Lincoln National right now. I'm pleased to introduce Dennis Glass, President and CEO of Lincoln. Dennis has been CEO since 2007. It's fair to say that the life insurance sector is facing some macroeconomic challenges, but if we look at Lincoln's performance in the last three years under Dennis' leadership, by our measure, they've grown adjusted earnings by 13% per year while returning $2.5 billion to shareholders. Definitely impressive numbers considering the difficult economic backdrop. With that, I'm going to turn it over to Dennis for some remarks to lead off.
Good. Thank you, Seth. It's great to be back at your conference. This has been one of the more important conferences for the life insurance industry for years and years and years. We're happy to be here. I'm going to make a couple of opening remarks. Then we're going to go into a Q&A. I have to do the before I begin, let me remind you that my comments could include forward-looking statements and would point you to our website and regulatory filings for all necessary disclosures. A quick recap. You've all saw our earnings release, but it was a good year even though it was a tough environment, volatile environment. Earnings per share up 5% after notable items. ROE ended the year up a little over 12%. Our book value per share, ex-AOCI, is at $52, which is an all-time record.
Then just sort of looking back a little bit, Seth just mentioned this, our earnings per share have grown on a compound basis by about 11% for the last four years. We've demonstrated last year and over the last several years a strong franchise and good earnings growth and good return on equity. I just want to touch on a couple of points that those of you who follow Lincoln have heard me say before about the strength of the franchise, because I just want to get back up to that level. These results that I've just talked about are driven by our strategy, our franchise strength, and our risk management capability. Let me talk about strategy for a couple of seconds. It has a couple of foundational pieces. The first, we expect scale in our key business lines. We only sell retail products.
We're not in the business of selling wholesale products, which can be a fairly simple thing, whereas retail products require such an integrated distribution, product development, risk management perspective. I think it makes our franchise more competitor resistant. We focus on high-growth markets. For example, in our group business, employer sizes of 1,000 to 5,000. That's a very strong market, better pricing capability, more growth. In our RPS market, the small corporate market, government and healthcare segments. Again, faster-growing segments. We don't try to be in every market in all dimensions of it. We try to pick the best segments of the market where we can get growth and decent pricing. I really have to talk about this next one. We keep coming back to the point that Lincoln's distribution and product breadth is as good as any company in the industry. Put it in perspective.
In a 24-month period, almost 100,000 financial agents or advisors will sell a Lincoln product. 100,000 people. That's a big, large sales platform that gives us the capacity to do a lot of different things that other companies who don't have that aren't able to do. Our product portfolio is well-priced and diversified, and even for today's interest rate levels, is producing good returns on capital. We have about 1,600 Lincoln employees that interface with this 100,000 group of independent advisors and agents that sell our product. Distribution strength, product breadth are extremely important. One of our competitors recently mentioned agility as a reason to break up the organization. Maybe. Franchise strength with strong distribution and product breadth sets the stage for agility. Let me give you a few examples.
We've moved life sales from 65% of total sales in guaranteed universal life a few years ago, down to 18% today, and no product has more than 27% of total sales. We have reduced sales of VAs with living benefits from 92% down to 70%. Again, another big pivot, these two pivots are the result of that 100,000 strong sales base and product breadth so you can give our distribution partners different options of products to sell. The list of pivots go on in our other businesses. I want to make a point. I think we've made this over several years. The strength of product and the strength of distribution has resulted in Lincoln having positive net flows every year for the last decade.
Positive net flows every year for the last decade, I think is a very meaningful demonstration of this powerful combination of distribution and product strength. As I look forward, I think the ability to change product and distribution focus will be one of the most important capabilities to meet what I know is going to be changing consumer demand, regulatory impacts, and from time to time, pricing adjustments. Just one other point on risk management, which is very important to what we do. We are frequently recognized by rating agencies as having industry-leading capabilities. I think all that is extremely important as you think about Lincoln as an investment opportunity. Let me look forward a little bit. As Seth mentioned, clearly, the financial services, businesses, and the insurance industry had some headwinds, and Lincoln is part of that.
I'm going to start out by saying our franchise and balance sheet strength have never been stronger to deal with what might face us. Let me talk about a couple of the headwinds. First, interest rates. Rates are low. Our capital markets rates are low, and equity markets have gone down. With respect to interest rates, this is an earnings drag, but low interest rates will not materially weaken our GAAP or stat balance sheet, as we have demonstrated since 2009. Low interest rates is predominantly an earnings drag. Equity markets will, if they continue to decline, affect earnings, and we measure that about $9 million of earnings for every 1% drop in the S&P 500. That's capital markets impacts on our business.
