Ladies and gentlemen, please welcome your host, Chris Giovanni.
Thank you all, and good morning. If I could ask everyone to silence their phones before we get started, that'd be incredibly helpful. I'm Chris Giovanni, the Head of Investor Relations, and on behalf of all of us at Lincoln, welcome to our 2016 conference for analysts, investors, and bankers. Let me start by thanking those in the room, and others that have joined us via the webcast, for your participation today. We appreciate you taking the time to learn more about our company and the strategies we have in place to create long-term value for shareholders. Now for a quick look at the agenda, which you can find in the front of your booklets. Dennis Glass will lead things off. We will then move to presentations on the businesses, Will Fuller, Mark Konen, and Ellen Cooper. Finally, Randal Freitag will discuss our financial results.
We do have two question and answer sessions scheduled. As always, we ask you to please wait for the microphone, identify yourself and your firm, and also limit yourself to one question, one follow-up, and if we have time for additional questions at the end, we'll get back to you. After the second Q&A session, we will have lunch in the hallway across the way. We'd ask you to join us for that. We also have other members of the leadership team for Lincoln here, so we'd invite you to have conversations with them during the lunch or during the breaks. Lastly, just want to turn your attention to the cautionary language statements that you can find in your booklets. As you can see, we will be making forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially.
We describe these cautionary statements in disclosures that you can find in the appendix in our forms 10-K, 10-Q, and the 8-K that was filed this morning. Today's presentations do contain non-GAAP financial measures, and where appropriate, we have included reconciliations to their most comparable GAAP measure, as well as explanatory notes in how we measure these and for the reasons that we do so. At this time, I'd like to turn things over to Dennis Glass, our President and CEO.
Thank you, Chris. Good morning, everybody. Let me add my welcome and note we generally appreciate the time that you take to be with us on these investor days. I think we have a pretty good track record of imparting new and more insightful information at each of our investor days. I don't think you'll be disappointed today on that note. Again, thank you very much. We appreciate your interest in Lincoln. We, of course, think it's a great company and are complimented by the fact that we have so many people here trying to learn more about us. It's been 18 months since our last get-together. I think it's a good time frame in which to measure the progress of Lincoln, metrics, and in other ways.
I also think it's a good length of time for you in the audience to assess management's actions and initiatives in response to the various challenges and opportunities that occurred during that time frame. When I think about the last 18 months, certainly not as crazy as 2008 and 2009, but certainly not without its challenges from an external perspective. The two that come to my mind most easily in terms of challenges that we had to deal with are, one, our reactions to consistently and persistently low interest rates. We'll talk about that a lot today. The second thing during this 18-month time frame is that we continued, like other financial institutions, to be challenged by both state regulations as well as federal regulations.
Change will continue to occur. What is important is that management has a clear view of where they're going and takes action in response to what's going on. I think over the last 18 months, the management team that you're about to see this morning took very aggressive actions in response to the challenges and opportunities that we were faced with. I'm confident that that management team and the 10,000 employees at our various key cities throughout the country that represent Lincoln will continue to positively react to what's going on. Let's talk a little bit about what actually did management do during this time frame. Again, we didn't sit around.
We had a clear vision of where we're going, even though the ground was moving a little bit below our feet. We had both feet solidly on the ground, again, with a clear vision of where we wanted to go to improve shareholder value. Now, what did we do? First thing I think is very important, across the board, product repricings to get a decent return or a good return on the capital that we're putting out behind new business because of low interest rates. We started that three years ago. We continued it through this 18-month time period. A lot of new product development, which further diversified our product lineup, both reducing concentration risk and responding to changing consumer preferences. Very important product development activities.
You all know that we have been significantly tilting our sales towards shorter guaranteed products, we made significant progress on that. We're well on our way to fixing the profitability and growth prospects for our group business. Recently, we've increased our focus on in-force profitability management actions. We have expanded distribution and shelf space in select products. We reshaped our alternative investment portfolio and trimmed our energy and commodity exposure. We had a lot of regulatory engagement that positively influenced the environment in which we were operating. I think we got a lot done. I believe these actions were forward-looking and significantly moved the company toward sustainable long-term shareholder improvement. On the other side of the coin, we're disappointed that despite these actions, our share price is 20% less today than it was the last time we got together.
We have designed today's presentation to include thorough responses to what we believe have been the primary areas of uncertainty, confusion, or concern from investors affecting our valuation. Let me hit four of these right up front. The first, continued concern about the impacts on our balance sheet of these persistently low interest rates that we're all aware of. Randy's going to dig into this deeply, and you will see the numbers aren't much different in terms of the impact than what we shared with you two or three years ago, even when we test the balance sheet down to very low interest rates. Very manageable balance sheet.
The second issue that we think is on your minds, I think this is fading a little bit with the price of oil going back up to $51, it's the concern about energy investments, along with prices rising, we have significantly reduced our energy exposure, the remaining credit loss exposure is very manageable. Item number 2. Third item is the concerns about the impact on our business of the fiduciary rules that came out. You have heard us say a couple of times already that the rules moved in a very positive way during the comment period, we think that as we continue to deal with the Department of Labor in our one-on-one conversations, that we'll be able to continue our business. We'll have to respond in some ways, but we don't see this as a huge impediment as we go forward.
Finally, this last one, in the slide up there, I talk about the volatility in the capital markets sort of generally, that affects us in a couple of ways. I want to come back to this issue of our annuity earnings stream, I think is undervalued. Randy and I continue to pound away at this issue at all of our investor meetings. Actually, this issue is more perplexing to me than the presidential primary activities of the last six months or so. Why is it perplexing? It's perplexing because, one, we have, on an absolute basis, grown this income stream over time. The income stream has not been volatile. Nothing has blown up over the last decade. We've outperformed, again, on an absolute basis, we've performed very well. We've outperformed every one of our leading competitors that do well in the business.
There's several companies that got out of the business. I'm not talking about them. I'm talking about the fact that we outperform the good competitors in the industry. We have good results, growing earnings, strong ROE, and you would think after a decade of those results, investors would have a greater appreciation for the earnings that come out of our annuity business. We're going to spend a lot more time this morning trying to provide additional insights and answer some of the questions that we have heard about the impact of this, that, and the other thing on the balance sheet in the business. Again, I think this is an area this morning where you'll get some new insights. I think the annuity business that we're in is one of the best businesses in the insurance industry on a go-forward basis.
We hope that as we work through our presentations this morning, we can take these worries off the table and more so help you better appreciate several factors that differentiate us, including our track record of very strong financial results and active capital management, the strength and resiliency of our distribution and product franchise, and looking forward, the various strategic initiatives we have underway to make sure that we sustain our success over the long term. Let me spend a few minutes digging into each of these a bit more. First, our diversified mix of business has produced solid financial results since 2009. Look at these results. Earnings per share have grown at an annual rate of 12%. We have improved our ROE by nearly 300 basis points.
We've increased book value per share at a 7% rate, and we've returned $4 billion of capital to shareholders while we've maintained record financial strength on our balance sheet. $4 billion to our shareholders while maintaining record financial strength in our balance sheet. I think these are extraordinary results, our strategy should support, will support continued good results. The second point would be that Lincoln's franchise, based on our industry-leading distribution and product breadth, is as strong as ever and as resilient as ever. We recognize sales growth has been muted the last couple of quarters, we're confident that this can be overcome. The primary reason is that our valuable wealth and protection solutions are needed more than ever, given the favorable shift in demographics and the fraying of traditional government and corporate safety nets.
Our distribution and product development activities are poised to meet these needs. Let me talk about two important distribution strengths. The first is we have a huge employee wholesaler force across our individual businesses and our group businesses. Our wholesalers are, without question, the most experienced and productive in the industry, this experience is not just a throwaway. When you have complex products, you have complex issues facing financial advisors, having experienced, thoughtful, smart wholesalers is a differentiating capability. With respect to our distribution, we have a producer universe of over 90,000 financial advisors who are independent and choose to do business with Lincoln. This is a huge army of financial advisors to be able to tap into as we pivot, tap into as we try to grow, tap into as we develop new products.
It's already 90,000 strong, as I said, we believe we can meaningfully increase this amount. Back to product. We already have among the broadest set of product offerings in the industry, marketplace trends are creating additional openings, and we have a track record for product innovation to take advantage of them. Will and Mark will dig into the power of our differentiated distribution franchise and why it is a competitive advantage for Lincoln as well as the strengths of our overall product portfolio in the next couple of hours. My next point is that companies are facing an evolving regulatory environment, as I mentioned already. An ability to both respond, influence, and adapt is increasingly required. As I mentioned, Lincoln has a proven ability to do these things, and we've met the challenges from a regulatory perspective.
Let me first talk about the state regulatory environment. It really is quite fascinating to me what's happened in terms of regulatory challenges over the last two or three years. Let me first say the big-ticket items are off the table and behind us. What do I mean by that? AG 38, big-ticket item for the industry, resolved, grandfathered the in-force business, and adjusted the reserves in not a destructive way for new business going forward. That's off the table. A triple X and triple X, the use of A triple X and triple X captives, again, in the rear view mirror, resolved in a satisfactory way for the industry and the regulators. Going forward, I'm also very enthusiastic from what's going on. Some of these things are actually helpful to us.
The first one is the industry, excuse me, state is continuing to look at VA captives, as you've heard me say before, this is going in a very positive direction, and I think it will end up in a solution actually that reduces the need for captives. Probably again, I think it'll end up being in a better situation than it is right now. The other one that we don't talk about too much but is also important is that we now have, we, the insurance industry now have reached the point of state acceptance of principle-based reserving, which will begin in January of 2017. Principle-based reserving will have two significant positive impacts on the industry and Lincoln.
The first of those is that because of the way we do our business, when we calculate principle-based reserves, we'll find that we need less on a go-forward basis on new business, less reserves than we've had in the past. That's a good result. Similarly, on A triple X reserves, although the impact is not quite as big as it is for term reserves, it's still a positive impact, again, on new business lowering future reserves. Again, a positive development from a regulatory standpoint. If I turn my attention to federal regulations, we've talked about the fiduciary rules, as I've said, the final rules put us in a pretty good position. Each of the presenters this morning will talk about that in more detail. Let me also say that I'm very proud that Lincoln not only embraces these challenges, but we take a leadership position.
We did this once again with the DOL fiduciary rule by leading a consortium of annuity companies to meet with the department to help highlight a couple of key facts. One, lifetime income is important to consumers, and our industry is uniquely positioned to provide that. Two, that commissions also can be in the client's best interest. Those two things were not in the original rule, but both issues found their way into the final rule. The ability of companies to influence and take a leadership position, I think, is important. There's a lot of issues that are going on. Lincoln spends its time on those that are most important to us and every one of those things that I've just mentioned, both from the state and federal perspective, the industry was led by industry.
Excuse me, by Lincoln. Let me come back to federal regulatory issues and of course, not only federal, but international regulatory issues. The big concern of companies who are in the crosshairs of federal regulation and international regulation are concerned about what increasing capital requirements they'll have as a result of being under the Fed or the IAIS. Let me repeat, Lincoln is not subject to any secondary regulation, either federal or international, because of the way we do business. I'm also going to repeat what I've said to you before. There is little chance, in my opinion, that these extra capital requirements that apply to the big companies and to the international companies will ever apply to Lincoln, and they will unlikely bleed over into the regulatory bodies that in fact, regulate Lincoln.
I think it's an important issue for some people, but it's not for Lincoln. The last item I want to highlight is that we have various strategic initiatives going on to make sure we maintain our success. This is all aligned, of course, with creating long-term value for our shareholders. While I think many of you recognize our product and distribution innovation, there probably isn't as much appreciation for other areas of innovation across the enterprise, particularly around digital capabilities. You'll see some of these over the course of the morning, but let me give you a few examples. First, in our distribution organization, we use predictive analytics to identify producers most likely to sell our products, and digital tools enable our wholesalers to target specific producers. Productivity inside our wholesaler force. Second, throughout our businesses, but let me use the life business.
We are improving processes, particularly in the life business, through something we call LincXpress, which is a streamlined digital app submission and policy delivery experience. Very helpful as we move forward. Finally, we recently added industry-competitive mobile options in RPS. Digitization is a trend which has changed industries and will change the life industry probably sooner than we all think. Uber and Amazon are setting the customer expectation levels that all industries will need to meet. Lincoln needs to go in that direction. We have a good start and we'll be doing more. Let me leave you with a final few thoughts. One, a track record of solid financial results, strong balance sheet, and active capital management. Two, a resilient franchise with great long-term opportunities in front of us.
Three, a proven ability to respond and adapt to changes, whether they be regulatory changes, capital market-induced changes, or consumer preference changes. We have shown, again, an ability to respond to all of these things. Finally, a commitment to leveraging technological innovation to sustain success. With that, a lot to work through today. I'm going to turn this meeting over to Will Fuller to dive into distribution. Thank you very much.
Thank you, Dennis, and good morning, everybody. We're going to kick this off with distribution and then go right into the business line presentations. Let me start by saying that, as you all know, we made a conscious strategic decision as a management team that distribution was a core part of our company's strategy. Now let me tell you about the formula that we use. This formula takes place across each of our distribution franchises, worksite, wholesale, and retail. Here's the formula. Anchored to a strategy of consistency, right along with our product discipline of strategy of consistency. Focus on being a market leader on our terms. You got to have that alignment with the company's financial objectives, company's risk objectives. Selling through the cycle. This ability to be consistently productive throughout different types of markets throughout a full market cycle.
As a company, leading our pivots. From time to time, in any business, you have to shift, you have to pivot, you have to have that agility in the marketplace to meet new consumer demands, either opportunistically or to face a challenge. We focus on remaining a market leader in a business on our terms and balance being valuable to partners. Okay? This is how we do it at Lincoln, and it doesn't just happen kind of on its own with distribution out, standing on its own. It happens as a part of an integrated process with product development, with risk management, working in an integrated way. When it does, we win, and we win on our terms. That's our formula at Lincoln across all of our businesses.
We go into the market in the U.S., as you all know, we're focused on the U.S. consumer. We manufacture retail products across our four businesses, Group, RPS, Individual Annuity, and Individual Life. This is a very vibrant consumer market in America. On one hand, you have assets in the hands of retirees or those near retirees, and that is growing. In 10 years, 80% of investable assets will be in the hands of those at or near retirement. On the other hand, we have a vibrant market of those entering the workforce, producing income. We start with that element. Financial professionals in the U.S., this is a big market. There's 850,000 financial professionals in the U.S., and many of them are having to evolve to be more generalist in their activities.
There was a time a couple of decades ago where you were a stockbroker, or you were an insurance agent, or you were a benefit broker. Increasingly, you're aiming to engage and serve a consumer on a broader set of their wallet share. Whenever in any industry you become more of a generalist, you require specialization. That's what our wholesalers bring, whether it's in the group protection or the RPS market, it's working through the worksite, trying to access those consumers that have the income, or you're an LFD, and you're working predominantly in the retirement space, accessing those consumers with assets.
Our wholesalers have to be experts so they can help advisors deal with those specialization areas that are anchored in our businesses, like retirement income, estate planning, how to deal and fund long-term care and healthcare costs, how to deal with protection from income loss, or the loss of an income-producing family member. Vibrant marketplace in the United States, and as you go forward, more wealth in the hands of retirees and more income. Pretty attractive long-term fundamental elements to the market. We're valuable to our partners because we have a model that meets their needs. Let me talk about elements of that model or building blocks of that model. First and foremost, a scalable national presence. Partners want to know that you have a coast-to-coast ability to reach their local markets where they serve.
If you're Merrill Lynch and you're anchored in the large metro centers and medium-sized cities, they want to know that people can go into those branch offices and work with those advisors. If you're Edward Jones and you're operating towards small markets, small towns, they want to know that someone can go into that main street and work with that individual advisor. When you hear Dennis talk about this large distribution, I want you to think national scalable model with a local market presence. That's essential. Second, we're channelized. This is a big industry. We are aligned and organized by the unique business models that operate in unique ways. Benefit brokers have a method of doing business that is different than an employee in a wirehouse or an independent financial planner affiliated with a broker-dealer.
We're organized to meet with that individual and know how they happen to run their business and support them. That's the second building block. The third is you got to bring expertise. You can't just bring product. If you're an annuity wholesaler, you have to be an expert at retirement income and tax planning and the risks that face individuals in retirement for their retirement security. If you're a MoneyGuard wholesaler, you better know about all of the issues around long-term care planning and funding, including Medicare and Medicaid, and you actually need to know what that means in local markets or local states, different from another local market or local state. We bring that expertise. We focus on a highly professional workforce with a lot of tenure and a lot of development.
