Again, good morning, on behalf of all of us from Lincoln Financial, we want to welcome you to the 2014 conference for analysts, investors, and bankers. Let me start by thanking you for your participation today. We know it's always a tough thing to stay out of the office for a half a day or more, but we appreciate your attendance and your engagement. Thank you for coming. I also want to acknowledge that this is webcast. I want to thank those who are participating online. We have a full schedule this morning covering a variety of topics. We'll look to wrap up as close to noon as possible, but obviously leaving time for your questions. Slides for today's presentation can be found on our website at lincolnfinancial.com.
Briefly, the agenda at the front of the books, Dennis Glass, President and CEO, will kick off, followed by business presentations. Randy Freitag, CFO, will conclude the presentations before our final Q&A. We do have two question and answer sessions scheduled. As always, would ask that in order for everybody to participate, that you limit yourself to one question, one follow-up. We can get back to you if time permits. After the second Q&A session, we would like to invite you to join us for lunch on the other side of the floor. I want to acknowledge that in addition to the presenters today, we have other members of senior management and our corporate leadership group. We hope that you'll have a chance to meet them during the break and during lunch.
Before we start, I'd like to turn your attention to the cautionary language statements on the screen. I won't read them, but I want to point out that this morning we will be making forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from current expectations and are described in the cautionary statement disclosures in the appendix and in our Forms 10-K, 10-Q, and the Form 8-K filed this morning with the SEC. Today's presentations contain non-GAAP measures. Where appropriate, we have included reconciliations to the most comparable GAAP measures, as well as an explanatory note on how we use these measures and the reasons we believe they are useful. At this time, I would like to start the conference by introducing Dennis Glass. We'll take it from there.
Good morning. Great to be here. We really appreciate, build on what Jim said, the fact that you've taken so much time today to spend with us. Hopefully, we'll be presenting a good amount of information that will help with your understanding of Lincoln. I can't start, we have this great opportunity, a lot of friends in the audience, to once again thank Jim Sheeren for all the work he's done for Lincoln over the years. I'm reminded of it because I just got an invitation to his retirement party. Jim, thank you so much for everything you do. Also, it's an opportunity for me to welcome Chris. Chris, where are you? Chris Giovanni, we're delighted to have you in Jim's role and look forward to working with you for a long time to come.
As I look back over the last couple of years, we've continued to build the strength of our franchise and have effectively powered through some steep challenges, such as the financial crisis, and rebuilt the balance sheet after that occurred. Another steep challenge, which was the drop in interest rates and the repricing of our product portfolio that we executed well. As I stand here today, I think Lincoln is in the strongest position to move forward that I can remember. Given this, we have designed the agenda today to reinforce some key points that are frequently asked of us, but also to spend more time on where do we go from here? What are the opportunities and the levers we have to continue the success of the last several years? One of our team members likes to use the word awesome when describing success and excitement.
Well, my view is awesome describes the performance we've had over the recent past. What do I mean by that? Our diversified mix of business has enabled us to drive consistent results. We have seen steady improvement in our financial results that have mostly exceeded expectations. We have further fortified an already strong balance sheet and added to our liquidity profile while accelerating capital allocation to our shareholders. Collaboration across the organization has enabled our powerful distribution and our broad product suite to execute our pivot strategies while maintaining market-leading positions. Of course, what we're most excited about, because we work for the shareholders in this room and all of our shareholders, what we're most excited about is the stock performance has followed those good results.
Specifically, for the three years ending December 2013, we were one of the top two performing stocks in our peer group for that trailing three-year period. It appears, in December 2014, we'll repeat that performance again, being one of the top two performers in our space. For the following, excuse me, for the preceding three years. That's what it's all about, creating value for our shareholders. We're very obviously excited about that. You can tell, bottom line, I'm happy with what we've accomplished, but I'm equally excited about the potential opportunities to advance Lincoln even further. Along these lines, I meet with many of you, and I regularly get asked, what are the catalysts for Lincoln? Are they largely tied to higher interest rates? Well, admittedly, an improving macroeconomic environment and higher interest rates would help Lincoln and the rest of the industry.
We remain confident that we have internal levers and inherent product demand that will enable our positive momentum to continue. These factors should drive good, consistent earnings per share growth even if macro headwinds persist. Randy is going to get into detail about these levers later in the morning. As I just mentioned, I really don't recall a time when our relative strength and industry position has been this good. Let's start with a recap of our overall strategy. It starts with the fact that we manufacture only retail products, no wholesale products such as funding agreements or closed-down pension business. I believe this focus on retail products makes us more competitor-resistant and a more resilient franchise. We focus on the fastest-growing segments of the broader markets that we serve in.
In the U.S., we invest in distribution and product breadth to both serve changing market demand and, importantly, have access to distribution which serves multiple markets. We'll expand on that quite a bit. We maintain industry-leading risk management. As I've said, we're actively directing capital to best returns while accelerating returning more capital to our shareholders. The strategy has been consistent. If I can use an analogy of a duck swimming across the pond, the surface looks calm, as does our consistent overall strategy. To continue the analogy, Lincoln is doing a lot of paddling below the surface to react when necessary to changes and to stay ahead of the curve. You know what these have been. They include various pivots to faster-growing market segments, repricing our entire product portfolio, and increasing its diversification.
We're tilting away from long-dated guarantee products in life and in our variable annuities, and we're increasing our emphasis on mortality and morbidity margins. Steady strategy, strong execution in response to change has formed the foundation for our success. We have potential challenges, of course. The world remains cyclical and subject to shocks, and state, federal, and international regulation is evolving. When I look around the industry, I think we have a pretty clean story. I believe we can be more offensive in executing our plans as we are not in the crosshairs of dual regulation or distracted by precarious runoff for closed block businesses. Our 100% domestic footprint better protects us from global macro uncertainty and currency headwinds. It also affords us the opportunity to use our expertise to attack the favorable shifts in demographics and the fraying of traditional government and corporate safety nets.
Taking my optimism for upside even further, with leading distribution capabilities and a balanced and repriced product suite, we expect new business to enhance our already strong book of in-force business. We see profitability ultimately being restored in our group protection business, which should support our tilt toward more mortality and morbidity earnings. Capital generation remains a key piece of our story, and our move to products with less capital strain should give us even more capital management flexibility. As I think about the Lincoln story, I continue to see it as a company that can produce consistent results and provide upside potential. We hope those are the messages that resonate with you today when you hear from our leadership team. Let me give you a quick overview of what you're going to hear this morning. Will Fuller is going to kick things off.
