspective of the Lincoln organization.
Any other last-minute questions? Last one right here. Alan?
Yeah. Hi. Just curious, with the VIX going up quite a bit, your cost of hedging, I assume the last few years, has been pretty low, and now with volatility increasing, will we notice as an outsider that your cost of hedging is probably going up?
I think the other way around, actually, Alan. The cost of our hedge is more dependent on the 30-year swap rate. That's been rising, so our cost of hedging has been going down. I think the math on this is a 25 basis point increase in the 30-year swap adds a 1% improvement to our return on capital in the market. You look confused.
Yeah. I look at it as a return on capital. I'm not sure how to translate that to earnings.
The reduction in the cost of the money for the hedges from a 25 basis point rise in the 30-year swap rate contributes enough additional lower cost to boost the return on capital, all things considered, by 1%. If we were earning 14% on our VA new products and the swap rate goes up 25 basis points, we'll now be earning 15%. Okay?
Let's leave it at that. Dennis, thank you very much.