Last, it's the broad product portfolio you're going to hear Mark and I talk about today. Being able to have a lot of different tools in the toolbox so that you can meet and make the appropriate recommendations to the financial professional based on the consumer need and their actual preferences. That broad product portfolio helps us meet needs, but it also facilitates cross-sell, and partners like the idea of cross-sell. There are a lot of companies that have one of these elements or two of these elements. It's having all four, the combination of all four coming together consistently. This is what makes you a valued partner, and this is why you want Lincoln Financial in your system and in demand. You see that.
Our partners that leverage our broad portfolio generate the majority of our sales, and we even have room to grow that shelf space. While we have strong market leadership in our businesses, in our partners that leverage all four of these elements, including that broad portfolio, we have a higher market share. A big part of why our wholesaler model is in demand and will continue to be in demand. I need to advance the slide, please. No, the visual slide. Thank you. Our strategy at Lincoln has long been anchored to independent producers. We believe independent distribution offers you multiple ways to win, gives you a broad canvas at which to navigate the marketplace upon. Keep in mind, there's 850,000 financial professionals, give or take a few, in the industry. You can't really go after 850,000 financial professionals.
If you did, you would either, A, be spread too thin, or we would have resources that would exceed our product allowables, right? Good businesses, what do they do? They target their market. They narrow their focus, and we do that. We look for producers that have the attributes in their businesses that would make them interested in the types of products and solutions that we offer, and that they would be likely to sell today. Maybe they sell with us, maybe they sell with a competitor, or maybe they just simply have that attribute that we could educate them and get them to enter into our lines of business. It could be their business model, could be their interests, could be their attributes. We deploy our marketing and our wholesaling activities to that larger population.
What you see here is this 90,000 producer base that Dennis was talking about, large productive advisors. They're loyal year-to-year. They're repeat producers. They generate a good portion of our sales. 25% of them are cross-selling and selling multiple products, and each of these statistics have grown over a period of time. That broader universe also helps you pivot. Here I've highlighted two pivots, and I made this point at our last Investor Day, that all pivots are based on producers. You need to have people change their practices and come along with you. It is hard enough when you do it with an individual, but you've got to get a lot of individuals to be able to change all within a period of time, and we have a proven ability to do this. I think of it in terms of three buckets.
First, you generally have a producer doing the business in the area that you want to shift to. You then have to take advisors and convince them to also make that shift, and some will, and some won't. You can't stop there. You then have to be able to go out to the marketplace, target new producers, and bring them on board. I would submit that in both the life pivot and in the variable annuity pivot, it was that 6,000-plus new producers that really turned this from being marginally successful to wildly successful. Dynamic analytics are changing the game. Dennis mentioned it. I'll mention a little bit more of a detail. There was a time not long ago where we completely relied on an individual wholesaler to market our products and to engage with producers.
That wholesaler had a spreadsheet of names, probably had a list of last year's sales, and that's about it. Not anymore. Today, we use predictive analytics to segment all producers in the industry, so we can target those that have the attributes and the factors most likely to do business with Lincoln. That's what wholesalers used to have to do. We now can do that, and we're getting smarter and smarter at it every day. We look at factors like business model, licensing, educational credentials. We look at elements even like behavioral attributes, like spending habits, home values. They tell us a lot, not only about the producer, but about their affinity. Also you can make inferences to their clients. Generally, you find that producers have clients similar to them. This tells us a lot about what they might be interested in.
We can have a sense if they would be more or less interested in MoneyGuard, more or less interested in guaranteed retirement income, more or less interested in doing business with us, and we can market to them broadly through digital online marketing capabilities. What this allows a wholesaler to do is be more effective because we now put in every wholesaler's iPad at LFD, their market analytics. All of this insight, all this intelligence in their hands telling them which advisors they should target their activity towards. This gives them more time to educate advisors, more time for selling activities, less time profiling, less time in doing administrative responsibilities. You see this wholesaler efficiency in our productivity gains up measurably in recent years. We have fewer wholesalers, we have higher productivity. Important point.
Let's turn to the topic that has consumed a lot of my time, our management team's time, and consumed a good part of the conversation with all of you in the audience when we engage with one another, and that's the Department of Labor fiduciary rule. Certainly an important topic. I'm going to cover it at a high level here, we'll also speak in a little more specificity to each of the affected businesses in the presentation. With me in the annuity presentation later today, Mark inside of RPS. Let me start by adding to Dennis's comments that we are generally encouraged with the adjustments that were made to the final rule, in particular on the priorities that were most important to Lincoln.
First, the recognition and the specific inclusion of lifetime income guarantees that are fundamentally different than traditional investments and the ability to offer a very clear and straightforward approach to how to use this inside of the BIC, recognize that different benefit profile, recognize the differences in how the advisor and client interact, recognize the differences in cost for guarantees different than cost for investment management, and recognize the differences in compensation. Very important point, our most important priority. Second, the recognition that there can be value in commissions. I want to go further than this. I don't want you to walk away and say that it's just about commissions. It's not. It's about having all forms of compensation held to the same standard.
Our issue was that there was consumer value in commissions, there's consumer value in fees, hold them to the same standard, and that was an important reflection in the rule. I think it's likely the most significant reason why most distributors intend to use the BIC, because every method of compensation is held to the same standard. The grandfather provision definitely avoids a very disruptive backward application. Anytime you have a regulation that's this comprehensive, there's going to be some level of disruption as you shift to it, some level of disruption to advisor productivity, but a backward application, having to avoid that was very, very significant. We've been working with most distribution partners, as you can imagine.
I can tell you, I must say virtually everyone, I don't know of a distribution partner that doesn't intend to use the BIC or isn't working feverishly to make that conclusion. I think what you're largely going to see is an industry that says, "Yeah, we have to continue to serve retirement savers if we're going to be competitive." Keep in mind the point, how many people are going to be in retirement, how much of investable assets are going to be in the hands of retirement savers. If you're going to serve that market, you have to be in the qualified retirement plan business. You're going to operate towards the BIC. I think you'll see the industry largely move in that direction, and I'd be surprised if you don't have anything other than just a few stragglers.
Importantly, in our own BD, LFN, we've already made this decision. We announced about a month ago to our advisors that we will operate to the BIC. We will hold commissions and fees to the same standard, we are working towards that process as we speak. We're dedicating, as Dennis said, our full energy across the company to this effort. We get a lot of questions around, well, why were these changes made to commissions in the rule? Why would there be an inclusion of lifetime income? We thought that anchoring to these two points would be helpful for you. These were two exhibits that we shared with the department. We also shared with the OMB through the comment period process. What you see here on the commission slide, this shows cumulative compensation paid over a period of time between an upfront commission and level fees.
The upfront commission exhibited is a 4.5% upfront with a 25 trail. That's a standardized comp for the wirehouse channel in particular. 1% level fee is generally viewed as a standardized approach to level fees. What you'll see here is that there's a break-even period of about five to six years. If you're a consumer and you're a low-volume transactor, you're a long-term buy and hold investor, like annuity purchasers, that you can't just jump to the conclusion that commissions are not in your best interest. You just simply can't get there when you take into account the horizon of the investment. Through this methodology, you can see if the commission's a little bit higher, then the break-even point's going to be pushed out a little bit on the end.
If the commission's a little bit lower, you're going to see the break-even come in a little bit closer. I think this exhibit and looking at compensation over the customer life cycle is really what drove bringing these compensations to the same standard. That's the first point. The second point is that the risk of longevity in retirement, this is not theoretical. This is not theoretical. If you're a retiree, you have a 50% chance of outliving your money in a mutual fund. You have zero possibility, zero possibility of outliving your income when you invest inside of an annuity. These are guarantees that only our industry provides. I want to reinforce here, keep in mind that the reason you have qualified retirement plans, the reason they exist is so savers can develop an asset base at which at some point to take retirement income.
Our industry provides that solution. That is our value proposition. While there may be some near-term disruption with this rule, we do believe fundamentally longer term, that this is a strong value proposition, and we are well positioned to take and have future growth from that. In closing, I sit back and I think that on one hand, we've got this very powerful distribution network, worksite, retail, wholesale. Actually, could you go back please on the slide? Thank you. 800-plus wholesalers offering specialized expertise, proven ability to pivot, very experienced. We've got this large advisor base of producers. As I've shown you, we have room to grow and capabilities to help do that. I go to market with our teams with a broad portfolio in our core markets, lifetime income, tax advantage investing, long-term care, estate planning, life insurance. There's new markets.
There's actually paths for growth. You'll hear about them today in some of the business line presentations. You'll hear about the opportunities for fee-based annuities. You'll hear about the opportunities in Registered Investment Advisor channel. You'll hear about, from Mark, the interesting things that we're doing in terms of online term insurance and reaching new markets that we haven't reached at before. All the things that you've counted on Lincoln's distribution to do well, which is grow our shelf space and grow our productivity, enhance our capabilities, and drive that efficiency is what you can count on. We are resolved in distribution to create shareholder value and to help the company be successful. In closing, let me say, this formula that we have of distribution is one piece of the puzzle. It's one piece of that puzzle.
It goes along with product, goes along with risk management and working closer together, you're going to hear how we do that through the rest of the morning. Thank you very much for the time today. I'll be back. With that, I'll pass it to Mark Konen.
Morning, everybody. I'm up here to talk to you now about our protection businesses, I'll start with our life insurance business. Life insurance at Lincoln, we're a consistent market leader. We're doing that through a disciplined risk management approach and those sustainable, compelling wealth solutions that I'll touch on, delivered through that army that Will just talked about. This morning, I'll touch on three key topics. One, how our scale, diversification, and innovation differentiates Lincoln and leads to that consistent market leadership. Second, I'll touch on mortality and how we believe it provides long-term earnings potential despite recent volatility. Finally, I'll talk about the actions, the actions we have taken and will continue to take to combat those headwinds this industry has. First, the franchise. We have an army. Will referred to it.
It's the one-two punch that I love as a manufacturer, having the ability to have LFD, those 265 wholesalers with a proven ability to pivot, 55,000-plus advisors with room to grow. That's a powerful weapon in the marketplace. To that, we add a compelling solution set. Every year, we do what we call our M.O.O.D. of America survey, where we ask consumers, "What are your financial concerns? What are your needs? What are you looking for?" The bottom line is we have the solutions to meet all their needs, whether it's in the wealth protection space, including long-term care funding with MoneyGuard, whether it's in retirement accumulation or tax planning, we're there with relevant solutions. It's that scale and diversification that gives us the ability to invest, gives us the ability to innovate, to stay ahead of the market and maintain that consistent market leadership.
Speaking of innovation, we have the one-two punch in that what I'll call the baby boomer market, our main market, baby boomer and mature market, 117 million Americans. We continue to invest there in distribution and in solutions. We're also expanding into Gen X and millennial markets. There, the process becomes very important. Dennis mentioned something called LincXpress, which we rolled out about a month ago now, industry-leading. It makes the process easier and faster, from policy application on through issue. Utilizes a tele app process, potential lab-free underwriting, and electronic delivery across our entire product line. In fact, it includes a lot of boomers because it's available to anybody under age 60 and up to $1 million of face amount. It turns the whole process from app to issue into days versus weeks and months. Also, we have a product called TermAccel.
It's both a product and a process. It's really targeted to give affordable protection to younger consumers at lower face amounts. Fully electronic, simple quote to issue, utilizes automated underwriting and predictive analytics. Again, policies issued in a fraction of the traditional time. I can tell you that we're a market leader. We have consistent market leadership. To me, the proof is in the pudding. Let me explain this chart to you. This is the 2015 top 10 life insurance companies based upon sales. You see Lincoln there at number 3. The length of the bar indicates the scale. Number 3. If I showed you that chart from last year, number 3. If I showed it from a year before, number 3. Since 2010, we've been the number 3 writer of life insurance in America.
The two above us are mutual companies who sell whole life policies, a product we do not manufacture. In fact, Lincoln's been a top 5 producer every quarter for the last decade since the merger between Lincoln and Jefferson-Pilot. Top 5 every quarter. To me, that's the definition of consistency. Also we're top 10 in every one of our product lines. That's the scale point. On the diversification side, I call this our rainbow chart because every one of those colors measured there is a different product line. No product represents more than 30% of our sales. That's the third year in a row we can say that. We're the only company to have sales every product line between 10% and 30%. That diversification, that scale, gives us a competitive advantage, making us a true powerhouse in the marketplace. It's not just about growing.
It's about growing where we want to grow. We've seen growth in that business while intentionally decreasing our reliance on long-term guarantee sales. You see the growth rate on that top chart, you see that our non long-term guarantee sales have gone from 48% to 67% while growing the franchise. That's contributed to the driver growth that you see at the bottom of this chart. Account values, 5% CAGR since 2010. In-force amounts, 3% CAGR. Again, consistent year after year at those kind of levels. As you know, those two key drivers are very important to revenue and profit growth. Let me address mortality for a second. That top chart. 2015 was not indicative of long-term expectations. The average actual to expected mortality ratios from 2010 through 2014 were within 1% of expectations. Comes 2016, 6% unfavorable. 2015, excuse me, 6% unfavorable.
What happened in 2015? If you recall, in the second quarter of 2015, Lincoln had a number of elevated injury related claims, kind of an anomalous event. Younger insureds, not underwriting related. That was thing 1. Thing 2, the entire industry, if you think back to first quarter 2015, had a bad mortality quarter because of the incredibly cold winter then and the ineffective flu vaccine, the seasonality of our business, if you will. Speaking of seasonality, let me draw your attention to that bottom left-hand chart. What that shows is the average daily claims by month for Lincoln over the last five or six years. The red line is the average across for the year. The blue line is the average for each of the months. Clearly, you see a seasonal impact.
That gets more pronounced as you might expect for older ages as people age. Just a little interesting fact, if you were looking at that chart from Australia and Australia business, you'd shift everything over 6 months. July would be the start of that high seasonality for the folks down under. It's something you should expect every quarter, and the first quarter of 2016 was no exception. Now let's turn to volatility. That's the right-hand bottom chart. What you see there is a % of our total net claims that come from claims of $5 million or better. As you sell bigger policies, as you retain more, that red line you see would be expected to grow, and that's what you see. Coupled with that, volatility also is expected to grow and increase as a result. Large claims are the biggest driver of volatility.
Plus or minus a few large claims can swing your quarterly results. Seasonality and volatility are short-term events, but it does not change our long-term view. We believe that maintaining mortality risk increases our earnings potential. Why do I say that? We have a proven ability to assess mortality risk. If you look at our actual to expected experience for policy sold over the last decade i.e., since the merger, which represents our current underwriting model, our current underwriting process, our current underwriting philosophy. That actual to expected mortality is actually 10% better than expectations. Proven ability to assess risk. Also, by retaining the earnings, we're not giving them away to reinsurers. They'd expect a profit. Consistent with what Lincoln is trying to do in increasing our ability to gain earnings from non-correlated market risks, it makes sense to retain that mortality.
Now, I talked about the power of the franchise from a growth perspective. Now let's focus for a minute on new business and its profitability perspective. The diverse sales mix, well-designed products, strong underwriting lead to strong new business returns. That's the little green dots up there on that column labeled best estimate. Green dots across every product line, green dot across when you look at it in total, i.e., better at or better than our corporate standard return measures. Then I looked at a couple of sensitivities. What about interest rates? What about if you use the forward curve? In total, you still have a return 12% or better. What if you assumed, well, you're not going to get your mortality expectation, you're going to get something 10% worse than your mortality expectation. In total, still a green dot, still north of our 12% hurdle rate.
Again, I'll remind you, that's a pretty stressed scenario given we're actually seeing results 10% better using today's model, not 10% worse. That diversification across the products is a key contributor to being able to have those green dots at that bottom line. Everybody knows there's been industry headwinds for this business, but we've demonstrated the ability to respond while protecting and growing the franchise. Similar to the rest of the industry, back in the day, we relied a lot on interest rates to get our margins and profit potential. But the declines of interest rates in 2012 drove new business and in-force management strategy to restore our targeted returns. On the new business side, we had protect and pivot. That brought us that diversification. That brings us those green dots.