He will touch on our powerful distribution franchise, where we, as we've said, are maintaining a consistent presence in key markets. That, combined with scale and diversified product portfolios, helps us to grow sales where we want to grow and on our terms. Mark Konen will speak to annuities, life, and group business. Our annuity business is really exemplary of the various initiatives we have in place across the organization. Again, those are maintaining a consistent presence in the marketplace, in the VA business, a tilt in the new business mix towards less guaranteed products, and prudently managing risk. All these actions have helped drive steady improvement in earnings and risk management in this business segment.
In our life business, we've also accelerated our risk reduction with less concentration in long-term guaranteed business, more product diversification in general, and again, a completely repriced product suite, which is producing returns of 12%-15%. In group, as we noted in our third quarter earnings call a few weeks back, we are still not where we need to be, but we continue to make significant progress, particularly in renewal pricing. Adding to that, further investments into claims management should help us restore profitability in this business. As we've said, our progress here may not be linear. Chuck Cornelio will highlight our Retirement Plan Services business. Here, growth in new markets and distribution expansion continues to provide a solid pipeline to RPS, combined with in-plan organic growth, is helping to offset spread compression.
Ellen Cooper will address our investment management business, where we have tempered credit risk since the crisis through more asset diversification, and we are benefiting from expansion into yield-enhancing debt and alternative strategies. Lastly, but not leastly, Randy will discuss our financials and provide some outlook commentary. His area of focus will be our consistent results and steady improvement in our financials. He will spend a little time on risk management and sensitivities in our annuity business and the impact of managing Lincoln in a low interest rate environment, two areas of key focus for most. Lastly, capital generation and deployment remain pillars to Lincoln, and we are pleased that we continue here to surprise again on the upside. With that, I'm going to have Will kick things off. Will, why don't you come up and continue the day? Thank you.
Thank you. Good morning. I'd also like to thank you for your time today. We've accomplished a great deal since our last Investor Day. We've had our successful life and annuity pivots. We've had the expansion in the RPS business to the government and the warehouse space, the shift to sales to products without long-term guarantees, consistent new business, consistent net flows, and a more attractive, diversified sales mix. These were all part of our strategy that we talked about at the last Investor Day, all the while, either maintaining or improving our market leadership positions in our businesses. I'm also very happy with how our distribution has performed, how our distribution has been aligned and focused on executing the company strategy, and I'm very excited about the opportunities that we have in front of us, and look forward to talking with you about that today.
We talk all the time, you hear us say all the time how important distribution is to Lincoln. This is, and has been, a conscious strategic decision of the management team because we believe that there is a value chain that needs to come together in a synchronized way to be effective in the retail business that Dennis mentioned. It's product manufacturing linked and synchronized with effective risk management, linked and synchronized with distribution, all singing off the same songbook, one integrated strategy, alignment of objectives, and focus on execution. That's how we do it at Lincoln. Together, we choose the markets that we believe are attractive to Lincoln. Together, we choose the product portfolio that we'll take to that market. Then together, we focus on maximizing our reach. This really is different.
This is a different model, it's something that we believe is key to our success. Dennis mentioned that we have 100% domestic footprint. That's right, it allows us to have a laser-like focus on retail products in the four businesses that we are in. No hobbies, no distractions. This is where our focus is. We choose the segments within each of these businesses that offer the most attractive subsets. It really is all about where we can consistently win on our terms, which means we can reach the ultimate consumer at the level of risk and the level of return that we want and that we expect.
Behind these segments, you do have this kind of dual tailwind of demographics pushing us, as well as consumer preferences that align very well with the type of solutions we sell, solutions around protection, solutions around retirement. As you think about boomers entering retirement, more end-of-life planning becomes paramount on one end, then millennials entering the workforce. These are not trends that are going to go away anytime soon. We reach these segments through a distribution model that we talk about as breadth and depth. The first part of breadth and depth is the distribution franchise we have to go into the markets. We have a retail franchise in LFN, a wholesale franchise in LFD, really focused on individual segments, and we have a work site franchise that reaches individuals through employers.
It's this combination of retail, wholesale, and work site where each franchise is a leader in their segment, each franchise at scale that has what's driving this consistency in results, the diversification of results, and successful pivots that you've seen from us and that we talk about all the time. Through these franchises, we go to market. I'd say the next part of the breadth and depth is how we go to market, really is about reaching as many producers and then consumers as we possibly can. Making our products as widely available where producers are and where consumers go to be served. That's this channel point. Here I've highlighted for you just a handful, not all, but a handful of our core channels. This is the breadth comment. We want to go across channels in the marketplace to expand our reach.
Each channel has their own unique business model. Each channel will have a tendency to focus on certain product segments. For example, benefit brokers will specialize in group products, where in financial institutions like banks, we're more oriented towards individual products like annuities and life. The second point, the depth point, is we want to go into those channels. We want to pick the right partners. We want to find and pick the leaders in those channels, generally ones whose growth prospects are better than the overall industry. Check on breadth, then you get a check on depth. When we target our sales focus channel by channel by these market leaders that have faster growth prospects in the industry, that's where the market leadership in terms of market share comes from, not from our management of market share. That's not how we do it at Lincoln.
This breadth and depth really gets us to what really matters. Which is that the success is driven by having producers, and a lot of producers that are actively selling your products. Our reach to producers is very broad and it's diverse because of those three franchises and because of those multiple channels. It's growing. It's growing over time. It's growing through crisis. It's growing through pivots. The catalyst for that growth is our strategy. Expanding shelf space, broadening out the product portfolio, enabling new channels and new partners, and then pivots. One reality of pivots is that it brings you new producers, and I'll talk a little bit more about that in a moment. Underneath this producer base is upside potential. We have upside potential simply in our core base of 68,000 through increasing their productivity.
Keep the producers we have, get them to sell more volume, get them to sell more product. You see here some of the productivity measures that we look at. I'm going to spend some time on cross-sell because I think it's particularly unique to Lincoln, and it's because our business model is particularly unique to our industry. We are unique in that we run distribution as a standalone business at Lincoln. Cross-selling is a natural pursuit. That would be very different if we ran our business in product-by-product silos disconnected from one another. We can bring together technology, producer analytics, training, and incentives and leverage the army of wholesalers that we have to make producer referrals to one another. Let me give you an example.
