Good afternoon, everyone. I'm Jay Gelb from Barclays. I lead up the U.S. Insurance Equity Research effort. It's our great pleasure to have with us Dennis Glass from Lincoln Financial. Dennis is President and CEO of the company. Lincoln benefits from a strong presence in U.S. life insurance. It's the third-largest U.S. life insurer. It also has a major presence in the annuities, retirement savings, and group insurance markets. Lincoln's been able to effectively navigate the sustained low interest rate environment, and you might hear something a little more about that in a couple of minutes from the Fed. With that, it's my pleasure to turn it over to Dennis.
Jay, thank you very much. I'm delighted to be here. I guess I'm competing with some minor announcement at 2 o'clock, if you're looking at your iPhones, I'll understand. Jay, thank you very much. Let me just quickly point you to our various forward-looking statements cautionary language on pages one and two of the presentation, then let me jump right into it. Again, thank you for being here. What I'm going to talk about today is what I think has been some pretty spectacular performance by Lincoln over the last four or five years. I'm going to talk about the drivers of that performance, talk about the franchise and its strengths. Then I want to get into, in a little bit more depth, the Variable Annuity business, which I think is, and as I say later on, is a little bit underappreciated.
I think it's underappreciated because maybe some of the stumbles that were made 10 years ago by some of our competitors. In the case of Lincoln, actually not only in the case of Lincoln, but in the case of the industry, I think it's one of the best risk-reward businesses that we have today. We're seeing 20% ROEs and expected cost of capital on that product line might be 14 or 15, or even 13 or 14. I'll spend a little more time on the VA business because I think it's an opportunity if the market better understands it to see some movement in our stock price. Let's then go directly to our record of strong and consistent performance. This is the perfect graph. From 2009 to 2014, we've compounded our earnings growth by 14%. Our ROEs improved by 470 basis points.
While we've had the largest share repurchase program relative to our capital base in the industry over that timeframe, we've also managed to increase our statutory capital by $2 billion. Now we carry, and this is sort of a frustration on my part, we carry one of the highest betas in the industry, yet this consistent performance, and if you look at the lower right-hand side of the slide, you'll see that our earnings volatility is amongst the least volatile in the industry. Great performance, great ROE development, consistent performance, and we're quite proud of those results. What are the drivers of those results? Just stepping back a little bit. We sell only retail products. We have great distribution, we have great risk management, and we have very effective capital management. Let me speak to that in a little bit more detail.
Distribution and product solutions. We have in our distribution organization, the people who sell our products year in and year out over the last 24 months, 87,000 different individual advisors who could pick any insurance company in the U.S. has picked Lincoln. We service that 87,000-strong distribution, third-party distribution organization with what we call wholesalers and other people that interface with them. We have just one of the strongest of the distribution networks in the U.S. What does that translate into? By the way, we also have a strong set of product solutions. It gives us the ability to pivot into products and sell products when we have to respond either to capital market conditions or changing consumer preferences.
Some good examples of that is if you look at on the upper left-hand side, the tilt of products without long-term guarantees. In 2009, this is in our life business. We used to sell predominantly Guaranteed Universal Life for a lot of reasons, not the least of which was the decline in interest rates. We pivoted away from just Guaranteed Universal Life. As you can see today, it's a smaller percentage of the total. I'm going to come back to that a little bit when I talk about the life business. The other couple of things that the strength of distribution is demonstrated by is this 9% CAGR in RPS Group Protection switch from employer-paid to employee-paid sales mix. Then in the annuity business, the ability to go from 87% or 88% guaranteed product to now only 70% of the product's guaranteed.
This is all about the strength of distribution and the ability to sell product into the marketplace and, when necessary, the ability to pivot toward whatever one of our objectives that we have, either again, by consumer preference or by virtue of capital market changes. Strong distribution, great product breadth. The next issue is risk management, and there's a couple of things I want to talk about with respect to risk management. One of the big risks in our business, of course, is managing our living benefit guarantees. One of the issues there is your derivative program matched up well enough with your business that you don't have hedge breakage? As you can see, since the first quarter of 2010, we've had very little hedge breakage, even though there's been fairly significant swings in the hedge target.