We may or may not be entering a credit cycle, I believe for Lincoln, whatever the credit cycle is, it's very manageable given our diversified investment portfolio and the strength of our balance sheet. First, with respect to our overall portfolio, it's high quality and well-diversified by industry geography and issuers. The overall portfolio has an average rating of A-, and 95% of the portfolio is investment grade. If you excuse the pun, drilling down to energy is also well-diversified by subsector and issuer. It has an average credit rating of BBB+, and 93% of the energy portfolio is currently investment grade. Turning to our balance sheet. The balance sheet is as strong as it's ever been. We have $600 million in cash at the holding company, and we don't have any debt maturities until 2018.
Just to put that into perspective a little bit, when we entered the 2008-2009 crises, the holding company had borrowed $700 million from the regulated life insurance subsidiaries. We had no cash at the holding company, and we had a $500 million maturity staring us in the face for the next six months. Our liquidity position at the holding company as compared to then is $1 billion stronger, and we don't have any maturities until 2018, and that maturity is only $250 million. Our RBC is about 490%, and statutory capital is at $8.4 billion. This strength allows us to both absorb credit losses and downgrades. On downgrades, let me remind you, as the environment improves, upgrades will occur. Downgrades impact on RBC can be a temporary issue as opposed to when you actually have to take credit losses.
That's what happened to all the life insurance companies following 2008 and 2009. By 2013, there had been a lot more upgrades offsetting the impact of the downgrades that occurred during the crisis. Looking just lastly on the DOL, I get asked this question all the time, and I'm happy to answer it because I think the market perception of the DOL impact on Lincoln is a little exaggerated. Let me give some numbers that I gave in the analyst call. Only 30% of our annuity products are affected by the current DOL. Of the 30%, already some distribution organizations are comfortable with selling commissioned VA products with the regulations as they stand, so long as that VA has guaranteed lifetime income.
Also, several of our distribution partners have asked us to emphasize our fee-based product, some people are asking us to put that into their distribution system. These two could potentially lower that 30% by a third or even a half, so that you might get down to the amount of actual VA sales affected by the DOL as it currently stands 15%-20% of our business. Finally, as we've said, any temporary sales slowdown will free up capital to buy our shares, blunting the earnings per share impact of a temporary decline in sales. Lastly on this DOL, again, I mentioned strength of distribution, product diversity, the ability and capability to pivot and make adjustments if we have to. I'm pretty confident that the DOL is not going to materially impact us over the long term.
It might disrupt us in the short term, but again, we can fix that with share buybacks. Seth, strong franchise, strong balance sheet, I think form the basis for us to move forward with agility as we focus on growing earnings, and I'll be happy to take your questions.
Great. Thank you for that intro, and I would echo the commentary that DOL is where we probably get the most questions as well. I appreciate the context that only 30% of sales are impacted by DOL. Still not an insignificant chunk of new sales, obviously, and in the short term, you could blunt the impact. Could we talk a little bit about the long term in terms of being able to restructure the product, if that means a wrap fee account type arrangement or some other type of adjustment to the product that would be DOL compliant, and how those conversations with distributors are going?
Yeah. I mentioned that in the opening remarks, but I'm happy to repeat it because I think it's an important question and an important answer. 30% are affected with the current rules. My view, and I know I sort of stand alone on this, is I think there'll be marginal improvement from where the rule stands today that will be helpful to the annuity business. Most people ask the question, well, if that's not the case, what are you going to do? Again, I'll reemphasize 100,000 advisors, broad product diversification, demonstrated ability to pivot over the long term, whatever comes forward out of the DOL and its impact on distribution partners, we'll be able to deal with. With respect to specific products, we have a fee-based variable annuity with guaranteed living benefits that's priced exactly to the same risk reward, and returns as our commission-based VA.
We're being asked about that, so that can help us. Again, I mentioned that quite a few of our distribution partners are okay for us to sell commission-based products, if the current rule doesn't change at all. As I said, that could be as much as a third or a half of that 30%. There's other products that we sell that aren't affected by the DOL that have living benefits associated with them. That includes indexed annuities, our regular fixed annuities, deferred annuities. Again, I think this is manageable over the long term because of the scale and the product breadth that we have. You and I talked a moment before we came in here. Let's remember, in terms of the product itself, VAs with guaranteed living benefits, the industry has sold $700 billion worth of this product over the last five years.