A variable annuity wholesaler can say, "If you use variable annuities to protect your clients' retirement income, you might be interested in protecting the other risk to their retirement security, which is unexpected long-term health care. We have a great solution in MoneyGuard. Would you like to meet my MoneyGuard partner, Jane?" We can facilitate that introduction through producer to producer. The results here are pretty extraordinary. One third of our RPS small market sales and a third of our MoneyGuard sales are generated through our cross-selling strategies. It's a unique pursuit for us. It's a natural pursuit for us, and it's delivering really meaningful results and helping to increase the productivity of our producer base and helping to help us reach new markets and our products.
At our last Investor Day, I told you a story about the Merrill Lynch retirement business as a way to help explain why one would want to partner with Lincoln, why a market-leading firm in a channel would want to partner with us, and why we might be different than just another provider. At Merrill Lynch, they didn't need another 401 provider. They did not need another product. By adding another product, it's typically just a take share deal. What I mean by that is a new product company comes in, focuses efforts on the people already selling that product and just take share, not growing the overall business for that firm. Merrill Lynch's goal was aligned with what we could deliver, which is they want to grow the overall business knowing they needed more Merrill Lynch producers selling 401 plans.
They chose us even though they did not need another product because we can leverage the army of wholesalers in their system to bring 401s to producers that weren't already going to do the business. It's a major reason why firms partner with us, why they like to be a strategic partner with Lincoln, and the type of benefits we provide them and in turn, the benefits that they provide us. We see more opportunity over time for these types of programs. Our access to this producer base, this broad, diverse producer base, is exactly what drove and what drives successful pivots. All pivots are driven by producers. You need a lot of people to buy in and change their practices to make a pivot work. Just look at these two examples. The life pivot was driven by 16,000 producers.
Some were already selling our pivot products. Some we had to convince to shift from selling GUL to our pivot products, 2,300. For those that wouldn't shift, we had to go out and get new producers. You see this combination come together. That's what delivers the results from pivots, and it's consistent in every pivot that we've done. Another one I highlight here is the variable annuity pivot to living benefits, which is really more opportunistic. The increase in marginal tax rates has more erosion of investment returns over time for consumers. Tax deferral is now more attractive than it once was. Let's go capture that opportunity. Driven by 9,000 producers, 2,000 were already selling, the rest were a shift or the rest were new.
The result to our business is we go from 9% of our sales without having to guarantee now 24% of our sales in the third quarter not having to guarantee. This is a system. There's a couple foundational points. You must have a consistent market presence through cycles. You must have a broad product portfolio so that you've got products to pivot to, and you must have the distribution to get you access to these producers before you can have the ability to influence them, to get them to change consistently. I would submit to you that pivots never end. Pivots should never end. They're about pivoting from challenges like low interest rates in life or pivoting opportunities like VA. It's a discipline every distribution organization should have, and we have it. We do it well.
I'm confident that if there's a challenge or if there's an opportunity, as a company, we're nimble and flexible enough that we will pivot better than anyone on it. Where are we focusing our sales efforts now and in the future, and what will be the catalyst for future growth? First, as I just mentioned, our core markets have upside potential simply through expanding organically the productivity of our 68,000 producer base. To drive this further, we have multi-year sales force expansions for wholesalers in life, annuity, MoneyGuard and our RPS business. We're also expanding our advisors and insurance producers affiliated with Lincoln Financial Network through recruiting and investments that we are making to make the overall LFN system more attractive to advisors. There's upside in our core.
Second, we have product enhancements, and we have new products that we get from time to time that allow us to create new opportunities. I've got a few of these listed here. Of note, the investment-only VA to help drive that non-guaranteed VA tax deferred consumer opportunity is an example. We're already showing meaningful sales results just being after this for a year, $2.1 billion in sales. The addition of our Investor Advantage product, which is our investment-only product without a guarantee, was launched in June, and we're seeing nice success in having that be accepted by producers. Flex Pay MoneyGuard allows us to really go down market in age, expands the population of people who will be able to buy MoneyGuard because they can buy it over time over a period of years versus having it be a single premium.
22% of our MoneyGuard sales are now in younger ages that we really were never able to reach before. Next year, we will have a mass affluent term offering, so lower face amount death benefit for term. This has been something that our core life producers have been asking us to do for some time. That'll help create some upside. Lastly, we build out new channels. We're constantly looking for new channels and new partners that would demonstrate incremental and promising growth. Good examples of that are the government space and new small market partners in RPS, the employee space for group, middle market channel partners like Primerica for annuities. The new term offering I just mentioned is actually a platform that will allow us to sell through the internet distributors and really reach that do-it-yourself consumer.
That is a new market for Lincoln and an additive market for Lincoln. To recap, we've got upside in our core. We have upside in our new. Now in terms of wrapping this all together, what I'd like you to walk away with is that we do it different at Lincoln. It's a coordinated strategy across that entire value chain that I talked about, and it's about executing Lincoln's plan. It's a laser-like focus on retail products, no distractions, no hobbies. Focusing in on those segments that are attractive. We're attractive to the consumer, and they're attractive to us. We get that. We can reach them, we can get the risk, and we can get the return that we want.
The powerful distribution network that gives us diversity and breadth and allows us to achieve the goals and make the types of pivots that we need to be successful. As a distribution company, we are as committed as you can be in delivering consistent results, driving the upside potential, doing it profitably and not seeking market share. It's always on our terms. With that, I'll conclude my remarks and invite Mark to talk about the life business.
Thanks, Will.
Thank you.
Good morning, everybody. Let's talk about the life insurance business first. Frankly, I'm pretty excited to stand up here and tell you about the life business. I know we're positioned to win, positioned to win now and for the long term. In fact, I'd say we're in the strongest position we've been in years. Let me tell you why. We've long been a consistent market leader in this business. Creating opportunities out of the challenges through our innovation and disciplined risk management, which has been core to that market leadership. That market leader position has resulted in where we're at today. Strong new business returns with upside and limited downside, product diversification and scale, and the potential for future growth faster than the rest of the industry. A pretty powerful place to be.
We've done what we've needed to do from a product perspective to restore compelling new business returns, putting us in the strong position we are today. The chart behind me shows some of that activity over the last few years. The hash marks you see, those are major pricing and product efforts as we responded to the headwinds that we saw mostly related to interest rates. We took expected new business returns from 10% or so in 2012 up to the 12%-15% range that we see today. Our scale and market leadership enabled us to do that. We were able to stay a relevant force in the marketplace as we made the shift.