Roughly translated, the hedge target is the present value of future claim benefits. We've done an excellent job of that. The results show it. The rating agencies applaud us for having one of the best risk management programs with respect to Variable Annuities in the industry. The other thing that I would talk about in terms of risk management is overall, our credit risk is less than what a lot of our competitors have. We've got good credit risk. Then another dimension of risk management is duration of management, and we've been doing very well at that. That means that we're able to weather interest rate moves, the magnitude of which we've seen over the last couple of years, without significant impacts on the balance sheet.
If you look at our statutory balance sheet as an example, even with the drop in interest rates, we still have very strong excess reserves for our overall businesses, despite the drop in interest rates. On the GAAP balance sheet, we've been talking about the fact that we may be looking at a little bit of a DAC change related to interest rates being lower for longer than what we've anticipated. We've sized that possibility. We haven't made any decisions on that at 50 basis points. If we drop the interest rate assumption by 50 basis points, there would be $125 million impact. Spread compression has been an issue. We've been in a secularly declining interest environment for the last two decades. Over the last three or four years, as our liabilities hit their minimum guarantees, we've seen headwinds in earnings power of 2%-3%.
That's abating because our new money rate is getting closer to our portfolio rate. We think that over the next four years, that will disappear. Finally, what contributed to the big earnings that you've just seen is our capital management. As you can see in this slide, we've generated about $4.8 billion of capital management in the period that we're talking about, and that we've bought back $2.7 billion worth of our shares. As a percentage of capital, that's more share repurchases than what most of our competitors have done. Strong distribution, good product breadth, excellent risk management, and strong capital management, all of these things have contributed to the results that I showed you on the first page. Where do we think we can go from here based on these strengths, the business model?
We think 8%-10% long-term earnings per share growth is reasonable expectation for our business. It's been 14% for the last five years, but I think we all recognize that a lot of our earnings are driven by fees on assets under management, that's boosted that earnings a little bit. Just on a go-forward basis, assuming equity markets grow consistently at 6%-8%, interest rates remain where they are, and we get a 1% improvement in our group business, we think 8%-10% is a reasonable ongoing growth rate. I think that would be a very acceptable outcome for our shareholders when we achieve that. Now, let's go to the individual businesses, starting with the life insurance business. You'll find on these slides quite a bit of information.
I encourage you to go take the slides with you, I'm not going to spend all of my time going through each one of the slides, try to convey what the slides tell as a story. In our life insurance business, the big story is a significant reduction in concentration risk in the products that we're selling, and a fairly significant move from the amount of guaranteed products that we're selling to non-guaranteed products. If you look in 2009, 66% of our business had long-term guarantees. Today, only 27% of our business has long-term guarantees. In terms of diversification of product, and therefore some diversification of risk, we've gone from no single product being more than 23% of sales.
This is a fairly massive change in the kind of business that we're selling into the marketplace from a diversification standpoint, and I think good for us over the long term. Mortality, most of you who follow us closely, you're aware that we had, in the first quarter and the second quarter, higher mortality than expected. If you look to the lower left-hand side of this slide, you can see that over the period of 2010 to 2014, our expectations about mortality and what we experienced was spot on. In 2015, I would just say throw out the second quarter because that was very unusual, 1 in 100 sort of expectation. The first quarter was elevated, both on the basis of severity and frequency from what we have expected. Again, I go back to over the last four to five years, it's been pretty consistent.
We are one of the major suppliers of life insurance in the United States, the third largest life insurer in the United States. We measure expected mortality against a large base of customers. I don't see anything from a long-term perspective in the U.S. market that would significantly change our expectations about our long-term mortality assumptions tracking with our pricing expectations. Now, again, you can have one, two, three, four, five quarters where just because of the volatility of mortality that you can see a drift away from expectations. Over the long term, I'm just not aware of anything that would make me believe that there's a higher expectation for us long term from a mortality perspective. Better diversified portfolio, good sales growth. I got to come back to new business returns remain strong.