On the in-force management side, first there were all the crediting rate actions that we could do, we have taken and continue to take other actions. The gray box up there highlights many of those. Just rest assured, just as in the past, we will continue to respond to market conditions, be it on the new business side or the in-force side. Let's put it all together and why I believe this business is positioned for future earnings growth. What this chart is looking at over the last three or so years on an apples-to-apples basis, what's been happening to the earnings in the life insurance business. It goes from year-end 2012 results through 2015 results on apples-to-apples basis.
What you see is a little growth, but essentially a green bar equal to the red bars, the main red bar being the impact of interest rates and spread compression, the green bar being the organic growth from the business. They've been about equal. I think the red bar stays about where it is if you think about it going forward, but the green bar is going to grow. It's going to grow fueled by that powerful, profitable new business franchise I talked about. It's fueled by in-force management strategy, whether they be actions to protect margins, actions to improve policyholder retention, actions to make our existing customers give them tools and things that are more relevant to where they are in their life today. Together, those actions will overcome the impact of spread compression. Think about that green box on the prior slide.
In closing, the life business is positioned to maintain that market leadership position. The relevance of our solutions to consumers across generations, the scale, diversification, innovation to capitalize on those preferences, and the army of distribution to bring them to market. Lincoln's life insurance business it'll remain a significant contributor to our overall earnings profile. Remember, we're focused on growing those non-market correlated earnings, mortality, morbidity. The life insurance business helps us do that, as does the next business, which I'll talk about, group protection. In the group protection business The key message here is how we're driving long-term profitable growth. How are we doing that? Through pricings and claims management and sustaining that loss ratio improvement that we're seeing. That's Thing one. Thing two is growing in our target markets. I'll talk about that.
Finally, how our increasing sales and improving persistency will drive premium growth. Loss ratio improvement plus premium growth is going to get us to that target 5%-7% margin that we're looking for. Let's start with loss ratio improvement and pricing, which is one of the key drivers. We've had recent renewal results that have reduced loss ratios and increased margins. Over the last five quarters, we've seen about $1.2 billion of life and disability premium come through the renewal process. Of that $1.2 billion, we retained about $700 million. On that, we got roughly an 8% rate action. That's good. On the $500 million that didn't stay with us, that actually carried an average margin of -3%, i.e., unprofitable business.
The result of those two things, getting the increase on what we kept and losing the less profitable business, allowed us to get a pricing margin improvement of about six points or about $45 million of additional after-tax margin. That's important. That's good. In the future, we'll continue to embed margin through new and renewal pricing strategies, through driving away unprofitable business, and through improved persistency. As we get to a place, which is where we're getting to, where we can have more normal renewal rate actions, our persistency will indeed improve. In addition to pricing, claims management is also an important lever that drives loss ratios. In 2015, we had $16 million of additional earnings that came from improved LTD claim resolutions. How do we do that? Through people, talent, and proficiency gains.
We implemented something where we have senior claim examiners mentoring junior claim examiners. We did that by adding to staff so that we could afford to do that and reducing the caseload overall about 15%, the caseload per examiner, to give them more time and ability to work the claims. We also looked at process. We re-engineered some processes. Something as simple as initiating early phone contact with our claimants actually has a dramatic improvement in the final outcomes of that initial reach out. We added to our medical and rehab expertise, along with processes to get the right claims to that, the right protocols to do that.
On the technology side, you might remember we implemented a new claims system in 2014, now it's about leveraging that system, leveraging its analytics, the predictive modeling, so that we can get the right claims to the right examiners to handle in the right way, the right rehab resources, et cetera. We're on that journey of improving claims management effectiveness, work continues. It's happening. The path to recovery is happening. We have improved loss ratios through pricing discipline and claims management, leading to significant earnings growth and progress toward our target margins. We'll continue to drive the loss ratios into that low 70s range, which is where we think long-term levels will be. The next phase is turning our attention to top-line growth. Consistent with the corporate strategy, we are targeting the fastest-growing segments in this business.
Total group market, we're a top 10 player. Industry grows at about 6%. Our target markets, employee paid business, we're number nine. It's got an industry growth rate projected of around two times the overall group business, it's a good place to focus. Nearly half of our sales in 2015 came from employee paid business. We also continue to focus in our small and mid-size business market. That's been a core strength of Lincoln for a long time, we continue to focus there and innovate there. You see a list of strategic initiatives up there on the right-hand of that slide. I won't go through all of them, but let me call out a few examples. First, in the employee paid space. We've implemented a new technology and process to exchange data with the employers.
Greatly improving our enrollments, both from the standpoint of speed, from accuracy, and from the overall experience. In the small and mid-size businesses, we introduced a new product, FMLA absence management product. We launched it August 1st of 2015. As of a few weeks ago, let's just say it's resonating in the marketplace. We already have 130,000 lives and counting under that program, and it's totally mobile enabled. Those initiatives are important. Focusing on those target markets is important. Another key to driving growth is our distribution franchise. It's no secret that our aggressive pricing actions we had to take in the renewal space especially was disruptive in the marketplace, which caused us to see sales declines 16% year-over-year and renewal persistency, excuse me, down to 60%-65%. In spite of that, we still have a large, highly regarded distribution system.
160 wholesalers, nationwide reach focused on our target markets. About two-thirds of our sales come from those target markets, and they bring that expertise to the marketplace around our broad product offering. In spite of the heavy water they've had to carry related to some of these price increases and that market disruption, they're still highly regarded by the brokers they serve. Look at that favorable Net Promoter Score. Us, +29, our competitors, +1. If you think about the moderating rate actions, you think about this powerful distribution franchise, you can see how that will lead to restoring premium growth. We can envision sales growth in that 5%-7% range. We had 5% in the first quarter of 2016, and getting back to that renewal persistency of 70%-75% as our rate actions moderate. Again, let's put it all together.
How are we going to progress toward that 5%-7% margin? The chart up here starts with where we ended 2015, then how will we build to where we want to be. First, claims management. Significant progress. I talked about the 2015 actions that are already embedded in that 2015 margin, but I also said it's a multi-year effort. More work to do. We're not done, and we expect additional contribution from those efforts. Pricing. I talked about the margin we achieved in 2015. Some of that margin actually found its way into 2015 results. Some did not because of timing, so you'll see it emerge over the next couple of years. Again, we will continue to act, continue to take new business and pricing strategies that will continue to embed margin going forward. Finally, premium growth.
That's highly important because it relieves expense pressure and therefore contributes to the margin expansion. All that combining to achieve our 5%-7% margin that we're looking for. In closing, we're positioned to do that through our loss ratio improvement, through our focus on target markets, and through increasing sales and persistency to drive premium growth. That's the story around group protection. With that, let me ask Dennis and Will to join me on stage for Q&A.
Chris. Nice job, guys. Okay. We have about 16, 17 minutes or so for Q&A. Want to get through as many questions as possible. Again, please limit yourself one question, one follow-up. We do have mics that will be going around the room, so if you just wait for those, and then we'll get started. We'll start first over here with Suneet.
Thanks, Chris. Suneet Kamath from UBS. Will, I was curious about your comments on the BIC exemption, specifically that most of your distribution partners appear willing to use it. That's a little bit different from what we're hearing from some of our industry contacts. Again, just want to dig into which channels specifically feel more comfortable, and how contingent is their view on this whole private right of action potentially getting repealed?
Suneet, frankly, there's either firms that have announced it, intending to announce it, or working towards an announcement. I'm not, and I don't believe my team is aware of a partner that's choosing not working towards the BIC. We hear something pretty consistent. I think we have partners seem to be announcing it within their systems at their own pace. I would add that firms were slow to make that announcement because they really wanted to check and double check. The changes in the rule, specifically the changes in the BIC, to take away some of the more onerous issues like the disclosure requirements and assistance requirements. In addition to removing the path out of it by giving fees a pass, making fees hold to that whole standard.
People are coming to the conclusion that if you're going to serve the retirement saver, you have to operate towards the BIC. Our engagement with the Department of Labor, they've been very helpful post-rule issuance in engaging with us in a constructive way, giving us a forum to ask them questions, allowing them to provide their own interpretation. The preamble was pretty, which they view as a very strong, contemporaneous expression of the final regulation. They have mechanics to offer additional guidance, whether it be sub-regulatory guidance like advisory bulletins or FAQs. They've been very constructive to work with.
Will, you might just mention one challenge is the fixed indexed annuity through independent distribution. That's a bigger challenge than where we are with most of our sales.
Yeah. There is one element of a business model that was disrupted. I'm going to speak to in the annuity business, which is the fixed indexed annuities being pulled into the BIC was a surprise. If you are a non-registered distributor, you are disrupted because there's no supervisory structure that they plug into. That is a business model that's disrupted. To be able to continue to sell, they have to comply with the BIC, which means they have to develop a supervisory structure, and some institution takes this right of action. That's unclear how that shakes out. I would note at Lincoln that fixed indexed sold through non-registered advisors represents 3% of our sales. Our emphasis has been more towards the registered broker-dealers and banks in that product area.
My follow-up is some of our industry contacts have also kind of discussed the SEC and how they may eventually come at this with their own fiduciary standard. Now that the DOL come out with sort of a base case, that it would be hard for the SEC to come out with something that is significantly different/more lenient. I'm just wondering if you have any thoughts on that.
One thought is the SEC really prides itself on its independence, in my personal opinion. The framework of them as a governing body has a very different constitution than an executive branch agency. They're a regulator that knows our industry well, engages with us regularly and actually has an enforcement arm. Just to put this into perspective, I think between the SEC and FINRA, we have, in any given year, 30 different regulatory exams. They're heavily engaged. They understand our different business models. We expect to see something in the later this year, early next year. That's the time frame that the SEC has, I think, shared publicly. They've been known to change that timeline if they feel like they're not ready. I'm not sure they're marching towards a hard stop. Also keep in mind for a moment that it's not unusual.
In fact, we operate to multiple regulatory standards. It's not unusual to have multiple regulatory standards. The SEC has multiple regulatory standards. If you're a financial advisor and you're offered a mutual fund in a brokerage account, you're wearing a securities hat. If you're offered a mutual fund in a fee-based account, you're wearing an investment advisor hat. If you're selling an insurance product, you're operating under a state regulatory hat. Now, of course, you sell a qualified plan, you've got a DOL. Harmonization to some extent will be helpful, but it's hard to predict the situation. I think that the likelihood that there's a capitulation to one standard just because it's out, I think would be contrary to the SEC's processes in the past.
Tom.
Thanks. Tom Gallagher, Evercore ISI. Question for either Dennis or Will. Just on DOL and the BIC, and this is more of a broad question. Should we expect to see a move back to more products with enhanced guarantees? I know there's been a push both for the industry and for Lincoln over the last several years of moving into things like variable annuities without guarantees. Do you think we're likely to see those kind of that de-risking become more challenging from a product standpoint?
Yeah. The value proposition of a variable annuity without a guarantee is really a value proposition for taxable accounts because what it is is tax deferral. It's the ability for a non-qualified taxable account to get access to tax deferral accumulation. I don't necessarily see that being affected because with higher marginal income tax rates, that value proposition kind of still hangs together. In qualified plans, I think it really does come down to the value of guarantees, whether it be a lifetime income guarantee or it be a death benefit of some form. I didn't talk about it specifically, but you would've seen the statistic in my presentation that would suggest survivorship risk in retirement is a big deal.
There's a 90% chance that a couple that's 65 entering retirement is going to have at least one surviving spouse at age, I think it's 80 or 85 in the slide. Death benefits, I think, have a place in qualified plans, too. That really is a land for qualified plans. I think you've got an industry All that we can see is sound and disciplined pricing, as it relates to guarantees. I would hope that as an industry, we don't move away from that, and you've come to expect at Lincoln, we're going to have that disciplined product price, and we're going to price profitable products we're going to sell on our terms.
Tom, I'll just come back to one of the central themes that we've been sharing with the group this morning, that is this powerful distribution and breadth of product that we have, and our objective of selling business on our terms. We're always going to be running into challenges, regulatory and consumer preferences, but we have the structure in place to adjust as necessary. We'll have to sell products on our terms. Come back to the 70/30 that we're trying to achieve and essentially have achieved, non-guaranteed and guaranteed. That's a mathematically arrived at combination, taking into consideration balance sheet risk, earnings per share growth, ROE targets. Again, there's going to be a lot happening around us, but our capacity to deal with it, because of the reasons you heard this morning, I think are as good as anyone's, if not better.
Thanks. Just a follow-up from Mark Konen. On slide eight, you showed if interest rates follow the forward curve, that your MoneyGuard and Guaranteed Universal Life products would be sub 10% ROE. That's nearly 40% of sales for those two products combined. My question is, I would not call the forward curve a stress scenario. How would you look at product profitability for those two products if rates stay flattish? Are we still looking at profitable products? With regard to those two products, is the reason those are lower right now because you're transitioning or pivoting from a pricing standpoint, or you're fine at current levels in terms of pricing?
To answer the second part, those are current pricing levels. Those are products that have a longer term to them. Obviously, Secondary Guarantee UL is our longest term business and still relies on that profit margin. That's why we've driven it down to about 10% of our sales. We do look at, Tom, every quarter, we have a discipline to look at what kind of returns are we getting from our business, expected returns. What are the sensitivities around that? What's the marketplace look like? How do we stand? Then when you add it all up, how do we look as a franchise, i.e., the bottom, that green dot. Do I like those red dots on those couple of product lines? No. Is there something we need to do about it today? No.
Every quarter we will watch that, we will adjust price if in fact we need to. We don't want to be too herky-jerky in that because we don't want to disrupt that consistency. While those specific dots are important, the diversification that we strive to get to be able to keep the green dot at the bottom is really a key focus point to maintain that consistent market leadership.
Sorry, just to reiterate the one part of my question, can you provide, and maybe this is for Randy later, but can you provide any sensitivity as to where those would not be profitable from an interest rate standpoint or levels of profitability?
I don't have that off the top of my head, Tom. If I think back to last investor presentation, we actually showed you results that went back to what was the average 10 years since 1870, what was the lowest period for rates, and stressed that, and still the portfolio as a whole, we ended up north of 10.
Thanks. Al?
Thanks. I had a question for Mark as well on the group protection area, the plans to expand the growth in the 1,000 to 5,000 employee market. You all have done a very good job turning the margin around, as far as you've done so far. My question, though, is in that mid case market, 1,000 to 5,000 employees, it seems like competition has picked up quite a bit. A number of companies, including yourselves, are no longer facing big headwinds. Is this the right time to be growing in that market?
I think it is, as long as you do it with the same discipline we've talked about in all the businesses. It's important to remember that rough numbers, 20% of our sales already come from that. We are in that space, and we look to play in that space where again, where's our value prop resonate most. Be that a healthcare provider, be that whatever. I think if you do it right, we're okay expanding there. It's just around the edges where we need to focus because we're already focused there. Competitively, actually, I would say the market's pretty rational right now across everything. Maybe it's a little tougher in where you're talking about. I won't deny that, but I wouldn't call it an irrational pricing market right now.
Thank you. I just one other one, if I could, for Will. I wonder if you could just explain just how much of a benefit is that grandfathering element of the new fiduciary rule. I'm not quite sure. You think about when the rule goes into effect the year after that, an advisor will still be held to the fiduciary standard and I guess, advice to keep an old product in a client's account versus switch to a newer one. That seems to me to be investment advice right there. Give us a sense for how strong a protection Lincoln gets from that grandfathering element.
Great. There's a couple dimensions of this. First, if it was a backward application to the rule, you would've essentially had a process of repapering all customer accounts, which would have been an extraordinarily burdensome administrative process. I've gone through that before when you saw Rule 202 abolished, vacated by the federal courts. It eliminated fee-based brokerage. In particular, ironically, because low volume transactors would've paid less in commissions versus fees. This was back in 2005, 2006. We had nine months to repaper accounts, very disruptive. Thank goodness the marketplace was actually quite small and contained. It would've been a very burdensome process, would've, I think, ground industry to very low levels of productivity for a period of time. The grandfather language is actually quite strong. It essentially says that the rule of best interest goes into effect in April of 2017.
Any transaction or even recurring deposit that would've taken place prior to that date can continue, including the compensation. It's also pretty specific that what triggers the regulation on that existing legacy account would be a new transaction that generates new compensation. In a scenario like an annuity where one invests $100,000 in American Legacy Variable Annuity prior to April 2017, and the solution is continually rebalancing for the customer, and as they have questions, we're helping them understand their contractual guarantees that they bought, you've got a very strong grandfather. Now, the moment that we say you should put more money in that, and by the way, by putting more money in that, there's a commission or compensation that's paid, now you're under the regulation. We think the language is pretty clear.