Not only did we end up with 12%-15% expected returns, we have the added benefit of reducing our dependence from this portfolio on interest rates from a new business return perspective, although rising rates do remain a positive. Let me do a little bit deeper dive on this interest rate topic. Our recent actions, those hash marks back on the previous slide, were priced in a lower interest rate environment than today. They had an expectation that rates would rise over time. That's what yields our expectation of a 12%-15% return portfolio. Those are assumptions we're very comfortable with. Rather than me and you getting into a he said, she said, about our interest rate assumptions, I thought it might be more useful to show you some discrete examples of how this portfolio would perform over certain scenarios.
I've got four of them up here behind me. First, what if interest rates stayed where they're at forever? For the next 30 years, we use 2.3%, roughly where the 10-year is today. What if they stayed there? Our portfolio would return 11%. We went back and said, what if we look at historical lows? We went back as far-- we didn't pick 1871 because it made the numbers look good, but we picked 1871 because it's the farthest back we could go to find what 10-year Treasury rates were. We took that 140-year period, whatever that is, and said, okay, what's the worst 30-year period for the 10-year in that stream of history? That came out to about 2.7% 10-year. Note that if it did stay where it is today at 2.3, we'd set some new records.
From the last century and a half. If it did stay at 2.7, this portfolio would return 12%. We said, let's look at the forward curve. Let's look at kind of what the average forward curve has been so far in 2014. You do that, you get a 13% return. We said, what if, back to that 140 or so years, we looked at just what the average has been, 4.6%, average 10-year, 16% return. On that one, it's not like we assumed tomorrow we wake up and it's a 4.6. We took six or seven years to grade from today's 2.3-ish to that 4.6, and if we did that, we got returns north of 15. I think it's a powerful demonstration of how we've reduced our dependence on interest rates and kept some of the upside. Whoops, sorry. Went backwards.
Part of the reason we're less dependent on interest rates is because we've realigned this portfolio to take on more mortality risk. We've reduced reinsurance and our reliance on that, which allows us to keep more mortality profit. We're also shifting to products with more of their earnings potential driven by mortality, term, for example. You can see from the pies, current in-force, roughly 50% of our earning source is mortality driven. New business, it gets closer to two-thirds. Mortality is a risk we understand front to back, from that front end and how we assess the risk in our underwriting department, to the back end, where we analyze, monitor, and adjust as necessary when the results come in.
In fact, 22 out of our last 23 quarters, so five-plus years, we've had 22 of those 23 quarters come in with a 95% confidence interval versus our expectation. Been doing a lot of stuff. How does it translate to growth? Revenue and earnings driver growth has been steadily in the mid-single-digit range. Importantly, it's outpaced the industry. In 2013, for example, our in-force base amount, so the amount of insurance we have on the books, grew 4%. Industry grew 1%. Our sales were up 18% versus a slight decline for the industry as a whole, outpacing the industry. Let me recap what we've talked about so far. Strong new business returns, less dependent on the interest rate environment, and growing faster than the industry.
Now I want to dig a little bit into the portfolio of products we have and see how it stacks up against our competition and against marketplace needs. Our position of strength has enabled us to dramatically shift and diversify this portfolio. As these pies illustrate, we've gone from a company that used to be more concentrated in GUL. Through the pivot strategy, we've diversified our business mix and achieved a healthier balance with that beautiful chart or pie that you see on the right. Not only is it very diversified, you also see that no one product type dominates the mix. Oh, by the way, we've grown sales while doing that diversification. Again, I would say positioning ourselves to win today and for the long term. How does that stack up against the competition?
This slide shows our product sales for our top 10 life insurance players in the business by product type, so each color is a different product type. A picture tells a thousand words, or picture's worth a thousand words. As you can see, our product diversity and scale are superior to the rest of the industry. We simply have the best-looking bar, the most colorful bar up there. We have a more diverse product mix, and excluding a couple of mutuals who sell whole life, we are the market leader. We're top 10 in virtually every category with our interest index UL quickly climbing the ranks. Just one more proof point on how we're positioned to win now and for years to come. Finally, how does our portfolio stack up against what the marketplace wants and needs?
We believe consumer demand and financial security needs will continue to drive growth for this business. Every year, Lincoln does what we call our Mood of America survey, which measures optimism, outlook, and direction. We poll a few thousand people across the United States, random sample. Consumers most recently told us a few things about their financial concerns, and three of them fit squarely into the value proposition for life insurance. Protecting their wealth and assets, putting money away for retirement, and tax planning. We have compelling solutions that meet those needs and the distribution breadth to reach the consumers. In closing, power of Lincoln's life insurance franchise, strong as it's ever been, positions us to win with strong new business returns, industry-leading product diversification and scale, and the potential for continued growth as we grab and help those consumers with their needs.
Very clearly leading the market on our terms. Let me transition to Group. Group remains an important business for us at Lincoln. Gives us mortality and morbidity earnings source, as well as has strong growth potential. Today, I want to talk to you about three key areas of focus. One, we have and will continue to increase prices to drive profit improvement. Two, we continue to target the more attractive and higher growth segments within the market. Three, we continue to invest to support that growth. Let's spend a little time on the pricing. First, let's talk about the employer-paid business. New business prices are increasing middle single digits this year on top of what we did in 2013. We expect that as we move into 2015, new business pricing will be relatively constant with where it is today.
From a renewal perspective, if you recall, coming into the year, we talked about our plans to reprice $1.1 billion of in-force employer-paid business over the next few years. The chart on the right shows the timing of when that business is subject to the renewal pricing actions, so that by the end of 2014, the end of this year, we will have touched $500 million of that business with an average 7%-9% renewal rate increase. We have another $500 million coming in 2015, the bulk of which is at 1/1, and then the rest spread out through the year. There, we're targeting low double-digit increases. Let me help you with a little math. Let's do a little hypothetical on this. Let's look at that $500 million in 2015. What's going to happen? A few things happen, right?
Some of it takes the rate increase, some of it lapses, and also a lot of it's 1/1 business, but not all of it's 1/1 business. Since folks pay monthly, how you actually see that affected premium come into your financials comes in month by month by month. If it's a 1/1 case, you get a whole year's worth of your action in that particular calendar year. If it's a July 1 case, you get half of it. Right? Let's take that $500 million. Let's say 30% of it lapses. Now you're at $350 million, right? Let's say this timing thing I talked about.
If 60% of it is 1/1 business and the other 40 is spread out throughout the year, you do that math and you take that $350 million of affected premium, and what's going to come through in 2015 is somewhere in the $250 million-$300 million range. Let's apply the rate increase. Remember I said we were looking for low double digits on the increase? Well, just to make the math easy, because I'm not very good at math, being an actuary. Just to make the math easy, let's take the lowest double digits there is, 10%. Take that $250 million-$300 million to about $25 million plus of increased premium on those saved cases that will flow through in 2015.