12%-15% with today's yield curve is our expectation for the new business that we're selling. Put that in perspective with some of the deals that have been done in the marketplace on an M&A basis in the last three to six months, where discount rates are as low as 6% in arriving at the values of those businesses, maybe 7% or 8%. The fact that we can put new business out at four to 500 basis points above what people are transacting M&A at, I think is a powerful statement about the businesses that we're in. That's the life business. Let me go to the group protection business and move up along. We stubbed our toe on this business. We let our pricing in the marketplace get too aggressive.
As we implemented some changes in our claims management activities, our claims management capability was less than it typically is. We've been in this business for a decade. We've had a couple of years where management, under management, if you will, produced some volatile and not-so-hot results. That's the bad news. The good news is that we've changed management out. We've got a better handle around pricing. We've got better handle around claims management. The good news is that everything to restore this business to our long-term targets of 5%-7% is in place. We have two things left to do. I think we've repriced 60%-70% of the business that was underpriced, and by the end of 2016, all that will be taken care of. The claims management process, including new claims management system, is in place.
I'm quite confident that over time, we'll get that 1%-2% improvement in our earnings per share that I showed on the slide that gets us up to 8%-10%. A property just sold. As a matter of fact, Barclays represented the seller. They did a terrific job for the seller. The property sold, I think, at roughly 20 times earnings. I mention that not to give Barclays a compliment, although they deserve it, but to mention that this is a very valuable business and recognized by a lot of people in our industry. We've been very good at it. We'll correct these problems, and it'll be a big contributor to earnings and I think to valuation as we go forward. Retirement Plan Services. We're well-positioned for future growth. I say this in the context, again, we sell only retail products.
We're only in the U.S., there's a benefit to that because we're not in the crosshairs of international regulation. We're not in the crosshairs of currency and exchange issues. We're not in the crosshairs of a lot of the problems that some of our competitors look at. In the U.S., it's important to mention that we don't cover all these markets in their entirety, but we look for the fastest growth segments in each market. In this particular business, it's small to mid-corporate business that is the fastest-growing business. Job formation in the U.S. has always been driven by the smaller companies, not the bigger companies. Then mid to large in the government business and the healthcare business, those are 5%-8% type growth businesses where the overall defined contribution or retirement business is probably 4%-5%.
You can see that we've steadily increased our growth. We've continued to invest in this business, both in systems and in distribution, it is showing good results. I will say this is one of the businesses where lower interest rates and spread compression has hurt a little bit. The annuity business, I'm going to get into this in more detail. You can see here that just 23% compound annual growth and earnings, 12% over the 2009-2014 period, 12% first quarter of this year versus first quarter of last year. It's a good business. I'll repeat what I said. I think this is the best business in the insurance industry today based on returns and expected cost of capital. Let me now talk for the last 10 minutes about why I think the annuity business the way we do it is so good.
I think I have to predicate that a little bit by making the observation that part of the reason that the annuity business is not fully appreciated is because a lot of companies made mistakes back in the early days of this business and ended up with bad outcomes and had to either get out of the business or take big charges. You really have to go back 10 years and ask the question: did you start the business with a reasonable value proposition, and did you take the necessary steps back then that would help you over a decade of time not experience bad problems? The two keys to that are the value proposition that we have. We think the two keys to that, the differentiating factors are, we've always said account value matters, and guarantees are a secondary but important part of the value proposition.
Why does that help? That helps because we have never got into feature wars around excessive roll-up features or excessive payout ratios, because it has been a balanced focus on both account value appreciation as well as the secondary guarantee. The second thing you had to do from the get-go is to fully hedge the living benefit guarantee risk. We have done that. We did that from the beginning. Some of the companies that had trouble, particularly during the crisis, had trouble because they had not fully hedged the business, then had to go out and buy hedges when hedges were the most expensive at the most expensive time in the last decade to make those purchases.