I just come back to just make sort of an overarching statement. Set aside some of the things that people don't like in the DOL, and I mentioned the right of action. There are some things not to like, but just generally the idea of doing what's in the best interest of the customer and the greater transparency that's going to continue to evolve in the financial services industry because of the tools available for customers and advisors to see what the inside of the products look like and compare them on a cost basis. This is a trend that we have to embrace, because it's going to continue to be pushed, but irrespective of regulatory change that's going on. Sean?
Thanks. Sean Dargan at Macquarie. I have a question for Mark about the proactive actions to address headwinds in life, specifically the in-force repricing. In long-term care, I think it can be argued that carriers waited until it was too late to start repricing in-force. I am just wondering what the competitive pressures to repricing or not pricing are now, and what you've done to date.
Let's think about that in the context of how we manage the life insurance business. We've always looked at it from an end-to-end perspective as far as profitability, be that whether it's new business or on our in-force business. If you remember the slide, I don't remember what page it was, that showed some of those actions. Crediting rate actions, that's a form of in-force management, and that lever was pulled by us and by the industry to respond to the environment until that lever was no longer pulled when most of our stuff is set to guarantee, right? It becomes other in-force actions, and we at Lincoln have been doing other in-force actions. Whether again, that's trying to look at clients and say, "Okay, you bought this, but now your need really might be this. How about exchanging?" Helps us, helps them.
That's something we've been doing. On in-force repricing, other non-guaranteed elements at a very high level, it's no different than changing a credited rate. Now, because of some of the regulatory and the contractual pieces around it, you got to make sure the contractual terms are right. You got to make sure that whatever you're going to do is going to comply with those terms. You've got to make sure you have very detailed actuarial analysis based on future expectations in order to change it. We have done that. We will look to continue to do that in ways that make sense for all the stakeholders. In many times, you find that you end up with a result that's better for the shareholder, but still strongly competitive for the current policyholder in today's environment.
From where we have done it, back to your what's the competitive pressure, what we've committed to our distribution systems is that, look, this is part of the ongoing process. If we do it, if we find that it's justified and we end up doing it, we will be very transparent to you, and we will stand ready to help the policyholders understand what we've done. To the extent that's happened, we get very big kudos from our distribution partners about the way we've handled it. They understand the why. They're not too crazy about some of our competitors the way, but they really embrace the way we've done it.
We have time for one more question. Again, we will have a second session at the end of the day. Two spots over, Ryan.
Thanks. Ryan Krueger, KBW. I had a related question to Sean's, which is more around, over the last several years, you've done a lot of reinsurance transactions within the life business to free up capital. Is that something that you also see more opportunities to do? If so, how should we think about it obviously benefits you from a capital standpoint, but how should we think about the impact to the growth in life earnings?
Yeah. We did a transaction here just this last quarter based upon some New York business. We constantly look at that. I would say that, Randy might be able to speak to this more in the next. I don't see any big transactions on the horizon generally. I would say, again, it's part of the management of the business. As we write business that has overly redundant reserves in, or what we feel might be overly redundant reserves, we'll look at the reinsurance transactions as a way to release that capital. It does have an impact on the life earnings, but if it's a good trade for the corporation, we'll do that, and we anticipate to do that all day long.
Just a follow-up. When you said you expected better organic growth in the life business over the next few years, did that contemplate any continued use of reinsurance, or would that be an offset?
That contemplates the regular use of reinsurance for new business, term business, XXX business.
Thank you.
Great. We're going to take a 10-minute break and then come back to the annuity section. Thanks so much. Good job.
I love you oh so madly. I need your love so badly. I don't stand a ghost of a chance with you. I thought at last I had found you. Other arms surround you. I don't stand a ghost of a chance with you. If you'd surrender just for a tender kiss or two. You might discover that I'm the lover meant for you. I'd be true. What's the good of all my scheming? I know I must be dreaming. For I don't stand a ghost of a chance with you. If you surrender just for a tender kiss or two, you might discover that I'm the lover meant for you, I'd be true. What's the good of all my schemes? I know I must be dreaming. For I don't stand a ghost of a chance with you.
I don't stand a ghost of a chance with you. I've got the world on a string, sitting on a rainbow. Got the string around my finger. What a world, what a life. I'm in love. I've got a song that I sing. I can make the rain go anytime I move my finger. Lucky me, can't you see? I'm in love. Life is a beautiful thing. As long as I've got a hold of that string, I'll be a sinner, be a stone. If I should ever let go, I got the world on a string, sitting on a rainbow. Got the string around my finger. Lucky me, can't you see? Can't you see I'm in love? I'd be a silly soul. If I should ever say so. I got the world. I got the world. I got the world.
I got the world. Can't you see? I've got it wrapped around my finger. Lucky me. I am in love. I've got the world on a string. I've got the world on a string. I've got the world on a string. Sitting on a rainbow. I'm in love. I'm in love. I'm in love.
Ladies and gentlemen, please take your seats. Our program is about to resume. If I could ask everyone to make their way to their seats, we're going to get going with our next session. Great. Thank you all. Next, we're going to have Will Fuller come back up and speak on the annuity business.
Thank you. Thank you, Chris. Welcome back. All right. Let's talk about the annuity business. This is a business for us that's delivered very strong financial results over a long period of time, and it's frankly, as Dennis mentioned, one that is very different from our peers. I thought I'd start with the formula, once again, for the annuity business, because it's been our having the substantive building blocks for this business in place. Think about it. Anchoring to a strategy of consistent market presence, sustainable product designs, very disciplined product pricing, setting reasonable assumptions from the beginning, committing to hedge readiness day one, investing in that strong distribution. In annuities, having a value proposition that account value matters along with the guarantee. That value proposition actually mirrored the value proposition our financial advisors had with their consumers. That's the formula.
The key is that product and risk management and distribution work in an integrated way to bring that together day in, day out. We're one of the few companies that have consistently put those pieces together. That's where you get a track record of the type of impressive financial results that you've come to know Lincoln Annuity business for. You see this in the consistent earnings driven by a rise in equity market, but also that disciplined approach to the business and $30 billion of positive net flows during this time period. You see it in the strong returns, averaging nearly 20% for a decade, all of this in the face of a financial crisis.
Keep in mind, we capitalize this book to a very high standard, the greater of CTE 98 or floor, which is a percentage of assets, which we believe is a conservative approach compared to other companies. These results speak to the high-quality book of business that we've developed as a company. Consistent market presence, selling on our terms, is something that we pride ourselves on. We have a long-term track record here. In the annuity business, we were a leader before the crisis, during and after top 5 throughout those periods of times. That doesn't just happen. It happens because you've got continuity in a management team, and you've got strong and decisive management actions taken consistently throughout a period of time.
When you hear me talk about the sustainable product design and discipline pricing point, it's that element that led to our not participating in the arms race of living benefit guarantees leading up to the crisis. It's what led to our adjusting product features post-crisis in response to the market environment. When you see us talk about the consistent market presence, it's what led to our staying the course after the economic crisis in years that turned out to be highly profitable years for the variable annuity business. We'll come back to that point later in my comments. When you see leading with distribution at distribution powerhouse, you see that in the unique decision in our industry to create Lincoln Financial Distributors, a standalone wholesale distribution company, to execute in the marketplace consistently and lead the efforts around those very successful shifts and pivot strategies that we have.
It's these management actions that we take consistently in challenging times and opportunistically that result in our market leadership and qualify that on our terms. It also shows you a management team that has resolved to create value for shareholders. You see the result of all of these management actions over that long period of time in our book of business, which is diverse and it's high quality. We are not only a living benefit manufacturer. Nearly half of our book is comprised of variable annuities without living benefits and the steady income of fixed annuities. The other half, our living benefit book, is a core strength of us. It's a business, as Dennis mentioned earlier, that we've managed very well and effectively on absolute and relative terms. It's a high return asset management business.
That long tenure of disciplined pricing means we avoid those richest benefits that were in the marketplace, successfully transitioning to risk-managed funds, which further diversifies our risk, opportunistically executing reinsurance agreements. Allow me to point out that our variable reinsurance agreement is with a very reputable third-party institution, which further validates the quality of product design and pricing. All this creates a business that delivers those impressive results. One measure of consistency is the range of your sales over a period of time. What you find with Lincoln is a very tight range of sales as a percentage of our account values over a long period of time. This diversifies our risk. Essentially, we're dollar cost averaging across different market levels. This is what led to, again, staying the course.
You get some years that are challenging in returns, you get those years that I talked about earlier that turn out to be highly profitable for the variable annuity business. When you marry that with our disciplined product design and pricing point, what you get here is a living benefit book with an extremely low net amount at risk. This is the NAR for our living benefits. You'll see Lincoln at less than 1%, where peer average is nearly just over six. A high-quality book of business. Our work does not stop. It actually only begins when we bring high-quality business on the books. This is where key elements of our risk management process kick in. I'm going to talk about two of them today, our hedging program and our assumption setting and review process. Let's start with our hedging program.
When I say hedge readiness from day one, what that means at Lincoln is that we do not launch a product or rider available for sale without having a completely installed hedging program, one that's there to protect the balance sheet and to manage the economic risk. Our variable annuity hedge program is widely regarded as an industry-leading program, and you see over a period of time, modest breakage, which has helped preserve those returns that you saw earlier, helped support those consistent earnings, a program that is generating dependable, proven results. In our fixed index block, we have a simple product design. That simple product design leads to a straightforward approach to hedging. We have an interest credited liability, which is known. We have timing, which is known, and we're able to very tightly match that with an asset payoff. Simple design leads to a straightforward approach.
Another part of the formula is policyholder behavior assumptions. I said earlier, a key part of that is from the beginning, setting reasonable and robust assumptions, because when you do, it lessens the need for future adjustments in your DAC and reserve models later on. We start with reasonable, robust assumptions. We then have a process, as you know, that allows us to evaluate our experience, look for any credible shifts in long-term trends, and then we look for ways to improve and enhance our process and our models. You saw that in 2012, when we took our experience in the annuity business and our data, and we married that with the experience and the data of two leading companies, Oliver Wyman and Towers.
That has led to the more dynamic approach to assumption setting by using predictive factors that help tell us a little bit more about experience. Factors like in-the-moneyness, in or outside of surrender, attained age of the policyholder, gender, tax status of the account, policy size. We would take those learnings and apply those to the in-force VA business in 2012. You see assumptions very much in line with experience. With mortality slightly above, I would note that this would be a positive for the annuity business. Utilization right in line and lapses slightly below. Another element in our assumption risk management process is stress testing. We do quarterly stress testing on policyholder behavior assumptions. Here I've laid out some severe scenarios, severe sensitivities, dramatic drop in lapse rates, increase in utilization, and reduction in mortality. I think what you see is the impacts are modest.
Effective risk management on its own cannot deliver financial performance. The process starts with that joint effort between product design, pricing, distribution, and hedging, enabling us to sell on our terms. What you see here is a fantastic visual by Oliver Wyman that says that we consistently sell variable annuities business, living benefits with above average profitability. The red dots are Lincoln, you will see that in each year we meet or exceed averages. I think this demonstrates our commitment to profitability discipline and creating value for shareholders in pricing. As Dennis mentioned, there are near-term pressures that I want to acknowledge. In particular, near-term pressures on our sales. Headwinds through the combination of volatile markets and persistent low interest rates.
What we are seeing, what we typically see when you see periods of volatility is we see consumers tilt towards safety. You see that in the increase in fixed annuity sales in the industry. Fixed index, fixed annuities offer principal protection. We also see consumers keep money on the sidelines. This is a trend also. You see equity sensitive product, demand decline for equity sensitive product. You see that in variable annuity sales. You also see that in other equity areas like mutual funds in the industry. Persistent low rates particularly have an effect on living benefits. These are long duration, lifetime guaranteed retirement income. Low rates make that an expensive proposition for the consumer and for Lincoln. It affects both demand and it affects supply. There might also be some DOL impact wrapped up in this. It is hard to tell.
It's difficult to say with certainty because we saw similar trends in sales between qualified and non-qualified in the first quarter. It's something that we're paying attention to. However, beyond the near-term headwinds that you're facing, these environmental headwinds, the fundamental long-term tailwinds are clear. I talked about demographics earlier. I talked about the retirees' ownership of assets. We talked about the value proposition that annuities provide are right in line with the demographics, with retirees, with the folks being oriented towards high-quality income solution. While the near-term headwinds will be pressuring our sales longer term as they subside, I think that we will return to future growth. While living benefits, if you look at near-term industry studies on living benefits, they're projecting sales that are slightly down while this market environment persists, particularly low interest rates.
There are select industry markets that have very attractive growth rates, and they're here. I'd like to add that we are not starting from a standstill in these markets. We actually have momentum because of the product portfolio we have, because of the foresight to begin shifting our sales away from guaranteed living benefits in 2012, 2013. While you've seen living benefits decline, you've seen a 75% sales growth in the remainder of the portfolio. This validates why having that broad product portfolio coupled with a distribution entity that has a great orientation to being agile and being able to pivot. Allow me to spend a moment on the DOL as it relates specifically to the annuity business. Okay? First, how much of our sales are impacted by the DOL? Well, 62% are not directly impacted. 38% are impacted.
The reason why we have such a large percentage of our sales not directly impacted is we've had a long focus on the non-qualified market. That focus has come through having that patented i4Life income story, which has been the go-to income solution for taxable accounts for over a decade, as well as our shift towards those non-guarantees where the value proposition is found inside of taxable accounts where clients are seeking tax deferral. Okay? Second is the improvements I talked about today, the holding commissions and fees to the same standard, recognizing the consumer value in commissions, being very specific inside of the rule around how lifetime income and guarantees framework can be created inside of the BIC. Ready? Are all reasons why we believe that the changes were constructive. What's our plan to pivot? Well, first, we're going to continue our focus on non-qualified sales.
We have momentum here, and again, this is where our legacy strength in the variable annuity business has been. That's a check. Second is we have done product design and product development to broaden out the portfolio. What that's translated into is that we are prepared. We have fee-based versions of all our traditional variable annuity products. We are ready to take those products and expand the shelf space, should that be a path that advisors choose to go on. Brian Kroll and his team spent a lot of time last year building out the fixed indexed annuity product. We thought that would be a path to pivot. That's not a throwaway because the three new products we brought out are mainly focused on those that work in registered investment channels like broker-dealers and banks.
Remember, the fixed indexed annuity value proposition is very different from the variable annuity value proposition. They target different customer preferences. It's good to have the option of a variable annuity lifetime guarantee with a fixed indexed guarantee, let the consumer and the advisor choose which is best for them. While we believe that this rule is manageable, should we see disruption in lower sales, Randy will share with you in turn how we plan to use the capital that would have gone behind those sales. Let's step back for a moment again and what I guess how I closed at our session in distribution, that the reason retirement plans exist is to take retirement income.
In the end, I feel confident that if you are serving your client's best interest, how can you not introduce to them lifetime income solutions when the longevity risk is clear and survivorship risk is clear? As a manufacturer, as I think about the marketplace, I think about dealing with the near-term headwinds, I think about growing long term, I think about transitioning from the DOL. I have to think about the tools available and the strengths that we have. On one hand, I have a very powerful distribution force at our disposal, 300 dedicated wholesalers inside the annuity business. These are experienced and sophisticated veterans of our business. Many of them have been with us and through the crisis, with us and through the pivots. This is a battle-tested group of sales veterans.
We have almost 50,000 producers working with us on a regular basis with our annuity products in the marketplace. It's a very sizable group of producers. That broad product portfolio, it's broad within core VA, it's broad within fixed, and we've not been standing still. We're constantly in the product lab looking for new solutions that will meet new customers and help to grow and diversify our sales. What are some of those that you've seen recently? Well, you've seen us introduce the Investor Advantage, which is that investment-oriented annuity without the living benefit guarantee. It's been a very successful introduction for us. I think we just crossed over $1 billion of sales. We've been looking at the fee-based versions of our products for some time. I told you we're ready to get those available to shelf space. We've expanded the fixed indexed portfolio.