In summary, we expect our continued revenue growth plus the margin expansion from these increases I just talked about will give us significant earnings lift, driving us towards our 5%-7% margin targets over time. That's the pricing story. Shifting now to the growth markets. While we're intensely focused on the bottom line, we remain committed to growing this business. The total group space expects relatively modest growth, our strategy targets the higher growth segments within that broader market. Examples, employee-paid. Catalysts are clearly there. Healthcare reform, an historic opportunity, moving fast, still evolving. Frankly, it's an under-penetrated space. It's really an opportunity to make share rather than just take share from the other guy. I'll tell you, early results are encouraging. We were named the 2013 Large Company Voluntary Sales Growth Leader by Eastbridge.
Those of you who don't know, think of Eastbridge as the LIMRA in the voluntary benefits space. We also target small to midsize markets, building on our existing strength in that 100-1,000 life space and more rapidly penetrating the adjacent 1,000-5,000 life space, where we already get about 25% or so of our sales. This is an attractive space for us because it also allows us to be able to, again, push employee-paid solutions into that size case more effectively. We continue investments to support that growth. Much of the investment to date has been focused on distribution, adding reps, growing from 145 a few years ago to 187 feet on the street today. Providing them with more support, more solutions, management closer to the action, specialists to help them with their roles. Throughout that expansion, we've maintained industry-leading productivity.
As you can see on the chart on the right, actually continued to grow our employee-paid sales, which again, is one of our strategic imperatives. Above and beyond all that, they've effectively supported our price increases, be it new business or renewals, demonstrating just the powerful, valuable franchise the group protection distribution system is. In addition to distribution, we've invested in infrastructure. We are investing in infrastructure across the business to support our strategies. Roughly $100 million spend over the next three years, which is comparable to what we will spend in 2014. Focused on things like growing our target share in our target markets, adding to our capabilities, absence management capabilities being a big one that will come online in early 2015.
Continuing to grow our employee-paid business, adding employee retail marketing capabilities, things like education tools, et cetera, to help consumers make the right choices, as well as plug-and-play functionality with various ben admin and exchanges down the road. Finally, improving the customer experience, the employer and the employee experience by leveraging technology. Give them what they want, when they want it, and how they want it, whether that's on the phone, on the web, face-to-face, whatever it is. In closing, the key takeaways are decisive price increases, investments in distribution and infrastructure, all in support of our target growth segments will support positive earnings leverage, incremental growth, and restore our margins to where we want them to be over time. That's the group protection story. With that, let me turn it over to Chuck Cornelio to tell you about retirement plan services.
Well, good morning. I get excited about this story, so sometimes I may have a tendency to talk a little quickly because I'm here to talk about an exciting growth story for Retirement Plan Services. We've been showing solid growth in the four years since I first talked to you about the business. It's really about our compelling and relevant value proposition. We're winning new business, we're retaining plans, we're gathering assets inside those plans because we're consistently executing our strategy and building on what's working. We focus on core market segments that are growing faster than the retirement industry as a whole. I'm going to talk about expanding into new markets, which have added our capabilities for growth, particularly the government market. You heard a little bit from Will about the small case 401 market.
Our participants and our plan sponsors are continuing to approve and use our differentiated value proposition, which is a high-touch service model. We gather more assets, we get higher contributions, which also leads to higher individual product sales. The assets in this business are up 37% since 2011 with significant positive flows. Let me take a look at these market segments. Last year, we talked about our effort here in growing in these fastest segments. The healthcare sector is expected to have a one-third share of all job creation in the U.S. between 2012 and 2022. We are viewed as a market leader in this space. We are number 3 in providing plans for retirement in the healthcare space. There are a couple of interesting dynamics in this market, by the way.
What we're seeing as a result of the Affordable Care Act and changes in reimbursements to providers is an extreme acceleration in the merger and activity stuff that's going on in the healthcare space. This is a great opportunity for us because we're so well known in the space, but also provides a little bit of risk, so we want to make sure we're staying on top of this trend. The other thing that's happening that helps retirement plan providers like us is that hospitals are adding doctors to their staffs. They're buying significant amounts of doctor practices. This is primarily because doctors are actually getting a little bit weary of the business of being a doctor as opposed to providing healthcare. They're joining their hospital partners as employees.
For us, that's an opportunity to gather higher average account balance participants and help healthcare managers with the kind of difficulty they face when they're managing doctors as opposed to nurses and other employees. In the corporate market, we're focusing on small to mid-size plans, sold mostly through the retail advisors that Will was talking about. There's one dynamic in this market I'll mention to you, and that's fee disclosure, which started a couple of years ago. Fee disclosure hit advisors before it hit plan providers. In the small market, there are a fair number of advisors that have sold one or two retirement plans. As a result of those disclosures, they're having to work a lot harder to show the value that they charge those fees for, and we can help them do that.
We've set high expectations for ourselves in the government market that we really just reentered in 2013. We did have a small government space presence prior to that, but we decided to regroup. In 2011 and 2012, in a very methodical way, we made a determination about whether we fit the government market, and we concluded that our differentiated high-touch model and the solutions fit very well there. What we needed was additional distribution. We went out and added some of that distribution starting in 2013. We're pleased as a result of these things that we're meeting and sometimes exceeding our own high expectations. Our experience reinforces that our model fits very well in this space. Government plan sponsors are reacting very positively to the high-touch model we can provide to government employees. Here are some of the numbers behind these segments.
Executing our market-specific strategy is working. We've seen significant growth in our core markets. In the small corporate market, our wholesaler expansion has been ongoing since the beginning of 2014. Within the next two years, we will have doubled our wholesaling force here and getting great talent. We're capitalizing on Lincoln's strong distribution platform to deal with and work with strategic partners. Will talked about Merrill Lynch earlier. That's an example of the broadening reach of this business into the wirehouse channel, where we were not drawing significant share before, and we've made great progress here. We're seeing these efforts yield results. First-year sales in the small market are up 34% year-over-year. The healthcare market continues to be a very strong pipeline for new business for us. 40% of our current pipeline of new business comes from the healthcare space. That's not it.
That's not all. Our expansion activities are really working here, too. Take the government market. We're seeing a great story here. In 2013, our first real year in the government space, this segment contributed 15% to our sales mix. Year-to-date, government is 32% of new sales. There's more growth here. We're just getting started with the momentum we have of sales consultants and advisors that work in the government space. With every passing quarter, we're seeing more and more interest, we're seeing more RFPs to respond to, we're seeing more activity in this space. This is complemented by our long-term and established relationship with consultants in the healthcare and corporate markets.