Again, it is not just the way we are doing the business today, but it is the way we started doing the business with a good value proposition and a comprehensive risk management program 12 years ago that has contributed to our success. Finally, as I will say in a minute, we have been in this market consistently, and that consistency allows us to sell in good markets and bad markets, and that produces better results over time. Let us talk a little bit more about it. Of course, what drives any business is the demand for the product, and we continue to see good demand for guaranteed lifetime income. It is something that is purchased, of course, when you either shortly before retirement or you are in retirement. People want to have some guaranteed lifetime income without concern to what is going on in the capital markets or what is going on in the economy.
Defined benefit plans, like in the government section, defined benefit plans by and large have faded away. This product produced by this industry is the only solution for that. The second issue that has actually come back into vogue a little bit is, and we have moved into products that do not have guaranteed lifetime income, is because tax rates have got higher, and you get a lot of tax efficiency by the deferral of gains and income inside the Variable Annuity wrapper and in the Fixed Annuity wrapper. Demographic tailwinds create demand for annuities, and you will see that in a couple more slides. Come back to having such a strong distribution organization that permits us to make these pivots. Back to the pivot of 91% of our business being guaranteed to only 72%. That happened because of the strength of our distribution organization.
Again, 87,000 individual advisors across all of our product lines buy a Lincoln product in a 24-month period. That is a huge distribution organization serviced by our client-facing employees. You can see 2000, when we made this pivot, 2000, we are selling the non-living benefit. We shifted 3,700 of the 87,000 to that product, then we added 3,300 producers. Powerful distribution enabling us to pivot when necessary to achieve our objectives. On the right-hand side of the slide, I would point out a couple of things. That is, when you look at our account value of $125 billion, I think everybody in their mind thinks $125 billion of guaranteed living benefits as opposed to what is really inside the $125 billion. 42% of the $125 billion has no guaranteed living benefits associated with it. It is either Fixed Annuities or VAs without guaranteed living benefits.
Even in the guaranteed side, there's a couple of different flavors of the guarantee. Something called risk management funds, which we've introduced and the industry has introduced over the last three to four years, which shifts some of the market volatility risk into the account holders. It makes it a little easier and cheaper to hedge that living benefit guarantee. Strong distribution, constantly in the marketplace, and the mix of our business is probably a little bit different than most people think. Consistent market presence. I can't emphasize this enough. Back to my 10 years of very simple value proposition, you can see that on the upper left-hand side, the range of our sales year in and year out is narrower than a lot of the competition.
That's because a simple value proposition consistently in the marketplace, never getting into the feature wars, we never have had big swings in our sales. Consistency, predictability is what this conveys. You can see some of our competitors have had years where they've had huge sales volume. That's typically driven by taking your eye off of return on investment and putting your eye on sales volume, and that's typically driven by increasing the benefit to a level that everybody goes in and buys it. We don't think that long term is a good idea. Again, you can see consistency and market presence in a fairly narrow range. It's very interesting, I think as well, to see that this business has had positive net flows in every quarter, and this even precedes 2009.
We've never not had, in the last decade, a positive net flow quarter to my recollection. For sure, from 2009 to 2014, we haven't. That's a powerful statement about the value proposition, it's a powerful statement about our distribution, and it's a powerful statement about just generally the way we conduct the business. Consistent market presence, coming back to the risk of this portfolio or this business compared to the competition, we've got two statistics here, and that is guaranteed living benefit, net amount at risk. Roughly speaking, today, if everybody walked away, about four-tenths of our total portfolio would have to be paid in terms for the guaranteed living benefit. Compared to the competition, other than Ameriprise, it's the lowest net amount at risk in the industry.
Again, I think it's extremely important that you think about Lincoln and the way we run the business, and you really have to, as I started off, go back to not the way we've run it for the last two years, but the way we started it. Because it's 10 years of cumulative experience with a risk orientation, a good value proposition that makes the difference. Similarly, on the guaranteed minimum death benefit, the same concept, net amount at risk among the lowest in the industry. We've been more consistent with our sales, we have had lower features or less aggressive features in the product, and that's why our business has been so good. Now I'm going to switch for a couple of minutes to compare the VA business to the asset management business and make a couple of points here.