We see opportunities to do more. In particular, there's a very attractive segment of advisors in the industry, those that have traditionally not used variable annuities. They have a tendency to use and steer towards lower cost passive investments, tend to be more oriented towards registered investment advising and fee-based. We're in the process of developing a very compelling solution that would marry low-cost passive investments with a simple, broad, innovative lifetime income to reach that segment, which would be a new segment for our industry, one that's been very difficult to crack. Something that we plan to have out and in the market this time next year, ideally before the first leg of the DOL rule is implemented. In wrapping up, let me just say that this is a very good business. It's a high-quality book. It's managed with a lot of discipline.
It's delivered impressive financial performance. That formula that I started out with, that consistent market presence, that discipline around product pricing, a focus on hedge readiness from day one, being conservative and reasonable in assumption setting, then pulling that all together with a powerful distribution and working to improve those elements is a formula that's worked for this business, and it's one that we'll continue to operate by and will help drive future growth for our company. Let me stop there, and I believe I am also passing again to Mark Konen for the retirement business.
Thank you, sir. Hello again. I'm up here to talk to you about our Retirement Plan Services business, what we affectionately call RPS. RPS is positioned for long-term growth. Why is that? Our value proposition. High touch, motivating participant experience resonates in the marketplace. You see it in our sales and the growth in those sales. You see it in our positive net flows. Today, I'm going to talk about the three primary strategies in this business. One, target market growth, government, healthcare, small market 401(k). I'm going to talk about our differentiated customer experience and the enhancements we continue to make that even better. Finally, I'll talk about profitable actions we're taking to counteract the impact of low interest rates. First, let's talk about target markets. There's a lot on this slide, so let me walk you around it a little bit.
First, focus on fastest-growing segments with the biggest opportunity. Those segments were picked because, A, their growth potential, B, their profitability profile, and C, places where our value proposition does in fact resonate. Our target markets are both fast-growing and more profitable. Again, don't take my word for it. Look at the gray box up there. That's an industry view. On the left, the markets are ranked by growth potential, and on right, by profit potential. The markets we focus on are the burgundy ones. Let me give you a couple of statistics about that. The projected overall asset growth for those burgundy lines is over 5%, 5.2%, I believe. That's 33% faster than the non-burgundy boxes, the places we don't play. On the profit side, again, the burgundy lines, the profit per participant is four times greater than the non-burgundy.
Focusing on fast-growing, focusing on profitable, focusing where our value prop resonates. Our results. In the government business, we're the fastest growing provider. In healthcare, we continue to leverage our number three market leading position. Finally then in small market 401(k), our growth is outpacing the overall market, 16% versus 10%. That all leads to the charts on the right, 14% annual growth in sales since 2011, and over 90% coming from those target markets. Let me talk a little bit about the DOL fiduciary rule and its impact on those projected sales or those sales as we look in the future. First, let me just say, just as Will said, from our perspective, from the RPS perspective, the growth is manageable. I mean, the impact is manageable. Its potential impact on sales growth, we really don't see it being a big deal.
Why do I say that? The ERISA rule, it's not new to this industry. The sales that we get are covered by the BIC, level fee, or seller's exemption, all of which we're well-positioned with our product portfolio. Importantly, our high-touch value prop, because of some of the changes that were made in the final rule and the expansion of the definition of education, our value proposition is in fact intact. Bottom line, while there's work required around the edges, we're well-positioned to comply and to continue that growth I was just talking about. If you think about that 14% growth, that doesn't happen by accident. That happens because of focused strategic actions, things like expansion of our distribution and upgrading that talent, a 30%-plus expansion since 2011. In the small market, it happens because of the focus on our strategic partners.
In 2011, our strategic partner sales were about 25% of small market sales. Today, they're over 50%. Eight strategic partners, the likes of Merrill Lynch, Morgan Stanley, LPL, et cetera. On the product front, we've enhanced our Lincoln Director product. We've expanded the investment options in there. Importantly, we've designed it with simple, transparent, flexible fee structure, right at the bullseye and well-positioned for the new DOL rule. From a customer experience standpoint, we're really frankly focused on owning it, and I'll touch on that more in a little bit. Another strategic thrust is exemplified by the chart on the right, that is a shift in the business by case size. We're looking for more small and midsize case wins to reduce our reliance on large cases. In 2014, about a third of our sales were on plans with greater than $400 million in assets.
In 2015, that was zero. That doesn't mean those larger sales are inherently bad. In fact, they weren't. That's a more opportunistic space, a less predictable space, what we're looking for by shifting that mix a little bit is more predictability in future flows. Let's talk about the customer, whether that's the participant, whether that's the plan sponsor, or whether that's the intermediary. Our high-touch model is grounded in in-person relationships, that's core to our value prop. We have 138 folks delivering employee education. 116 of them are on-the-ground retirement consultants meeting one-on-one, helping our participants as they navigate their retirement future. The model works. A few proof points. First, from the participant side, a participant that meets with a retirement consultant is two times more likely to actually increase their contribution.
When he or she does, they actually increase it 30% more than somebody that doesn't meet with an RC. You and I both know that one of the keys to a successful retirement is actually saving money in the first place. From the plan sponsor side, we see lower terminations at Lincoln. Industry's at 5%, we're at 4%. You might say, "1%, what's the big deal?" 1% is about $500 million in positive net flows. Finally, on the intermediary side, those consultants and advisors that do business with us, look at the growth in the number of advisors that are doing repeat business. The model is resonating in the marketplace. Now we're investing. We're investing more, especially around digital and mobile capabilities, really as an extension of our high-touch model, it's enabled by research and analytics.
Let me talk for a second about that investment. It's really about the participant web experience, whether that's computer or whether that's mobile. It's key to the positive participant engagement. We've already launched a new web experience. Already there, it's streamlined, intuitive design, easy navigation, mobile optimized, completely mobile optimized. Coming soon, click to contribute functionality. You want to contribute, you want to raise your contribution, one click. Soon is actually this weekend that's going live. Soon after, we'll introduce a retirement income snapshot, which will tell you, the participant, where you are on your retirement journey and what are the options that you could do to change that picture if you so desire. The outcome of all that is it's relevant to that participant. It's a seamless, streamlined process and therefore drives action.
The results for Lincoln, new sales, better retention, new enrollments, higher contribution rates, all of that adding up to growth in account values. Let me shift for a second to the bottom line. At the top of the chart is some information on expenses. We've been seeing slowing expense growth after some infrastructure investments. In fact, our recent expenses have been growing about 2%. There's more to that story, that inside of that 2%, we're actually shifting to value add areas. If I'm talking about distribution or if I'm talking about our client-facing support, those expenses are actually up high single, low double digits, yet keeping the overall shift at a 2% growth rate. We continue to see that happening as we move forward. On the lower half of this chart, I'll talk about in-force optimization.
Just like we talked about in life insurance, just about like we talked about in group protection, there's actions going on here to improve the margins on the existing book. We're repricing to lower guaranteed minimum interest rates, GMIRs, with $7 million of additional earnings and counting. We continue to pursue actions in that vein. Similarly, on a new business, our low GMIR business is growing. It's now 19% of our actively marketed block has a guarantee of 1%. That's important for giving us additional flexibility in the future, dependent upon market conditions. Both of the expense work and the in-force optimization work is certainly going to help the margins over time. Again, let's put it all together. We believe that earnings growth will in fact reemerge in this business, and that chart shows how.
What we did here is looked at, okay, what's kind of the run rate we had in the past? That's at $36 million. It's the average quarterly earnings from 2012 to 2015. From there, I walk down into what did we get in Q1 2016. The headwinds, the red bars, low interest rates, Multi-Fund runoff. Multi-Fund's an old legacy block that is sold a long time ago that is running off about $1 billion of net negative flows a year. Those headwinds will continue, they're manageable. Again, really the story is around the growth of the green bar, which we expect to reemerge. That's because of those strategies I just talked about that drive asset and revenue growth in our target markets. That's because of our consistent disciplined expense management.
That's because the profitable actions we're taking on the in-force block, therefore ensuring that our asset growth yields earnings growth. All of that, the green bar will outpace the headwinds. The RPS business, it's focused, it's positioned for significant long-term growth. Those strategies I outlined lead to focused, measurable actions that in fact do result in top and bottom-line growth. With that, let me turn it over to Ellen to talk to you about the general account. Thanks. There you go.
Thank you, Mark, and good morning, everybody. When we think about our general account investment strategy, we start, first of all, with two core pillars that are the foundation of everything that we do as it relates to our investment strategy. The first, which has been in place forever here at Lincoln, is asset liability management. With asset liability management, we start with the disciplined approach to understanding the profile of our liabilities and the liability duration and investing in high-quality assets to match those liability durations via ALM. The second core pillar of our overall investment strategy is risk management. It's central to everything that we do. Throughout my remarks this morning, you're going to hear me talk about areas like diversification, which for us is a way in which we manage risk via strong portfolio construction and also active de-risking like in our energy exposure.
We'll cover that as well today. Three core themes that I'm going to highlight for you in our remarks. The first, proactive strategies to improve investment income and diversification. The second, despite the fact that we continue to find ourselves in a low-yield environment, the pace of our portfolio yield decline continues to moderate. The third is actively reducing our energy exposure to mitigate potential losses in a stress scenario. Let's start with new money and new money fixed income strategy in particular. As we all know, rates have been low, and the left-hand side is showing you the average 10-year Treasury by year starting with 2013. The bars are showing you our average investment spread from 2013 through the first quarter of 2016, and the blue line on top is showing you the new money yield. Let's focus on investment spread.
Investment spread in 2013 and 2014 at 190 basis points over the average 10-year Treasury. That's strong, that's consistent, we are happy with that achieved result. In 2015, in the first quarter of 2016, we achieved 210 basis points over the average 10-year Treasury. If you look to the middle of the slide, we did that while also going up in quality. We're trending up in quality while we're also increasing the investment spread of our new money. In 2013, our average new money, about 50-ish%, 47%, was the highest credit quality, or NAIC 1, trending toward 2016 first quarter, about two-thirds of our new money strategy was coming from A and above strategies. In addition to that, our new money fixed income strategy is also coming from more and more diversified sources.
If you look all the way to the right, we're showing you here the investment spread contribution of 2015 to highlight this. The average 10-year Treasury here was 2.1%, and we had 210 basis points of investment spread. 15% of that is coming from ALM. For us, what that means is that on average, we're investing a little bit longer than the average 10-year Treasury to match the liability duration, and we're picking up additional yield along the curve from that 15%. About 50% of our investment spread contribution is coming from what we think of as core: public fixed income, investment grade. About a third, 34%, of our new money is now coming from diversified sources. Let's break that down for you. About 2% is coming from corporate below investment grade. That's public high yield. This is opportunistic, where we see opportunities.
About 2% in non-agency RMBS. Here, this is legacy RMBS, NAIC 1, low capital requirements, attractive yields. Middle market loans, a place where we continue to see very attractive yields. A place where, using our external managers, we've got a variety of ways that we are sourcing diverse opportunities, building a diverse portfolio here that's got stronger covenants and better downside protection than their equivalents in the public market. Public investment grade. Here again, using our external managers, specialty managers that are sourcing for us in the syndicated market and also in the direct market at attractive yields and better covenants relative to public fixed income. Finally, CMLs, and you can see 15% diversified source of investment spread coming from CML. This is a place where we have been very focused in growing our strategy strategically, and I want to highlight this further on the next slide.
We're growing our CML portfolio. At the end of 2013, we were at 8%. At the end of 2015, we've grown to 9% with a target to grow the CML portfolio to 11% of invested assets. Why are we doing it? Number 1, we achieve an incremental about 30-40 basis points in new money yield relative to comparable corporates. Number 2, we have an internal team that has a long track record of excellent portfolio performance, has a long track record of managing through credit cycles, and understands disciplined underwriting. We are also very focused on portfolio construction and on strong diversification in the portfolio. The middle of the slide is showing our diversification across property types and also geographical regions. Finally, as we are building this portfolio and growing it, we're also very focused on its quality.
On the right-hand side, the NAIC adopted, a little over a year ago, capital requirements for commercial mortgage loans. The highest-rated capital requirement is a CM 1. CM 1 for Lincoln's portfolio, 75% of the portfolio fits into CM 1, and that compares to the peer universe that has 62% CM 1. We have high credit quality and higher quality relative to peers. Now let's look under the hood a little bit further at our portfolio. The portfolio attributes here are very compelling. Debt service coverage ratio, on average, close to 2 times. CM 1, the highest quality commercial mortgage loans, the break-off point there is debt service coverage greater than 1.5. At 2, we are significantly higher quality than that break point. Loan to value. Our loan to value of 51%, approximately 50%. That's based on original, at origination, third-party appraisals, very compelling.
Takes a lot to actually burn through that equity before we get to our actual loans. The average loan size in our portfolio, $7 million. That again points to the importance of diversification. More loans, more diversified. Finally, a debt yield of 15%. Again, a very compelling story. Disciplined underwriting in a space we know well, long track record with very attractive yields. I've touched on fixed income new money strategies, and I now want to turn our attention to another place where we have been very focused on proactively expanding and reshaping, and that's our alternatives portfolio. As Dennis mentioned, we've been reshaping our alternatives portfolio. What have we been doing? Here again, using our external managers, we have been using diversified sourcing to find opportunities to build a portfolio that has multiple opportunities across sub-strategies, across geographies, and across various different sectors.
We're focused on building a quality portfolio within private equity and broader alternatives that is lower in volatility and also has limited drawdown risk. As we've been growing this portfolio, we also have had a good track record of solid performance. Since 2012, our alternatives portfolio has achieved a 10% annualized return. You can see here that 12.6% of that is coming from private equity and 4.4% from hedge funds. We're disappointed with that hedge fund result. That does not meet our expectation. As a result, we are reducing our hedge fund exposure. We are shifting the mix. We are moving from about a third at the end of 2015 to 20% at the end of 2016, and ultimately 10% is our long-term target of hedge funds while we're growing the portfolio.
The portfolio right now is 1.3%, and our target is to grow the alternatives portfolio to 1.5% of total invested assets. Now let's look at the broader total investment portfolio. Total investment portfolio, $98 billion. It's highly diversified. Highly diversified across sectors, across asset classes, across issuers. High credit quality. On the right-hand side, average credit quality of A-minus, and the below investment-grade assets stand at 5.6% of the total fixed income assets. When we think about risk assets, we have lower risk assets than our comparable peer average. Here, the definition of risk assets we've sourced from JP Morgan. JP Morgan provides an annual asset allocation study where they publish these results. Risk assets here are defined. They include below investment-grade assets. It includes alternatives. It includes mortgages that are either late in their payments or foreclosed, real estate, and public equities.
What you can see is that our risk assets as a percentage of assets are about half of our peers. Our risk assets as a percentage of capital and surplus is about two-thirds. This provides us additional flexibility. Randy will touch on this in his remarks next. Let's shift now to theme two. Low yield environment. Pace of portfolio yield, however, and its decline does continue to moderate, and I'm going to highlight this for you. From 2010 to 2014, our new money yield is here, significantly below the portfolio yield. During this period of time, the portfolio yield decline from 2010 to 2014 is 20 basis points per year. Let's move to the next period, 2015 through 2019.
The solid line is actual new money. Here what we've done is we have projected new money yield forward, assuming a 4% new money yield for the next 10 years. We've also assumed that the portfolio continues to grow at a 4% pace, which is consistent with its historical growth. You can see that even under this assumption that the portfolio yield will decline by about 10 basis points per year through the end of 2019. If low yields persist and we continue to invest at 4% new money yield through 2024, you'll see that the portfolio yield moderates at this point with a three basis point decline per year through 2024. The pace of the portfolio yield decline does continue to moderate, even in a continued low yield environment. Let's move to theme three.
As Dennis alluded to in his early remarks, I stand in front of you today with oil around $50 a barrel. This may not be as much of a concern, certainly as it felt it was in the beginning of the year. However, it's a demonstration of our proactive nature of reducing risk and potential concern in a stress scenario. What have we done? We reduced our fixed income exposure at the end of the first quarter of 2015 from 10% down to, at the end of April, 8%. 8% of invested assets. How did we do it? We reduced primarily through sales. What did we sell?
We did a series of stress scenarios. Those stress scenarios targeted securities that we were concerned about in a low-energy environment that sustained for a long period of time and potentially would create credit losses. That's what we sold. When we look at those sales, and we look at the securities that were sold out of the portfolio, what we see is standing here today, about half of them are now high yield. They've been downgraded. We feel very good about the remaining exposure. The remaining exposure is diversified across sub-sectors, and 86% of the remaining energy exposure is investment grade. You've also heard us say repeatedly that our stress scenario is manageable and that our losses in a stress scenario are manageable. What better way for you to also feel that our stress scenarios are manageable than by us showing you those results?