Seven out of 10 Americans choose the VA guaranteed living benefit for their guaranteed lifetime income. It's a big market. There may be adjustments to the way compensation occurs, Americans need that product and have been buying it in large quantities. It's not going away.
You mentioned the build-out of indexed annuities. I think growth there has been pretty strong at Lincoln. What do you think about that product as potential to replace VAs if the rules are onerous?
There's so much flexibility in the VA chassis. One of the things that if you just take an immediate deferred annuity, as soon as the customer buys it, if they unfortunately pass away the next day, all the corpus goes back to the manufacturer. There's much more flexibility in a VA for the policyholder and his beneficiaries to access the account value over a longer period of time. There's much more upside potential in the VA versus a fixed annuity as equity markets continue to grow. That's why 7 out of 10 people are buying VAs for guaranteed lifetime income. indexed annuities are a good product. We've been in that business. Actually, I introduced the business at old JP back in the mid 1990s. It's a good product. We would focus on certain channels to expand that product. For example, in the bank channel.
In particular, I mentioned the bank channel because banks in general, financial institutions in general, are careful about the design of the products and the amount of the front-end commission. Some of the other distribution channels, independent annuity marketing organizations, they sort of tend toward high surrender charge, high commission products. We're not going to go in that direction. We've got good depth and coverage of the wires and the bank channels. I think that would be the big opportunity for us in indexed annuities to move that product more so in those channels. We sold, I think, $1.2 billion of it last year, and it was up 38%. We saw a big jump in the sales of that product, and again, in those specific channels.
You mentioned shifting over to credit, you mentioned the balance sheet being stronger than it's ever been at Lincoln. I believe RBC upwards of 490%. I think it's $600 million of the holdco, if I remember correctly. What kind of stress in the credit market could that withstand? How should we think about the balance sheet as it relates to stress in the credit market, as it seems that potentially the stock market getting ahead of where credit markets are today?
That's a tough question-
Yeah
to answer. We do our stress testing in the energy portfolio, we do our stress testing at pretty low prices for oil, certainly below the $40, or today, I guess it's around $30. That produces some stress. There's going to be industry-wide, both insurance and banking, if oil stays at $30 for a while, that's going to have some impact. Our best estimate today is if that were to continue, that it would be manageable. We'd have to make some adjustments, but it would be manageable.
As you think about putting new money to work, we're seeing some spread widening, which may not be a bad thing for the insurance world in terms of putting new money to work. Can you talk about some of the different strategies and philosophies at Lincoln now in terms of portfolio balance, if it's in alternatives or what asset classes you're looking to put new money to work?
Yes, that's an ongoing target. Let me come back to my comment about only selling retail products. If you only sell retail products, you don't have to take excessive credit risk because candidly, you're taking risk across a broad variety of activities in your business. You have distribution, even though we sell through independent distribution, we have a pretty large wholesaler force, there's risk in that in the sense that if sales decline, you've got to watch your fixed cost structure. We sell annuities with guaranteed living benefits, we have a $42 billion hedge position, that's another risk. When I look at all the different risks that are taken in the retail channels, sale of retail products, when I get to credit, I don't want to have to take excessive credit risk, because I don't need it to make the overall program work.
Again, in the context of we're taking risk at a lot of different points along the distribution of the product, the manufacturing of the product. We look at all of that. We have outside advisors. I think it's best to use outside advisors for the selection of individual assets. I have a strong team of people internally that focus on asset liability management, credit risk, credit concentration, and things like that. As I mentioned, just to come back as a proof point, 95% of our overall portfolio is in investment grade. That's a pretty comfortable number for us. During a credit cycle, that might go down a little bit, but that's because of downgrades, not because of investing in credits, below investment-grade credits.
The other areas that we look at, where our proportion of investments relative to the industry competitor is a little bit lower is, of course, alternatives. Most of our alternative portfolio, which totals $1.2 billion, is in private equity as opposed to hedge funds. We go forward, we're going to increase that. It's about 1.2% of our portfolio at $1.2 billion, in that same neighborhood. We're going to continue to increase private equity investments. A lot of people are backing off or getting out of hedge funds. I think we'll still have some exposure, but probably in terms of our total alternative portfolio, a little bit more, a higher percentage is straight up private equity investments, which we've done very well on. I think we've averaged about 10% pre-tax on our assets over the last 4 or 5 years, although last year was only around 7.5%.