Point number one is that a large majority of our earnings in the VA business comes from the same source of earnings that asset managers have, and that is simply fees on assets under management. That's what drives the asset management business. That's what drives the majority of the revenues inside the VA business. As you can see from 2007 to 2014, our growth rates have outpaced the mutual fund industry by some significant amount. Then if you drop down to the lower part of the slide, you can see the range of annual organic growth as measured by net deposits. As I mentioned earlier, we're at the top of that. We've never had a negative outflow. The rest of the asset management industry over this time frame has had significant net outflows.
Then you look at the multiples, better revenue growth, not very much risk demonstrated over the last decade, growing faster than asset management, we have a multiple that's quite significantly less than what the asset managers had. Now, I understand that we have capital behind the business, that's a consideration, but I don't believe that explains the magnitude of this multiple differential. Back to the fact that annuities are compelling to consumers. I'll repeat, they're the only financial instrument that can guarantee lifetime income. Annuity owners are pretty happy with the business. The boomers, again, continue to buy it. How, again, metrics that support this, the fees for the guaranteed living benefit have gone up. The fees for equity mutual funds have gone down over this time frame. The turnover rate, mutual fund redemption rate, is in the mid-20s.
For us, it's only 10%, which is our expectation. Again, as compared to the asset management business, certainly these metrics demonstrate it has, according to these metrics, a little better result. What kind of ROEs have we gotten? Again, it's 19%, we say roughly 20% through the cycle. This is why I say it's one of the best product lines in the industry because it has a wider gap between ROE and cost of equity than any other insurance product that I'm aware of in the business. Again, some of the other as I said, in the M&A markets, they're selling product at 8%. Sometimes you get the argument that because the hedge breakage is below the line, that operating income doesn't tell the whole story.
We've put this together, you can see over the time period that we're talking about, there's just a little bit of 95% of the income that we've earned. Total income comes from above the line and 5% from below the line. There's not that much difference between operating income and net income. Let me talk briefly to the Department of Labor issue, which I'm sure is on everybody's mind, not just for Lincoln or the insurance business, but for the mutual fund business and wealth management in general. The big issue for Lincoln is that we sell 40% of our living benefit business into IRAs on a commission basis. The DOL's proposal, as it stands today, would make it difficult, if not impossible, to sell that business on a commission basis into IRAs.
We've been working with our other annuity manufacturers in the industry to try to get that rule changed. You hear a lot of discussion about whether the DOL is going to do anything different than what's in the last proposal. Some of it is based by people in the bleachers versus people that are on the ground having conversations with the DOL. We're one of the companies that's on the ground having conversations with the DOL. We've spent at least six hours with them discussing the issue of annuities and how they're different from mutual funds. They're going to do what they want to do, but I think our sense from these meetings is, and we've seen some indications from both Secretary Perez and Jeff Zients, that they're willing to make some changes. What have we been emphasizing in these meetings?
Again, it's the only product, the VAs are the only product with guaranteed lifetime income, and in the DOL proposal, Fixed Annuities don't have some of the challenges that Variable Annuities do, but they're the same product. We think, as a matter of fact, the guaranteed income benefit is picked three out of four times. The VA business provides the guaranteed lifetime income three out of four times, so consumers like the VA business better. There's a difference between annuities and mutual funds. Fixed and Variable Annuities should have the same treatment. Finally, the advice cycle is different. This is an important point because the DOL wants everybody to pay a fee for advice over time.
If you took the 1% fee that a lot of investment advisors get on AUM, and you present valued it back and compared it to the commission that's paid on the VA business, it would be 70% higher. It's less expensive. More importantly, the advice cycle is that on insurance products, all of the explanation, all of the work done by the advisor is done upfront, and they ought to get paid for that upfront use of their time. Whereas in the mutual fund business, financial advisors continue to pay attention to portfolios and give their customers advice over a long period of time. Insurance products ought to have upfront payments because it tracks with the effort, and mutual funds ought to be paid out through fees over time because it tracks with the advice cycle.