We're going to do that on the next page. As I turn to this, I also want to highlight for you that the stress scenario we're going to show you includes energy, but it also includes metals and mining exposure. We have been actively and diligently, name by name, doing fundamental analysis of every energy and metals and mining exposure in the portfolio. Our stress scenario on the left-hand side, we have been looking at a sustained low oil price of $30 a barrel for a four-year period. Although oil touched 30 briefly earlier this year, the key here is four years and the impact that that has to companies in the energy industry. That's where we have been focused. Prior to de-risking, over that four-year period, we would have seen a stress loss under these conditions over that four-year period of about $600 million.
Post the de-risking, as of April 30th, as the portfolio stood, we have reduced those stress losses by 60%, and the projected losses remaining in the portfolio under the stress scenario as of April, $240 million. Again, that's $240 million over a four-year projection period, something that is quite manageable if in fact we were to see oil go to those levels. Points to the strength of our balance sheet, and again, Randy will be covering that in his remarks next. In closing, three themes touched on today. The first is proactive strategies to improve investment income and diversification. I want to highlight for you again two areas of particular focus for us, commercial mortgage loans with achievable and attractive yields of 30-40 basis points relative to their comparable corporates, as well as growing and expanding the alternative investment portfolio while achieving long-term good and strong returns.
The pace of the portfolio yield decline continues to moderate. Even if we continue to see 4% new money yields for the next 10 years, we'll see a 10-basis point decline between now and 2019. 2020 to 2024, we'll move down to a three-basis point yield decline. Finally, we have actively reduced the energy exposure from 10%-8% of invested assets and reduced our stress losses from $600 million over a four-year period to $240 million over a four-year period. With that, I'm going to hand it over to Randy.
Thank you, Ellen. Let me add my thanks to everybody for attending today's conference, whether in person or on the web. It's true that we don't do these meetings as often as some of our peer companies, but I think it's equally true that when we do do them, we do them better. I think you've seen that, hopefully, in the presentations you've seen before me, whether it was Dennis talking about overall strategy, whether it was Will talking about what differentiates us in the distribution and the annuity businesses, whether it was Mark talking about what drives growth in the life, the retirement, and the group businesses, whether it was Ellen just talking about our high-quality investment portfolio. Hopefully, you heard information today that allows you to do a better job of accurately assessing Lincoln and the value of Lincoln stock.
We positioned the financial overview last for a reason. We positioned it last because what I get to talk about today is really a culmination of everything you've heard before me. Our financial results, the risks we have are the result of the products we sell. It's the result of the risks we accept. It's a result of the investments we make. That's why I come last today. It's the consistency of what our businesses do that has allowed us to produce strong, resilient, differentiated, and repeatable financial results, both in the past and as we look forward. I'm going to focus on three topics today. I'm going to focus on our financial results, the financial results that we have produced in the last 5+ years, and the financial results that we expect to produce looking forward.
I'm going to focus on why we believe when we look at those financial results, why Lincoln is a significantly undervalued stock. I'm going to try to give you transparency on a couple key areas. When we sit down with you, what are the questions you ask us? Two areas I'm going to focus on, the impact of low interest rates on Lincoln, and I'm going to dig a little more into the variable annuity business. Will already started this, but I'll dig in a little more because there is no business at Lincoln that is more undervalued than the variable annuity business. Lastly, I'm going to focus on our ability to consistently generate capital and our ability to actually deploy that capital, not just talk about it. We're going to talk the talk and walk the walk.
Today, let's start by talking about our financial results, let's start by talking about the income statement. No bottom-line result happens without strong top-line growth. Look at our results. At Lincoln, 2009 to 2015, we have consistently grown the top-line revenues. In fact, we've averaged 6% growth in this key metric over this period of time. What you also need to get a strong bottom-line result is disciplined expense management. What have we done? We've shrunk our expense ratios by over 100 basis points over that same period of time. When you marry together strong top-line performance with disciplined expense management, what do you get? You get great bottom-line results. What have we seen? We've seen earnings, dollars of earnings, grow at a 9% rate over that period of time.
Those dollars of earnings, part of them has generated capital that we could deploy, we've deployed a lot of it into share buybacks, which has allowed us to lever that 9% dollar of earnings growth into 12% EPS over this period of time. That's great performance from a key metric. Let's shift to the balance sheet, book value, and returns. What you see, once again, is great results whether you're talking about statutory or GAAP results. GAAP book value per share. We've grown 7% a year for an extended period of time. Returns. We've grown our returns nearly three full percentage points over that same period of time. Everybody has their own favorite valuation metrics, but two of my favorite valuation metrics are these two exact items, book value per share and returns.
When you compare those two items and compare them to how other companies perform on those same metrics, what you see is that Lincoln, on a relative basis, is undervalued by more than $12 per share relative to peer companies. That is a significant undervaluation that is not supported by performance. You see similar results on a statutory basis. Look, we've grown our statutory capital base to over $8 billion, an RBC ratio of nearly 500%. We are a strong and well-capitalized company that can continue to deploy capital as you move forward. Why do we have an undervaluation of our stock? Maybe it's because those peer companies have outperformed us. Well, when you look at the actual results, that's not the case. Move to the next slide, please. Maybe they've outperformed us on EPS growth. No. 12% at Lincoln, 8% at peer companies.
Maybe they've done it with less volatility. No. Our earnings results are less volatile than our peer companies. Maybe they've done better on ROEs. No. We've doubled the growth in ROEs of our peer companies. Maybe they've grown their balance sheet more than Lincoln has. Absolutely not. 7% growth over this period compared to 5% for our peer companies. Maybe they've grown their statutory capital more. No, right in line with us. You can walk down the line. Every single measure we have met or exceeded peer companies. This undervaluation is not supported by actual performance when you compare it to our peers. Maybe the undervaluation is supported by what you should expect when you look forward. I don't believe that's the case either. Advance the slide, please. What do we expect when we look forward from an earnings standpoint?
When you look at the businesses we're in, life, retirement, group, annuities, when you look at the sectors that we operate in in those businesses, what does it imply from an expected growth standpoint? When we add it all together, what do we see? 8% to 10% EPS growth looking forward. How do we get there? First and foremost, we get there through organic growth. How are we going to grow our net flows and our premiums across those businesses? We expect that to be fully half of our earnings growth, 4% to 5%. I will also tell you that it isn't going to be like this each and every year. As a matter of fact, as we sit here right now, annuity net flows are a little bit challenged. Will talked about some of the reasons why.
Group premium growth is a little bit challenged as we've gone through a repricing process, as Mark talked about. While that first bar is a little depressed right now, you know what we've been able to do? We've been able to work on another bar to more than offset that. In fact, if you look at we've done from a share buyback standpoint, something we expect to contribute 2% to 3% over time. We have seen our share count over the last 12 months fall nearly 6%. We have the ability to pull different levers to get to where we ultimately believe we should be, which is 8% to 10% EPS growth over an extended period of time. What are some of the other pieces that are in there? We have the group margin expansion that Mark talked about, adding a little bit over the next three years.
We have the ability to actively manage expenses. I talked about that earlier. We'll continue to do that going forward. You have the capital markets components. If you look at a reasonable equity market growth, 6% to 8% total return, that contributes a component of growth 2% to 4%. If you look at what Ellen talked about from a spread compression standpoint, that's about a 2% to 3% headwind. When you add it all together, you get the very realistic opportunity to grow our EPS 8% to 10% a year after year after year. That's our financial results. I would now like to turn to a couple of the key items that we hear about from you over and over. I'm going to start by talking about low interest rates, and then I'll end by talking about variable annuities.
Let's start with the discussion about low interest rates and their impact on Lincoln. We've talked about this a number of times, but I want to update you in this low rate environment. Three areas we think about when it comes to low interest rates and their impact on Lincoln. Three areas. First, what is the impact of low interest rates on the returns that we are going to get on the business that we are selling today and tomorrow? Mark and Will both talked about this. This is primarily a life and annuity issue, but we have went through our entire portfolio over the last three to five years. We priced every single product to reflect low interest rates to the point where today, when you look across all of our businesses, we're earning returns in total in excess of 12%.
That is a strong result in a low rate environment and is reflective of the underlying demand for our products. The second thing we look at is the impact on the income statement, the spread compression that we've talked about. Go back three years, we were facing a 4%-5% headwind. Come to today, we're facing about a 2%-3% headwind. As Ellen talked about, if you go out another five years, that number continues to drift down. I'm not saying that we like low interest rates. We'd much rather see rates go up. It's much better for the products we sell. Allows us to give a better consumer value proposition. The impact of low interest rates on our income statement is something that we can manage, as I noted on what we expect to grow at.
It's something that we can manage and still grow. That leaves the third item. What do low interest rates mean for our balance sheet? Today I'm going to focus on what it means for our statutory balance sheet, because that's what drives distributable earnings. That's what drives free cash flow. Before I start that, I will mention that we did lower our GAAP interest rate assumption last year in the third quarter. That's the third time we've done that. We feel very well positioned with our interest rate assumption that's embedded inside of our GAAP models. Let's talk about statutory. These are great results and results that I do not believe any of you would have guessed come out of our models. First, overall cash flow testing. Asset adequacy results of $11 billion, up from $8 billion just three years ago.
That's growth of $1 billion a year. We get that growth because the value of the business we sell far exceeds the value of what leaves Lincoln on an annual basis. We were 8, we're now 11. Significant growth in asset adequacy. You can look at that result all the way down to much lower interest rate scenarios, and you would still see that reserves are adequate. In fact, we've looked at it all the way down to 50 basis points forever, and reserves are still adequate, and we continue to grow the number every year because we're still selling a lot of product, adding to value, adding to this number year after year after year based upon the profitable products that the teams are selling. There is a separate piece of asset adequacy testing that we need to think about.
Two subtests obscurely named 8C and 8D. 8C isn't much of an issue for us. 8D, which is a subtest that revolves around testing Secondary Guarantee UL issues issued between 2005 and 2012, does have the potential to create some level of additional reserve need. Last time I talked about this significantly was a few years ago, and I talked about the potential need for up to $500 million of additional reserves needed over a 10-year period. We've continued to manage this book of business. We've had a very disciplined process of putting on rate locks, for instance, when it makes sense. We have to the point where we have eliminated any risk at that 1.5% level. When you get down to the 1% level, you would see up to $350 million of additional reserves, 20 basis points of RBC.
If you got down to 0.5%, up to $700 million or 40 basis points of RBC impact. Those are big numbers, but those are easily manageable numbers in the context of a company with $8.4 billion of statutory capital, with a company which has an RBC ratio of nearly 500%. Significant reserve adequacy and significantly lower interest rate scenarios. The other thing I would point out about those sub-tests, if rates go back up, that Reserve B goes away. It's a temporary capital call. The other thing I would point out about them is that just the nature of that book of business is that this is a risk that exists only for a period of time. We naturally grow out of it.
Five years forward, and that risk would really be eliminated just by the natural growth of the business at the 1% level, out a decade, and the risk is eliminated at the 0.5% level. Extremely strong results in very low interest rate scenarios. Let's focus and move the discussion to variable annuities. In my opinion, the most undervalued business at Lincoln, the most underappreciated business at Lincoln, for the life of me, I cannot understand why this is absolutely an asset management business with a guarantee overlay, a guarantee that is managed, and it's been consistently managed in a high-quality way. Two items at the top of the page I want to focus on that create a differentiated book of variable annuity business. One is a consistent market presence. Year after year after year, we sell a similar amount of variable annuities.
It gives us a book of business spread across an extended period of time. We don't have to worry about blobs of business sold in one particular year that maybe was a bad year. We have it extended and spread over a period of time. That gives you a significantly different result when you go to model that business. The other item is the level of benefits. We talk about this, but this graph depicts it. This is a graph that's put together by Oliver Wyman, one of the leading third-party consultants to annuity business. What do you see? Every single year, 2008 to 2015, we have a lower benefit offering than our peer companies. I put a little statistic up there to bring some life to that. What does that mean? 2008 book. Our benefit versus peer company's benefits.
If we were offering a benefit at the level the rest of the peers did, we would have had a net amount at risk created on that book of business four times the level of what we actually create from our book. That's a real difference in the risk generated by the book of business. Third item on the page, I'll just reiterate what Will mentioned. We have had a high-quality hedge program from the beginning. We have a high-quality hedge program focused on the economics. We have a high-quality hedge program that covers all of the products, all of the benefits. It's done exactly what we've asked it to do. We ask it to generate the assets needed to cover the liability created by the guarantee we issue. We ask it to minimize volatility in the income statement.
It has done it every single quarter, every single year, regardless of the economic environment that has existed. What does it mean when you bring a more consistent market presence and a lower benefit offering together? Will had this slide, but I'll reiterate it. You can see what it means when you look at the risk created by the business. The benefits we offered create a net amount at risk. Net amount at risk, which represents the difference between the guarantees we offer and the account values our customers have. Less than 1% at Lincoln. Peer companies, greater than 6%. That is a real difference in the benefits we have offered. That is a real difference that is ultimately reflected in the risk of the book of business that we have. What does it mean to have a lower risk book of business? Where do you reflect risk?
You reflect it in the capital you hold. You can see that graphically on the right slide. Lower risk, less capital need. Higher risk, higher net amount at risk, more capital need. Not every company puts out these statistics. We found six companies that do it. You see a strong relationship between risk in the business and the capital required to support that business. Which may lead to the question, how does Lincoln capitalize its variable annuity business? Will mentioned this. I will reiterate it. It is a greater of approach. It is a greater of a CT 98 measure and a percentage of account base. Why do we do that? The first component, CT98. It is a deep in the tail measure. Why do we believe you should use a deep in the tail measure? Because that is where the risk in variable annuities with guarantees lives.
It doesn't live at the 50th percentile. It doesn't live at the 70th percentile. It doesn't live at the 90th percentile. The risk in this business is deep in the tail, and that's how you should capitalize it. We could have a lower measure. I hear peer companies talk about CT95. You want to know what that means at Lincoln? The difference between CT95 and CT98 is $1 billion. That's going deep into the tail. Now, to that measure, we apply a floor. That floor is expressed as a percentage of account values. I'm not going to get into exactly what those percentages are. Why do we have a floor value of capital? It is to counteract the pro-cyclical nature of variable annuities with guarantees. What do I mean by that? Equity markets go up, risk comes out, models tell you to pull capital out.
Equity markets go up a little more, more risk comes out, models tell you you can pull a little more capital out. Markets go down, companies are scrambling to find capital. You have a floor level. It stops you from pulling capital out when that risk comes out of those businesses. That's why it exists. A well-designed product creates lower risk, capitalized in a very prudent and strong fashion is how you operate the variable annuity business. The last item I want to discuss about that's related somewhat to the variable annuity business is that the operation of our captive. We regularly get this question: Are you going to recapture your captive? A couple companies may have done that. The answer is no. There's absolutely zero reason to do that at Lincoln. Let's talk about how we operate LinnBar.
I just talked to you about how we capitalize the variable annuity business. LinnBar is a well-capitalized entity, and you can see on the page at almost any point in time, in fact, if we were to bring it back into L&L, we would actually have increased our RBC ratio. We're not hiding anything over in LinnBar. We capitalize this entity. We run the hedge program over there that I've talked about. We've always used hard assets to support the reserve credit every single moment in time. Why do we have LinnBar then? We have it because there is a difference between statutory accounting, which is more book value-based, and the economic approach to looking at a variable annuity.
There's a real difference there that creates a real risk in certain economic environments, primarily if interest rates were to spike way up, especially in combination with equity markets going down a bunch. That is why LinnBar exists. That risk still exists. The NAIC, in conjunction with Oliver Wyman and companies like us that are contributing data, are currently looking at this issue. I feel very good about the way they're moving. We're not going to do something until we find out where they end up. There's absolutely no reason. We're not hiding anything. We capitalize it, LinnBar, in a very strong fashion, and it's doing what we ask it to do, which is protect us against these odd situations where book value statutory accounting can cause deviations from economic or economic approach to hedging this particular risk.