Investment grade alternatives. We're increasing our allocation to mortgage loans. We're upping that quite a bit. That's been a very good asset class for us. I think it's still a good asset class in America, that's a good one. From time to time, we do other investments that help marginally improve our new money yield, taking advantage of value opportunities. A couple of examples of that, 15 months ago, we maybe did $500 million in mortgage-backed securities, investment-grade mortgage-backed securities, because for a moment in time, there was a spread opportunity there. For a moment in time, we were investing with an advisor in middle market loans because commercial banks had moved out of that sector for liquidity purposes. We just look for opportunities.
Again, I come back to the point, when you sell retail products. You do not have to take excessive investment risk in order to make good returns on that business because of the integration of distribution, credit management, product design, and things like that.
If we shift from investing capital to deploying capital, I think over the last three years, you've probably beaten almost everybody's expectations in terms of having strong, normal free cash flow plus leveraging down the balance sheet a little bit in terms of some of that balance sheet strength you referenced at the beginning.
How do we think about the priorities for capital deployment and balancing that with an appropriate risk buffer given uncertain financial markets?
Yeah. Let me talk about the development of cash flow dividend up from the regulated subsidiaries to the holding company. On our analyst call, our CFO, Randy, raised our guidance a little bit on that number. We were, last couple of years, saying 45%-50% of GAAP earnings could be moved up to the holding company for the purposes of dividend payments to shareholders, share buybacks, or possibly other uses. We've increased that from 45%-50% to 50%-55%. Rough justice, what that means is we're pushing $800 million of capital up to the holding company. $200 million plus a little bit for our current dividend. Gives us $600 million of free cash flow.
Right now, as we have in the last couple of year, the major priority is going to be to use that money for share repurchases because our stock is so far under book, it just makes the most sense. Lincoln has been built on M&A activity over the last decade. We've probably done 8 or 10 major acquisitions. The old JP, old Lincoln merger. I don't think in today's market, I'm too excited about M&A. If I look at buying bolt-on acquisitions for cash, we've seen the Japanese come in and buy companies, and good for them. I'm not being judgmental about this, but they're paying prices that indicate an 8% discount rate, while we're selling new business at 10%-15%, depending on the product line. I would not want to tie up any significant amount of capital in an 8% acquisition.
For the time being, cash acquisitions are not my first choice, just because of the disparity between return on cash acquisitions of what we can do in new business. With our share price having Let's put our share price performance in a perspective. For each of the last three years, we've outperformed the industry on total shareholder return. 2013, we outperformed the industry on total shareholder return for the trailing three years. 2014, we outperformed the industry on the trailing three years. 2015, we outperformed the industry on the trailing three years. We've outperformed the industry for the last three years. Right now, we're underperforming the industry. Using our shares for any kind of acquisition, even thinking of transformational mergers or anything, it's not the right time to do that.
We're going to continue to do what we're doing, rely on organic growth, relying on generating excess cash flow, and first priority is buying our shares back.
We've a couple of minutes left. We have a question over here.
Thanks, Seth. Dennis, you talked about before how you wanted to grow your mortgage loan portfolio. Were there specific property types, geographic areas, et cetera, where you think there's more opportunity than others?
We're across the U.S., sort of the flip of our distribution, where we use independent distribution to sell our products. On the mortgage side, we use a national network of brokers to develop opportunities for us. It's the one product or the type 1 investment where we have our own in-house people doing the individual selections. What we've done, just like when we want to increase our sales of some product, we increase the number of wholesalers that we have. What we've done is increased the number of mortgage underwriters that we have internally to help us be able to underwrite and do more business. Maybe we're going to increase the size of the maximum loan we can do. Mostly, same kind of loan, same kind of conservative underwriting standards, just more people at Lincoln, in the mortgage department to create more volume.
A question on the energy exposure. You mentioned that if oil prices stay around this $30 level, you'd have to make some adjustments. Not to parse words, but could you elaborate a bit on the adjustments you would need to make if oil were to stay at this price level?
I said it would be manageable for us. There's so many different things that you can do if you have to do it. It'd be premature for me to say which particular lever that we might use. Again, I think the major point is, we feel very comfortable given the cash position and RBC position and big picture from an overall portfolio perspective with 95% investment grade, that it's manageable for Lincoln in this next credit cycle.
Great. I think we're going to have to leave it there. Dennis, thanks so much.
Seth, thank you very much. We appreciate it.