The DOL is going to do what they're going to do, but we sensed in our conversation that they have a better understanding of why insurance products ought to be treated together and differently than mutual funds. Again, I'm not going to predict what they come out with, but I would say I'm cautiously optimistic that we'll find a path to permit the payment of commission on VAs going into IRAs. Again, let me caution, it's entirely up to them. We have no recourse if they make a different decision. What does this all mean? All this slide says is our performance is better than asset management companies for all the reasons that I've already discussed.
If you give us a reasonable multiple on our earnings, reasonable or a multiple similar to what asset management gets, you would release or add $8 billion in value to Lincoln. Now, I wouldn't expect that full value to be forthcoming because we have to put capital behind these business, but it's just sort of an order of magnitude issue. Let me recap. Great earnings growth in ROE over the last four or five years. Active capital management while improving key capital metrics. Below average volatility in income. Our franchise is built off of industry-leading distribution and product solutions, good risk management, capital management, and an underappreciated annuity business. I'm quite optimistic about Lincoln's future. With that, I'll say thank you, Jay, and turn it back to you.
Thank you, Dennis. Deservedly so. We should be optimistic. By the way, the Fed didn't change rates. In case Dennis is probably the only person that-
Didn't know that
He has not been made aware of that yet while he's speaking. Let's go to the audience response system. I think everyone in the audience knows the drill at this point. You've got a remote in front of you. We can start the clock. If you currently don't own shares of Lincoln or are underweight, what would cause you to change your mind? As people are keying in here, got some instant feedback, and the results coming up. Half saying higher interest rates and 30%, the next highest level, saying clarity of Department of Labor proposed rule changes on retirement accounts. Think that makes sense, Dennis?
The insurance industry takes a premium today, it invests it, and pays a claim 30 years from now. Obviously higher interest rates is good for the industry. When you translate that into what in fact is the impact on Lincoln, it's fairly modest and getting more modest as we move forward. It would help. Set aside the practical reality of interest rates' impact on Lincoln from the impression, I would say it would help. I don't know that. Is it Department of Labor? Is that the next one?
Yes, 30%.
Yes. Based on what everybody has been talking to me about all day long, I would say yes, that would be very helpful.
Okay, next question, please. Is now a good time for Lincoln to increase its Variable Annuity sales? I should have took three off there. You have to have an opinion. Okay, and the survey results. Slightly more than half saying no, and one-third saying yes. It appears there's still a bit of concern around that.
Yeah, I'd be delighted to talk to the 55% a little more in-depth, because I think from a regulatory standpoint, and for all the reasons I've talked about, it really is one of the best businesses in the industry today.
Okay. Next question, please. My confidence that Lincoln's return on equity, which was 11.5% in the first half of 2015, will be at least 12% in 2015 and 2016 is Couple seconds left here. The results for this is high, 40%. 30% saying low. I don't think there's a real strong view on that one. Dennis, what do you think?
I think this puts me in the position of trying to forecast earnings. I don't do that, so I'm going to not answer.
All right. Last question for the ARS, please. Which should Lincoln pursue more of? We can start the clock. Organic growth acquisitions, de-levering, share buybacks, or dividend increases. If we have the results for that. Should we try that one one more time? I suppose we'll never know the answer. Okay. Well, with just a minute left on that, Dennis, if you can Oh, here it is again. Okay.
Yeah.
Everyone gets a second chance. Which should Lincoln pursue more of? We can start the clock, please. We used to run the Jeopardy! theme during this. I think that would be helpful. Okay. One-third, the highest %, saying share buybacks. A quarter saying de-levering. That's a little surprising. 21% saying organic growth and 16% saying acquisitions. Any thoughts around that, Dennis?
Well, I'll speak to acquisitions. We're on the sidelines when people are using 6%-7% discounts, and we can put new product out at 12%-17%. That doesn't make any sense at all. Share buybacks continue to be a very important part of our strategy, continue to employ that as we go forward. We don't need to de-lever. We're below our debt-to-equity targets already. I think long-term, value is always best built by good, strong organic growth with good return on capital. I would put that at the highest levels.
Thank you. Please join me in thanking Dennis Glass for Lincoln.