The last item I want to talk about is capital generation and capital deployment. This is a powerful story at Lincoln. 2011 through the first quarter of 2016, $5.6 billion of generated capital. If you want to get your iPhone out, push the calculator button. 5.6 billion divided by 21. $266,666,666.67 per quarter after quarter after quarter after quarter. That is significant generation of capital. It is not something we just talk about, "Hey, we're going to do this." This is something we've actually done. Where has that capital gone? Early in this period, we were still doing some delivering. We're not doing that anymore. We put about $300 million to that use. We've continued to grow as a company. We've grown our statutory capital base $1.3 billion.
We've had the ability to significantly grow our dividend, our shareholder dividend, up over 400% in this period to the point today we're at roughly $250 million of annual shareholder dividends. $700 million has gone to that use. The bulk, $3.3 billion, has gone into share buybacks over this period of time. That is a significant allocation to buying back our stock at what we believe is a significantly undervalued level. That's why it's gone there. The last thing I want to talk about is free cash flow generation. Once again, people like to talk about what they're going to do. We've actually done a lot. We used to talk about 45%-50% as our target. We consistently exceeded that because of actions we were taking.
Recently, due to a lot of the work that's been done by our businesses, a lot of work reducing the amount of more capital-intensive business that they sell, we've been able to up that guidance to 50%-55%. Additionally, this year, we've said we're going to exceed that level. Why are we going to exceed that level? Because we once again demonstrated the strength of our balance sheet earlier this quarter when Mark's team, in conjunction with Jeff Coutts in treasury, completed a reinsurance transaction associated with our New York Secondary Guarantee UL business. We had this need because New York decided they didn't want to go along with the NAIC's approach to reserving for these products, forced us to put up an additional $450 million of reserves. From the moment that happened, we said we're going to do something about that, and we did it.
We generated $400 million of capital earlier this quarter that will help support cash flow generation over and above that 50%-55%. That will go into buybacks most likely as we sit here today. As I've made the case, I believe our stock is significantly undervalued. It is a very strong place to put the capital that we generate as a company. How do we compare to our peers in this key measure? Once again, very well. Free cash flow as a percentage of market cap, you can see we're well above the average and towards the top of the peer group. I hope we've helped you today. We've talked about a number of items. I can reassure you, we remain committed, absolutely committed to creating long-term shareholder value.
We believe that we are significantly undervalued based not just on what we have done, but what we can do and how we compare when we look at peer companies. I hope we've given you information to help you better understand low interest rate risk and variable annuities. I hope you understand just how strong we are when it comes to our ability to generate capital and our commitment to absolutely deploying that capital in shareholders' best interests. With that, I'm going to wrap up my comments and I'm going to ask my peers to come back up on stage, and we will end today with some Q&A.
Want to come up? This is how you save costs. You have management move chairs. We have left plenty of time for Q&A. Same format. I'd ask those that have had a chance already if you'd hold off until we get through others. We'll start first in the aisle with Erik Bass.
All right. Thank you. Erik Bass with Citigroup. Will, can you talk a little bit about your expectations for the DOL on 1035 exchange activity and what that could mean both for sales but also for persistency of the in force block in your lapse assumptions?
Yeah, absolutely. Just to size it, about 15% of our replacements take place inside a qualified plan. The current standard for replacing an annuity product has been very high for some time. Let me just give you a sense what the process is today. An advisor has to sit down on a piece of paper and list out the benefit guarantees to the client of the current product. They have to list out things like the cost. They then have to list out the recommendation, what's the benefit of the new product, and they have to list out the cost. If that side of the ledger isn't better, the replacement doesn't happen. That's a standard process. That seems to be a best interest process.
I'm not so sure that you'll see the DOL in and of itself create it doesn't necessarily create a higher standard. I think it kind of creates the standard for everything or product outside of replacement insurance and pensions at that standard. It's hard to tell what'll happen, but just I guess the takeaway is the standard for replacement today, qualified, non-qualified, is very high and very much having to prove out that the new recommendations are in the client's best interest.
Thank you. Then just one follow-up. You've mentioned the pivot or the opportunity to, I guess, if you have sales and annuities decline to reallocate the capital potentially to buybacks. Can you just give a sense of how much capital gets allocated to annuity sales?
It's roughly 5% for each dollar of sales. It varies a little bit by product, on average, about 5% for the products we're talking about here.
Thanks.
Go just next to Eric, to Seth.
Hi. Thanks a lot. Seth Weiss, Bank of America, Merrill Lynch. A question for Ellen then a follow-up for Randy. Ellen, on the slide that showed the pace of portfolio yield declines moderating, obviously you have new money rates and portfolio rates converging, could you also help us with what the pace of portfolio turnover is in the 2010 to 2014 period versus the go forward periods?
Yeah, sure. Couple things. First thing is new money, as you know, 4% for the rest of the projection. Assume portfolio grows at 4%. In terms of the runoff portfolio, the legacy portfolio, on average, what we see is that it is running off at about 6% per year, pretty steadily between now and the end of 2024. There's another phenomena of what's happening underneath that between now and 2019, and that is that there are some lower-yielding assets that are part of that runoff. As a result, they're basically there to meet shorter duration liabilities. That's one of the reasons why we see that the portfolio yield decline starts to fall off once we get to 2020 period to 2024.
The only thing I'd add to that, Seth, is that that 6% decline, I'd remind you that a component of that is to fund outflows, right? We'll have annuities surrender over that period. That isn't a net number that we automatically have to reinvest each and every year. In fact, I'll remind everybody that our portfolio remains very well matched from an ALM standpoint.
Randy, just one quick one on the statutory reserve adequacies. In investor days past, you've given that number also in a more stressed flat rate environment. Could you provide what that is today?
Seth, I think I said during my comments, if you're talking about the overall asset adequacy, the left side of the slide I had, the $11 billion versus the $8 billion. I mentioned that all the way down to 0.5% that we have redundant reserves, and that the number keeps growing each and every year. The results are better than they were last time. It's $11 billion in base. If you look at 1.5%, 1%, 0.5%, you still see additional and redundant reserves in all of those scenarios. Those assume those rates forever. Okay?
Great. Thank you.
You bet.
Right behind Seth with Steven, then we'll go to the other side to Mike.
Hey, Steven Schwartz, Raymond James. Will, just to revisit the BICE one more time. LFN is going to be using it. I assume you're going to be using a differential commission structure. You're not going to go level commission within the BICE.
Our approach is that we're going to have standardized commission by each distinct product category. For instance, take lifetime income. I think you'll find the industry largely going this direction. Large institutions have standardized comp by product category. If you take lifetime income product framework, which would include annuities, I think you would expect there to be kind of like-to-like levels of compensation within product structures.
Does LFN offer a passive product?
They do. They offer any passive product can either be, call it the simple passive, and then there's more actively managed passives.
Okay. Do you see more money going to the simple passive due to the rules?
I think across the industry, you certainly see flows shifting to passive and held predominantly inside of fee-based managed account platforms.
Okay. Do you see it going through brokerage-based? Do you see that happening in brokerage-based?
We see a little bit, but the vast majority being inside of the fee-based environment.
Okay. For Randy, just a quick couple. Looking at your current hedging, are you fully hedged all the Greeks right now?
Yes.
Okay.
We continue to expand what we hedge and improve upon what we hedge each and every day. We have a very robust program that does not stand still. It gets better each and every day. The gentleman who runs our program, Kerry Hobbs, is out here in the audience, as a matter of fact.
Okay. Just so I understand here, the reinsurance deal that you just did freed up $450 million of capital. You said that was going to be used for share repurchase, or I think you do normally $500 million, $600 million of share repurchase a year. Are we looking at $1 billion this year now?
I'm not going to get into numbers other than that I told you we will exceed 50%-55%. The fact that we believe that our share price is significantly undervalued makes share repurchases a very logical place to put that. You can expect that when we look at the potential places we can put this capital we've created, that share buybacks will be very high on the list.
All right. Thank you, Randy.
Well, Eric, if you have a mic, we can do Eric first, then down on the other end of the aisle, Mike.
Thank you. Eric Berg from RBC. Randy, would it be the view at Lincoln that people who buy your annuities today will live, I'm sure you're of the view that they will live longer than your typical life insurance customer, just because life insurance companies I believe have known forever that on average annuitants do live longer than life insurance policyholders. My question is, what is your expectation for the lifespan of people who buy annuities with living benefit guarantees versus the lifespan of those who buy annuities without the guarantees?
This is around the assumptions that we set in our products. When we set our assumptions around mortality, we obviously base it upon the expectations for that particular piece of business. We assume annuitant-like mortality. We assume improvement in that mortality consistent with expectations for that type of business. As Will pointed out, as a matter of fact, our overall assumption today, we have better experience. Our people are living longer than we're actually experiencing. I feel very good, Eric, about the assumptions we've set around mortality. Assumption setting at Lincoln has been such a great story across all of our products, but especially in the annuity business. Many companies have had significant negative results associated with assumption unlocking, and you have never seen that at Lincoln.
You've seen negative components when we've had to change, for instance, our lapse rate when we had to lower it, there were other items going the other way that offset it. We take assumption setting very seriously. We know we're never going to get everything right, we try to be very disciplined when you think about the totality of assumption setting, you've seen that in the results.
The only thing I would add, Eric, is when we enhanced our process with that dynamic predictive modeling, we recognized there's differences in mortality between someone that has a living benefit lifetime versus someone that has a living benefit period certain to someone who has no living benefit. We reflect that in our assumptions today, because we installed it in 2013 to our variable living book. We take into account that people that have a view that they will live longer will be more attracted to a lifetime guaranteed income, and that is a part of how we do assumptions today.
Michael Kovac, Goldman Sachs. A question here for Will and Randy. As we think about variable annuity returns in terms of the ROE, both, I would say on variable annuity, fixed indexed annuity, and FA. What do you see as the new money ROEs in that in sort of stress scenarios similar to what you outlined for us on the life side?
I think you have to remember, Michael, that when we enter into a variable annuity, we hedge the risk from time zero. We hedge that risk with long-dated derivative assets. We lock in the return effectively for an extended period of time when we go out and issue a variable annuity. You're largely talking about single premium contracts here. I don't think you have the same sort of sensitivities that you might want to think about when you look at life insurance business. It's more around are we doing what we say we're doing, which is that we hedge these products at time zero with long-dated derivative assets. I think in general, you want to expand on this, that returns in the VA business have come down somewhat.
It was a couple of years ago when rates were a little higher that we were getting returns well into the 20s. Returns have definitely come down with interest rates. Interest rates have a very direct and probably the most immediate impact on the cost of hedging, and you see that in your overall expected returns. Now we're still at a level where we're getting acceptable returns, but they're undoubtedly lower than they were just a couple of years ago.
Only got to add, there's a relationship between the level of return and the volume of what we're selling. When returns were above our target returns, we were selling larger volumes. With returns at acceptable levels of return, we're selling at much lower volume.
Thanks. That's helpful. Then, a follow-up on the variable annuity sales. I understand it was difficult to disaggregate in the first quarter the impact of the DOL versus market stresses in that period. Now that we've had a couple of months sort of post the DOL being out with maybe a little bit less market volatility, any sense of what's happening with sales or conversations with distributors on the DOL impact?
We're seeing pretty consistent trends from the second quarter to the first. There's no, I would say, new trends. One element, still very early, keep in mind, this is a 1,000-page new regulation, add to that it's interpretive based. Firms, distributors haven't come out and been very quickly to publicize their intention to behave one way or another. There's been a bit of an information lag to financial advisors that I think will continue. We're starting to see firms like ourselves, like a few others, publicly announce to their advisors intentions to operate to the BIC, intentions to hold commissions and fees to the same standard. I have a feeling, my sense is you're not going to see much change in the market until there's more clarity in the minds of the actual individual advisor. I think that's still going to take some time.
Obviously, Michael, if rates go down even further, we'll have to look at whether or not things need to be repriced. We'll do that. We talk about this all the time, the decision to change price in a longer duration product, whether it be an annuity or a life insurance product, it isn't daily pricing, right? You don't reprice a product every single day. You take all the factors into account, what's going on in the marketplace, what are the actual returns you're getting, when you make a decision like that. Should rates go down further, that's something we'll have to look at. Do prices need to go up or the benefits need to come down? Humphrey?
Humphrey Lee from Dowling & Partners. First question is for Mark. When you show the IRR for the life insurance product, you show that using the forward curve and then use a high mortality expectation. If you combine both of them together, how should we think about the consolidated IRR for the life insurance portfolio?
Yeah, I think that actually was on the slide. I may not have mentioned it, but if I put it all together, we still have a return of 10%. If I assume that forward curve is the interest rate scenario, and if we would assume that, in fact, mortality is 110% of expectation versus the 90% it's running, then you put those two things together and run the portfolio, it's a 10% return.
All right. Got it. Then a question for Randy. You talked about the steps you've taken to drive the free cash flow generation from 45% to now 50%-55%. If we look ahead, is there anything else that you can continue to do or can you do to implement to drive that 50%-55% to higher at some point over time?
I think that at 50%-55%, one, it's a number that we're very happy with. We think it's very competitive, and we believe it gives us the amount of capital we need to get back to that EPS growth rate that I talked about when we look forward 8%-10%. Absent changing product mix significantly from what we've already done, I wouldn't expect significant changes in that measure. I believe it's very competitive. I think it's a good mix that reflects both the capital intensive products that we sell and the products that are less capital intensive. As I've said before publicly, we are strong defenders of businesses that require capital investment because they have a lot of benefits.
I know people get hung up on the capital investment. I will remind people that these are the same products that allow us to know that next year our earnings will be 96% of what they were this year if we don't do a single thing, if we don't sell a single bit of business. These capital intensive products imply that they're there for a long and extended period of time. There are positive aspects of those sorts of products, and we're very happy with the mix of business that we have today. I believe 50%-55% is very competitive. It's allowed us to deploy as much capital as anybody else. I don't care what they say. We've actually done as much as anybody in the business. They may say 60% or 65%, but we've actually done as much capital deployment as anybody out there.
Two over, just to Jay Gelb.
Jay Gelb from Barclays. If we think about the return on equity profile for the whole company of around 11% and if it has
12.
Okay, 12. I'll relook at my numbers. If we think about buying back stock below 1x book ex AOCI, and if you can achieve that 8%-10% EPS growth, is there potential, even in a low rate environment for that ROE profile to expand?
We talked about, Mark, well, that the business we sell today we're earning 12% plus. We have an ROE of right around 12% today. You would expect over time if you're selling new business at 12% plus and you're currently at 12%, that you would get tugged up over time. That is a slow process. Absent taking capital out of the balance sheet, and I don't see no significant reduction in RBC immediately. I think 12% and then growing over time with the new business being sold by the teams is what I would expect.
Okay, 12% with the ability to grow that over time, even in a low rate environment.
Yes. Given the business that we're selling today.
Oh, just as a follow-on, any interest in acquisitions, bolt-on or otherwise?
You going to take that?
No, I'll take it. We've been pretty clear that in the areas that we'd be interested in, which is the group business, retirement business, the cap rates or the discount rates are well below what we're selling new business for. We look at everything, but at this point in time there's not a big appetite to put long-term capital out at 400 basis points, possibly less than what we're selling new business at. Plus, as Randy's talked about and I'll point out, buying our shares back is a really good idea right now.
Jimmy.
Hi, Jimmy Bhullar from J.P. Morgan. I had a couple of questions. First, on the annuity business, I think it was slide 12 where you discussed the DOL impact and about 40% of your sales being susceptible to the rule changes. On that 40%, have you been able to get a better idea on how much of a decline in sales you expect to experience based on what your views of the rules is?
Jimmy, I think I understood the question to be of the 40% that's in qualified, do we have a sense of what the?
What the impact on sales would be
in a post-DOL installation environment?
Yes. Mm-hmm.
We have modeled, a discipline of the company throughout is to model these types of sensitivities and stress cases. In a sense we've had. In a sense we've looked at just to give you a sense of the methodology, we looked at distributors based on their affinity for insurance products. What we find is when we talk to the distributors have affinity to insurance products, and let's talk about what that might be. An insurance-owned broker-dealer or formerly insurance-owned broker-dealer or a financial planning oriented distribution business model or banks, they're very insurance friendly distributors. You definitely see a real zest to continue to drive sales and to do business. We see that inside of Lincoln Financial Network. We have less of a sensitivity in those. The other segment would be more investment oriented distributors.
Think of a large warehouse that's more oriented towards, in a sense towards fee-based. I think the last stress scenarios I saw, which would be folding in sometime in 2017 to 2018 would be a 20%-25% sensitivity for a period of time.