65%-70% of our deposits are recurring, and it's imperative that we deliver a superior experience for plan sponsors and participants, and that we gather business intelligence to understand what they need so that we can continuously improve our offering here. How do we do that? We do a huge amount of research, an extensive research shop, to understand the mindsets and behaviors of all of our customers, intermediaries, plan sponsors, and just as importantly, the end consumer, our participant or employee. Customer insights and data analytics inform our thinking, improve our offering, and help us reach customers more effectively. Data helps us make better business decisions. It's true that the cornerstone of our high-touch model is the participant-centric, one-on-one strategy that we use with retirement consultants. That service model is unique.
We also have to make sure that our high-touch experience radiates through all channels to gather the kind of assets we think we can and help people retire successfully. We need to create and continue to do better at creating a holistic experience focused on retirement readiness for the participants. How do we do that? On-site guidance, meaningful relevant education materials, resources available on the web and now mobile, targeted outreach by an internal retirement consultant phone team, and valuable tools that we provide for participants to track their progress and how they're doing towards their retirement goals. Our data shows this model is working. Participants who work with a retirement consultant at Lincoln have a 43% higher contribution rate to their plan than those that don't.
When they work with their RC, their average balance inside one of our retirement plans is almost twice as high as those who don't talk to a retirement consultant. It's actually working for Lincoln, too. We've seen significant flows to a proprietary Next Step IRA product for folks that are working on a total retirement solution. Those flows are up 40% year-over-year, and recurring deposits are growing at 6% annually. We know from research that participant engagement builds trust. It fosters loyalty to Lincoln, the plan provider. Our retirement consultant model is unique in this industry and adds value to our franchise. When participants are confident, plan sponsors are confident that they have the right kind of a plan and they're working with the right partner as a plan provider.
We have a comprehensive offering on the needs of plan sponsors that helps us retain business, and that's some of the numbers on this slide. Our plan sponsor service model is proactive, relationship-based, and solutions-oriented. Our products and services are competitive and relevant. I've talked with you before, I think the last couple of times, about our technology and the investments we're making there. We've made significant improvements in our record-keeping platform. We've continued to upgrade our web capabilities, and that's to allow plan sponsors to get what they want when they want it from us. Over the last year alone, we've continued to execute on our technology roadmap. The web offering gets stronger every quarter. We launched Lincoln's first mobile app aimed at participants and consumers. We've also added a secure retirement income product.
It's an in-plan guarantee that's differentiated from the marketplace, which is important to plan sponsors. I have to tell you, it doesn't have huge uptake at the participant level. This product is very different than some of the offerings in the market. We're not done yet here. We're going to continue recordkeeping conversions, which help improve our effectiveness and efficiency. We're going to build out additional auto features, from auto-enrollment that we do now to auto-escalation and additional flexibility for plan sponsors, ways for them to significantly enhance the features and performance of their plans. After all, if they have a good retirement plan from a good provider, they're more apt to retain and recruit good employees. We're continuing to work on the model in the small market.
Next year, we're going to revamp our small market service model to more finely hone the way we focus on our most productive distribution partners. Retention efforts are working, as you see on the slide. We survey our plan sponsors every year, and the data shows overall satisfaction with Lincoln in both the small market and the mid-market continues to increase, up to 87% this year. That has allowed us to have a longer relationship with plan sponsors, and as you see from the slide, those numbers are improving, and we continue to keep these plans longer. That means we're able to attract the right kind of plan participants, continue to grow contributions, and because we're keeping those plans longer, the costs of the acquisition of those plans are farther into the past, which helps us with our returns.
The key in continuing growth in this business is obviously ensuring that deposits outpace withdrawals, right? I mean, that's fairly straightforward. Our consistent strategy is working here. We're driving positive net flows, and we're driving growth. In this slide, you can see that we're growing faster than simple market appreciation. Let me spend a couple of minutes on this slide. The actions we've taken and will take going forward strengthen our plan sponsor experience, the actions I showed on the previous slide. This is important so we can have new plan sales and plan retention outpace plan terminations. We're seeing good results here. Since 2011, plan sales have been $1.7 billion greater than plan termination, leading to a 4% growth in our assets.
This shows the power of focusing on faster-growing market segments and the key of expanding markets as we've talked about in the government space and the small corporate market. I've talked today about our high touch differentiated service model, which is critical to our important mission that participants retire successfully, and that we successfully provide those opportunities to them. Our efforts here are crucial. That's 65%-70% of deposits that come from current participants, and we want those flows to come in clearly at a much faster rate than they go out. This key metric is working for us as well. Since 2011, participant contributions are $4 billion greater than withdrawals, yielding a 10% asset growth.
Now, when you see our financials, some of that growth is masked by the last small chart slide on the right of the bar chart there, which is what we call multi-fund, a closed block of business that comes off at about 10% a year. When you look at the market growth of 31%, plus organic growth in plan sponsor activity, growth in recurring deposits from participants, this business has grown 37% since 2011, with AUM at $53 billion, a record high for this business. We feel good about the progress, and we know we can do even more. Almost four years ago, I shared the focus strategy we've developed to revitalize this business. Our offering is compelling, it's relevant, and I will tell you, trying to copy that retirement consultant model is difficult for those that do not have retirement consultants.
I've talked about some of the actions we're taking, the financial investment we've made to put this business in the position it's in. We're consistently executing on this strategy. We're focusing on markets that grow faster than the retirement industry. We're targeting segments that have great characteristics for growth in the future, and that differentiated high touch model will lead us to continued growth in recurring deposits from our participants. I am optimistic about the long-term upside of this business. We've come a long way. We've got a great foundation, and even while we've been building that foundation, we've been adding to our assets at a record rate. As markets grow and more people recognize the need for retirement and to save for retirement and take the actions they can take with our assistance, there's a great upside.
We have a relentless commitment in this business to obtaining new plan sponsors, to retaining the plan sponsors that we have, and that participant growth, I believe, will translate into significant upside for the retirement plan services business here at Lincoln. Thank you very much. Jim?
I find ourselves in an unusual position in that we are actually running ahead of schedule. We're going to do a little bit of an agenda unlock, and we're going to take about 15 to 20 minutes for Q&A. I'm going to ask Will and Mark and Chuck to stay up here, and Dennis, if you care to join us, but we're going to take some Q&A, and then we'll just take the break a little bit early. Must be the French coffee. We've got mic runners back there. Okay, great. Tom. Could I ask when you get the mic, just your name and firm so that people on the web know who you are?