And then from our-
It's still very hard to tell, Jimmy, just given where we are in the marketplace.
Yes. On the retirement business, obviously you've spent a lot of money enhancing your technology platform, but some of the things you've discussed. Other companies have been doing them already. Where do you feel you are from a technology record-keeping customer interface standpoint in the retirement market to be competitive to grow?
Sure. Let's talk about that participant web experience that I had a slide on. What we've rolled out through today essentially gets us to parity with most of our peers, the fact that it's completely mobile enabled, many of our peers can't say that. I think we're slightly ahead of the game. That doesn't mean they're not catching up. After this weekend when Click to Contribute, that action-oriented, simple, here's what I can do, I think that'll be somewhat of a differentiator. When we come to the later in the summer, when we roll out the retirement income module where you can figure out where you're at on the journey, there's only one or two competitors that are there.
Lastly, one for Dennis. On M&A, what are your views on Lincoln as a potential acquisition candidate? Obviously, there are companies that say that they're opposed to a deal. There are others that say that they're looking for an acquisition if there's an attractive offer. Given your views on your stock price, where would you fall in that spectrum?
Well, there's a couple of questions in there. Let me talk about just the likelihood of Lincoln being bought. I think most companies are a little bit boxed in right now because they don't know what the SIFI capital requirements are going to be. There's nobody that's going to make a big acquisition that's not a SIFI that would push them into the SIFI category, and sort of similarly on the international side. I think until there's clarity around the capital rules, there's probably not going to be a big appetite on acquirers. If you go back 20 years in the business, if you look at the big acquisition countries, for a while it was Europe because they had a price advantage over the U.S. companies. That doesn't exist anymore. If you go to Canada, they've been big acquirers.
I think both Manulife and Sun Life don't have a big appetite for major acquisitions, maybe bolt-on acquisitions. If you go over to Japan, the size that you hear mentioned in terms of absolute size is probably $6 billion-$10 billion, of course we're already well above that, so that source of capital is not there. You're beginning to hear a little bit about the opportunity from China. I think that'll take a half a decade or more to mature in terms of Chinese insurance companies that are transparent in their sources of capital to come to America. Just as I look at what's happened in the past or what might happen in the future, I don't see big acquirers. Now, to the point of we certainly wouldn't sell our company for any kind of premium that wouldn't reflect long-term value of the company.
On the basis of today's valuation, that would be a pretty enormous premium.
Thank you.
Before we go on, I just want to get back to Jay's question on ROE, because I think we simplified ROE development a little too much. We talked about where we are today in new business. There are obviously many components which go into ROE development. There's the new business you're selling. There's what's going on in the businesses that you currently own. For instance, at Lincoln, we have the group business, which is in the middle of a recovery, which is supportive of something like that. Then you have headwinds that you need to think about, like spread compression. There are a number of items that go into overall ROE development, but that doesn't change the fact that the business we're selling today is supportive of ROE over time. Al?
Randy, you made a comment that, I think you've said this before, that a dollar of VA sales that doesn't happen frees up $0.05 of capital. I just want to make sure I understand that in the context of your slide 11, where it looked like the capital for a VA account value was 1%. I think that this simply represents the fact that Lincoln's been in this business for a very long time. The account values have shown a lot of appreciation. Do those two figures, the 1% of account value, the 5% of new sales, is that simply what explains that difference?
One, I don't think it was 1%. It was probably more like 3%-4%, if I remember.
The 1% was probably the net amount at risk.
Remember, the net amount at risk is 0.9%.
Yeah.
That's a mixture of all the business we've sold in that particular year and everything that's been on the books for a while. It's a stochastic measure of the risk embedded in the book of business and the amount of capital we need to allocate to that business. That's different from the capital that you invest when you sell a product, which goes into things like commissions and other acquisition costs, those sorts of things. The two aren't directly related.
Got it. Okay. Thank you.
Yeah.
One other question for you, if you don't mind. I don't know if it's for you or for Mark, but when you speak to the life reinsurers, they talk about the recapture from the point of view of the primary insurers of Universal Life that was sold so many years ago. The reinsurers speak about this as them putting that business back because they feel the business was underpriced. When you speak to the primary companies such as yourselves, and not every primary company's in the same position, obviously, but you guys spoke about it as a choice you made to take the business back. I wonder if you can give us a sense for that difference and maybe what vintages of product this represents and how you feel about the profitability on a gross basis.
That's definitely in Mark's wheelhouse.
Yeah. Randy, feel free to jump in. Let's talk about underpriced by whom, okay? When we think about it from, let's go back in time to when all the insurance primary carriers were selling that product line. You always look at, okay, what's your cost of mortality? What's your assumption? What can you go out and reinsure in the market? I would submit, and I don't know if the reinsurers would admit it or not, it was their underpricing of their view of mortality was actually better than the primary carrier's view of mortality, which then caused this arbitrage that the direct carriers took advantage of and locked in. I think mortality is X, well, they think it's Y, I'll lock that in. Now, they could've been right. Turned out, in many cases, maybe they weren't.
You get to the putting it back to the primary carrier because it was underpriced. It was them that underpriced it, and therefore, is there a price they're willing to pay you to take it back? That's the kind of transactions we did.
That's helpful. Thanks.
Sunny?
Thanks. One quick one for Will, and then one for Randy. Will, in your annuities presentation, I think you pointed to some industry data that suggested investment-only VAs are going to grow at over 100% over the next couple of years. Is that in a post-DOL world? And if it is, why is that product expected to grow so much faster than the industry?
Investment-only VAs can really get at that value proposition of tax-advantaged investing, tax deferral. I think there's a recognition by high wage earners that are in high marginal income tax rates that this is an attractive way to invest. It's a business that's kind of emerging to maturity. It's almost like back to the future. If you go back 25 years ago, this was the annuity business, which is tax deferral. This is a business that's kind of coming back of age. I believe sales have already doubled from a few years ago, from $4 billion to $8 billion in the industry. I'd say you're still early on in the marketplace, and it was really triggered by the increase in individual income taxes and the additional investment taxes related to national healthcare.
Presumably, that's non-qualified funded business?
Presumably, the vast majority of investment-oriented annuities is non-qualified.
Okay, thanks. For Randy, on the reserve adequacy, I guess it continues to look like a good story, no matter how far we drop the 10-year treasury assumption. Can you just maybe dig another level deeper and help us understand why is it that the reserves are so adequate in such a low rate environment when I think a lot of us would reach a different conclusion? What's going on that creates that adequacy?
Yeah, a couple of comments. One is a better story today than it was three years ago because of the business these folks are selling. It was $8 billion, now it's $11 billion, which is reflective of the business we've sold over the years having greater value than the business that's run off of our book. That's a very positive story, and we'd expect that to continue going forward. Look, statutory reserves are redundant for a number of reasons. The primary reason is probably the fact that the mortality assumption embedded in the formulaic reserves has a fair amount of conservatism in it. Second reason is that typically, reserves are calculated absent any assumption of lapse rates. Even though their lapse rates are very low, you do have some level of lapses.
You have a number of items inside of statutory reserving that create this reserve redundancy, and that's reflected when you run an asset adequacy test. Statutory reserves are not at fair value or an economic value. You got to remember, they're a formulaic reserve designed to be conservative. It is a solvency-based standard. It is not a fair value-based standard. That's the best explanation I can give you.
When you go to cash flow testing, you reflect the actual experience or the best estimate experience, and that's what creates the redundancy?
Factually, cash flow testing is best estimate with a provision for adverse deviation. That means that on some of the key assumptions, when you look at those numbers, there is a provision for adverse deviation. I believe in our case, the main ones are we lower the separate account return assumption, we lower the interest rate assumption, we assume lapses. We take the worst of whether that's an increase or decrease in lapses, and we increase mortality by 5%. I think are the big four that we embed inside of those numbers. There's conservatism embedded inside of those numbers. The other thing I would point out, and Mark reminded me or whispered to me here, is that ALM makes a big difference inside of those results. If we were not matched, you would have seen a significant diminution in value as interest rates have fallen.
Go to John, and then across the aisle to Tom.
John Barnes, Sandler O'Neill. This is a question about the competitive landscape. It has been thought that millennials are just going to use robo-advisors for their retirement needs. What are your thoughts on the DOL rule disrupting or stopping this trend and ultimately bringing them to Lincoln?
I don't think the trend towards digital advice is driven by regulators. I think it's driven by the need of consumers for advice and different preferences for how they get it. I think that for the industry, this is a very powerful positive. To be able to have a digital platform that can automate what is traditionally been a very manually intensive process like working. The work of a financial advisor is a very manually intensive process, even for the financial advisor. Profile information, uncover and establish goals and objectives. To be able to create an easier, more automated mechanism, even when an advisor is involved in that advice, is a positive. There are consumers that would prefer an advisor not be involved in that advice, and that opens up financial advice to a wider segment of American consumers. I don't think digital advice excludes a financial advisor.
I think you'll see digital advice is going to enhance financial advisors, increase the capacity for financial advisors to have more clients, deliver better client experience. At the same time, it's going to give a clear path for consumers of all ages, not just millennials, that would perhaps have a preference for a method of advice that's provided digitally. I think the robo-advisors, I'll just end with, I don't think that automating investment algorithms is where the innovation starts and ends. That's one aspect. If you think about digital advice as a much more comprehensive value proposition than just simply the algorithmic investing of a robo-advisor. Tom?
Thanks. Tom Gallagher, Evercore ISI. Randy, I appreciate the new disclosure. I think I would agree with the way you described it, that the $700 million of capital or reserve strengthening seems like a pretty manageable small number in a 50 basis point rate environment. I guess my question related to that is, what about VA? I think it's fair to say that virtually all of your competitors, if they were asked in a 50 basis point forever environment, would have very large charges related to VA. Have you stressed that as well? Including both, and I realize this is statutory, including both under current guidelines and also assuming there's going to be eventually more of a fair value approach on statutory to VA. Have you thought about that?
I wouldn't expect there to be charges for VA specifically related to the fact that interest rates fall. When we have hedges in place that should rise in value as interest rates fall. Remember, we're focused on hedging the economics. I don't think that in and of itself, if falling to 0.5% causes behavioral changes, right? We'll have to think about that. Will talked about some of the sensitivity in our key assumptions to assumption changes, but none of the numbers he talked about I would describe as material in any way, shape, or form. Lower interest rates would definitely cause us to think about what we're doing from a new business standpoint, because that is a big driver of expected returns on variable annuities, is the level of interest rates. It would cause changes on new business.
I don't see it as an item that would automatically cause charges on the in-force unless it caused secondary impacts that you had to think about. Tom, over time, I mentioned we use very long-dated hedges. Over time, eventually those hedges roll off, and there's change in the cost of those hedges or whatever. No, I feel very good about where we are from a hedging program and how that protects us against sudden changes in the economic environment that surrounds us. The only thing I would add is if interest rates fell to lower levels inside the fixed annuity block, we have the ability to manage spread compression. We have 68% of our assets that are currently above minimum guaranteed rates. We have a cushion. We have actions that we can take to manage that scenario.
That said, you've got to balance what's the level of rate that you set with persistency, you'd have to think about that relationship.
Randy, even considering another scenario, which would be if rates went to 50 basis points or 100 basis points, I assume also equity markets might be under some pressure. You feel like you're adequately hedged on the equity volatility side in combination with a sustained low rate environment. You feel like you're protected enough where we wouldn't see any really big charges on VA.
Yeah, absolutely. I believe we're protected, as I think I mentioned in response to one question. We're hedging all of the key economic inputs, including volatility, interest rates, level of the equity markets, foreign exchange, any number of factors, both first-order and second-order levels of those various Greeks. We're hedged across all of those risks and feel very comfortable with how we're hedging that risk today.
You had mentioned that policyholder utilization assumption would be something to watch anyway. If I remember correctly, somewhere in the slides it mentioned 6.8%.
That was in Will's slides.
utilization assumptions. I assume that could go to, I don't know, 50. Some multiple of that number. Would that create a big difference to what you're saying now?
I think Will had a sensitivity that showed if utilization changed by, I forget the percentage, it was a.
Full percentage would be 100% as utilization.
Sorry.
That is not 6.8% of expected. That was the percentage of individuals initiating their guaranteed withdrawal benefit in that given year. When we look at utilization, we look at two elements of it. We look at timing. We look at efficiency. Timing would be when it would be actually triggered, and efficiency would be what level of income. I think our efficiency, we're right in line with our expectations. Not all policyholders take the full amount of income that's available to them. That efficiency measure is, I think we price for 60 or 61, and we're right in with 60 and 61% of those initiating are taking their full amount. The other parts, they're not taking their full amount of it.
The sensitivity that Will showed that if we went to 100% effective utilization, so every individual policyholder was an economic animal who knew, with 100% effectiveness, how to use their benefit, the total charge was $160 million, I believe.
Got it. If I could just sneak in one last one. Really under that scenario, it sounds like your capital is pretty well protected, even under somewhat draconian rate scenarios. That's good from a capital standpoint. I assume, though, from a GAAP balance sheet standpoint, DAC, goodwill would be the areas at risk of major charges. Is that a fair assessment?
One I'd agree with and one I don't necessarily agree with. The goodwill I don't necessarily agree with. Once again, what are the drivers of goodwill? The amount of new business that we are selling, the profitability of that new business, and the rate we're discounting them at. You'd have to decide what all of those factors were doing in that lower rate environment. I can be pretty sure that the discount rates would be coming down, for instance, in that environment, which would be beneficial to goodwill. I don't necessarily agree with you on goodwill. On DAC, once again, we would have to look at the environment to decide whether we were going to change the long-term interest rate assumption inside of our models. We did show a sensitivity on there. The sensitivity has been very similar.
The three times we've lowered that assumption by 50 basis points, roughly $125 million or so after tax. We haven't updated that because we feel very good about where our assumption is today. There isn't an obvious reason to me. There's nothing cliff-like that I'm aware of in that assumption.
All right, thanks.
You bet.
Steven?
Thank you, Chris. Steven Schwartz, Raymond James again. Just a follow-up on the same slide that Tom was discussing, slide eight of Will's annuity presentation. Those are GAAP sensitivities. Is there stat sensitivities or does that just get subsumed in the overall reserve adequacy, Randy?
Yeah, those were GAAP sensitivities. Remember, it's more defined for statutory, you don't have that level of impact.
Okay. Then for Mark, I think it was TermAccel was the new that you're talking about there. Is that fluidless?
It can be. Again, one of the aspects of the new thing is to look based upon the tele app, do you need to have any lab work done or not? We expect a fair amount of it to go fluidless, but it's not guaranteed fluidless.
Okay. Do you feel good about that? Our GA has kind of warned on this, that it's going too far too fast. How do you feel?
Well, I don't believe we're going too far too fast. One of our competitors went out early with that. We wanted to make sure we understood what the parameters were going to be, whether or not we said yes or no to it. We limit it to less than $1 million of face amount and under age 60 even go into that process. On the TermAccel, it's only a maximum of $500,000 on that term product.
All right, thank you.
we've only introduced it to a select number of distributors.
Yeah, good point.
It's been a very deliberate, staged rollout, and as the underwriting team and the product team get more comfortable, then we open the aperture of distributors that are included.
Yeah.
That's good. Thank you, Mark.
We are just at 12:30 now. Maybe turn it to Dennis for a few closing comments, then we'll move over to lunch at 12:30. Hopefully, a lot of you can join us.
Thanks, Chris. I'd like to thank my management team, four of whom are up here, and three of them who are sitting down in the front row, the senior management team of Lincoln working hard. Also in the audience is a lot of our next level of management that also work very hard. We take these meetings very seriously. We don't want them to be a waste of your time. Your time is as precious as anyone else's. I hope we met that bar. I think we did based on most of the questions we had already answered in the slide presentation. Again, thanks to my team, the entire team. I'd also like to recognize that great companies are the result of a lot of groups, and one of them is having a very, very professional and experienced board of directors, which Lincoln is blessed to have.
I'd just like to mention that we have a new director who's taken time herself, and Deirdre Connelly , to come and learn more about our company. Deirdre, thank you very much. Again, thank you for your time. Again, I hope we met your expectations with the information. Lunch is served.
One thing. I just want to recognize Chris and his team, Jesse and Trevor, for putting together a great event. I think you would agree that they do a great job. I know we would agree as a management team that we are somewhat times like herding cats, and they're very good at that. Thank you.