Sure. Thomas Gallagher, Credit Suisse. First question is for Mark. You had showed the slide how you're retaining 75% of mortality risk now compared to around 25% 10 years ago. Can you talk about what's driving that? Is that more of the corporate decision to want to move the needle on underwriting margins or underwriting related income, or is it pricing in the reinsurance market has gotten a lot worse? That's my first question.
Right. The answer is essentially yes and yes. If you go back a decade or so, reinsurers, for whatever their reasons were more aggressive in their pricing, and Lincoln and other companies availed themselves of those prices. Today, it's a harder reinsurance market, the prices are stronger on the reinsurance side, and therefore, we're more comfortable keeping more of that risk, as well as we want to grow mortality profits. You've got the answer. You're right.
Just a follow-up. I think last year you all had showed the slide of actual to expected mortality. I didn't see it in the presentation this year, but the last data point I'm seeing was 78%, and I asked that question on the conference call, and I think Randy's response was that number has moved into the 80s, 80% or mid-80s. Can you comment at all what's going on there?
Yes.
Are you seeing less profits coming from that?
No. It's a kind of a refinement of the definition, essentially, is what changed it. If you put it on an apples-and-apples basis, we are in those low to mid-80s. I can't remember the last quarter, but it's got an eight in front of it and usually less than 85 or around 85. That's been stable for the most part. If you remember my slide where I said 22 out of the last 23 quarters have been within a 95% confidence interval of where we would expect. If you think about that, if you have 23 quarters, about a 20th of them ought to be outside the range if it's a 95% confidence interval, and that's what we've seen.
Sorry, one last one. What was the redefinition? It would seem just from on the % that you're quoting now versus last year, it would look like it got meaningfully worse, but you're saying it really hasn't.
No, it hasn't. What that is, you have old blocks of business and then you have newer blocks of business, right? Rather than try to go back and figure out what was the pricing expectation on stuff that we sold 20 or 30 years ago, we base that on a standard table, and we would expect that to be less than 100. Then on newer business, we would expect that we would come in our pricing assumption. Over time you're going to see just naturally, as more and more new business comes into the calculation, it's going to come closer to 100 because that's your expectation. That's the only real uptick that you're seeing. The rest was just math around changing the denominator.
Thanks.
Questions? Suneet here.
Thanks. Suneet Kamath with UBS. On the group protection repricing, I think you said that 2015 price increase is low double digits, but the 2014 was 7 to 9. Does that mean in three years' time, you're going to have to go back and reprice that 2014 block?
A couple of things there, Suneet. When you go into price increases, you're looking at, okay, how do I balance the price increase with the persistency of the block? I don't want to run away the good stuff. I want to run away the bad stuff. All that math goes into it, right? All that calculus goes into it. As we were doing 2014, we were seeing persistency hold pretty good, and that's what allowed us to say, "Well, let's take a little bit bigger bite and try to get into that low double digits." Now, as to what will happen with that 2014 block that we repriced, it's usually not a three-year guarantee. It's usually a one or a two-year guarantee on renewal.
We'll look at it just as we're looking at everything else and see what is the relationship of whatever the price is to where now our expectation of where that price will be. Some will probably go up, some won't, but it won't be nearly the dramatic change of low double digits.
In terms of your margin target for that business, when would you expect to get to? I forget the statistic that you quoted, but there's a target operating margin. By when do you think you'll get there?
It's hard to predict exactly when, and as we've stated before, it's not going to be probably a linear ride, but I'd say over the next three years, something like that.
Okay.
Brian, Stephen, right behind you there.
Stephen Schwarzman, James. First for Mark. Could you talk about the market environment for MoneyGuard and products like MoneyGuard? I think the benefits have been extended for MoneyGuard. I might be wrong about that. I'm not 100% sure. Maybe what's going on around benefit terms and things like that from other competitors.
In the MoneyGuard space, which is our hybrid universal life long-term care product, we continue to see interest in the marketplace both from people selling it and people providing it. There are some new competitors out there, a few that are bringing products to market. We've been in it for a long time, we're frankly pretty good at it and we're ahead of the curve. As we see competitors come with product, it might have been our version last year product, not our version this year product. Again, this is where my partner here on the right is so important because having that distribution breadth and know-how, it takes a while to get uptake in what this is and how you sell it. We like where we're at.
Frankly, we don't mind other people coming into the market because I think it's a rising tide will raise all boats. We did change the product in 2014? 2013?
'14.
We did it mostly because of interest rates and the impact. Now there's more opportunity to have a flexible pay MoneyGuard rather than a single pay MoneyGuard. That helps us from an interest rate risk perspective, but also broadens the market about people who can and want the product and can afford the product.
Have your benefit period increased? Is the market benefit period increasing?
No.
Okay.
At least ours didn't. I don't hear that in the marketplace.
Okay. Will, could you maybe dive a little bit deeper into LFN. What percentage of sales in life and then annuity RPS and whatever else was included in there is from LFN? Then goals, if you have any, to grow the number of producers.
Lincoln Financial Network, the retail business, really is comprised of two main segments. There's an insurance producer segment, then there's a registered financial advisor segment. That's why you would've seen it show up in two different channels, insurance brokerage and advisor. It's meaningful to our business. 20%-21% of our life sales come out of aggregate LFN. It's the largest seller of RPS, and it's one of our top sellers of annuities. In aggregate, it's the leading contributor of sales, 13% of our total sales. It's meaningful. We have an opportunity to grow really both sides of those segments. In the financial advisor space, we're an independent broker-dealer. We're an open architecture system. We have a lot of success attracting advisors that have a financial planning and insurance orientation in their practice.
My sense is you'll see low single-digit type of growth in registered rep. Then we focus on insurance producers who are looking to have a more direct affiliation with a carrier, and we would see the same type of low double-digit type of producer growth. We're at 8,500 affiliated advisors today, and that has marked up pretty steadily, and we expect to continue the same type of growth trajectory.
The insurance people are in that 8,500 number?
That's right.
What percent are they, or how much?
The breakout would roughly be 3,400 registered financial advisors and then the remaining retail insurance producers.
Okay. Thank you.
Okay. Where is it? Where's Mike? Nigel? Okay, Nigel, and then Jimmy. Ryan, stay right there with Jimmy, if you would. Thank you.
Nigel D'Souza from Morgan Stanley. In the past, you've talked about your desires to acquisitions in group insurance. Interested whether that's still a focus, or it's a focus more on just fixing what you currently have?
Group acquisitions.
Group acquisitions.
There's kind of an echo here, but group acquisitions, right, was the question?
Yeah.
If we were to do an acquisition, it would be in order of priority, first, the group business. As I think I've said a couple of times, probably not the right time to overlay an acquisition on top of the transformation that's going on in the group business. I think broadly speaking about acquisitions, this team has done as many as any team in the U.S. industry, so we know how to price, and we know how to integrate. This could change overnight, but right now, I just don't see much M&A opportunity for us based on what we want to do and what's available in the marketplace. If that changes, once again, we're capable of doing it. We have the extra capital to do good size bolt-on acquisitions, and we would do it. Again, the first priority would be mortality and morbidity businesses.
The second question, just on sticking with group. Private exchanges, how is that likely to impact the business, your strategies there?
Private exchanges.
Group private exchanges. What we're seeing related to private exchanges right now is not a lot of uptake. That doesn't mean that won't happen, and most projections have it happening, and the projections of when it happening are shortening. Who knows, right, at the end of the day. Even at the end of the day, maybe a third of the business moves to private exchanges. That's meaningful, certainly. What we're trying to do is watch that carefully, not make a big bet on exchanges. We're in four or five exchanges. We're making some small bets, watching it, as well as a lot of the infrastructure work I talked about, that $100 million spend over time. The plug-and-play functionality is a big one.
Being able to plug in to those systems when and if they become a viable piece is something we're gearing up for, as well as to continue the employee-paid capabilities of educational tools and all that kind of stuff, which will also be important as you move, the private exchanges become more important. Does that make sense?
Thank you.
Okay. Jimmy? All right. Okay.
Hi, Jamminder Bhullar at J.P. Morgan. I had a couple of questions. First, on retirement, maybe if you could talk about where you stand from a technology infrastructure standpoint versus your peers. That had been an area you've lagged in the past, but you've made a lot of investments there. Also what you need to enhance there to be more competitive. Secondly, for Will, what's the competitive environment like for hiring wholesalers nowadays? Because in the past, it's been fairly competitive. What's your goal for growth in the overall wholesaler force?
On retirement, Jammi, we spent about three years with a significant level of investment to change out the record-keeping platform in the mid to large business. We were getting pretty clear feedback that we were having trouble holding onto plan sponsors and actually even being able to win finalists.
That's changed radically. We did a very large conversion. We're now told by plan sponsors and consultant firms that our record-keeping platform is right in there with them, with others. I would say there are a couple of standouts. We're not going to spend the kind of money on technology that a Fidelity would. However, in the mid to large space where we play, our technology is quite competitive. It also allowed us to really significantly improve our web experience, both for the plan sponsor and the participant, which has allowed web interactions and participants that drive some of that recurring deposit growth. I would also say that as we move forward, we continue to refine that web experience because the expectations of people about what they can do on a website has changed, of course, over time. That's an iterative process.
The next big leap for the industry, I think, is mobile technology and what that means for plan participants. We've come into the space in the last quarter with a mobile application. In 2015, we have plans to continue to refine that. We're going to start putting transaction capabilities on mobile devices. I think that's the next big play in technology. I would also add to your question, though, that we still have some other record-keeping platforms. We've seen a 12%-14% improvement in our operating unit costs in both our service function and our technology. We still have room to grow that more as we continue to get off those platforms. We're actually pretty interested in continuing that kind of strategy. We think that we compete very well now on the technology side.
In the small market, we did a series of improvements to the advisor experience this year that put us right into the pack, near the head of the pack on the experience the advisor gets. We're feeling pretty good about both what we've done in the marketplace, what it's done for efficiency, and given us more room for upside.
Your question around sales force expansion and then sourcing of salespeople. First, how we think about it is we size our sales force to the market opportunity, and we must operate within our product allowables. The returns of the products are protected in terms of getting new business. With that as a benchmark, our plans are to grow our wholesaling forces 4%-6% with an emphasis towards small market RPS. We're still in real expansion mode. Smaller increases in life, MoneyGuard, and annuity. In turn, it has become a more competitive recruiting environment. We're somewhat buffeted by that in that five years ago, we made a conscious decision to begin to develop our own next-generational wholesaling talent. Right now, really through our developmental efforts through our sales desk and then out into the field.
The majority of our wholesaling hires are actually coming out of Lincoln's wholesaler development program. We actually see faster growth rates and better productivity when they train in our system than when we hire them from an outside system. We're buffeted from that recruiting environment in that we've got a really good bench strength of Lincoln talent. We can also go higher. For a couple of reasons, we are able to hire some experienced and sophisticated talent. Number one, I've got the ability to go to market and recruit by saying distribution is a business unit. Reports direct to the CEO of the company. Big part of Lincoln strategy. You can come here, and you can make a career of it. This is a company that values it.
I can turn to my product partners and say, look at the product partnership we have. We have this consistent market presence and this broad portfolio of products. A lot of really talented career salespeople will say, "I'd rather have a consistent career of selling than feast and famine years as companies choose to move in and move out of the market." I like our position and advantages as it relates to not only holding onto talent but also recruiting it, recognizing that in good economies, clearly, the competitiveness of those sales force increases.
Just one last one for Dennis. You mentioned interest in acquisitions. On the other side, how receptive are you to Lincoln as an acquisition candidate? Obviously, there hasn't been much interest from European or large U.S. companies in large deals. Recently, we've seen Asian companies get a little bit more interested. Wondering if you could talk about that.
There's only one goal, and that's to maximize shareholder value. We think that right now and most of the time, that's having a great organic growth plan and being a market leader the way we've been talking about it. At the end of the day, it's what's in the best interest of shareholders. I would agree with you that the big life insurance M&A activity that occurred before, which was driven by the Europeans or by the Canadians, that seems to have gone down a little bit. They're not as strong as they once were, or they don't have the interest in the products that Lincoln sells. Is there an opportunity for the industry with capital coming in from the Asian countries? Possibly, I think that would be long term. The most important point, to answer your question, we're going to maximize value for shareholders.
Again, I think right now that is and it has been organic growth and taking market share, building earnings, and ROE. It's all about the shareholders.
Eric.
Thanks, Jim. Eric Berg from RBC. My question is for Mark. One of your largest competitors in individual life insurance, Transamerica, last week announced that it would post a large increase in reserves for future deaths of American men over the age of 85. I think they said that the issue was that there was simply no data on old age mortality when these policies were sold in the second half of the 1980s and the first half of the 1990s. My question is twofold. First, what is Lincoln's accounting policy with respect to the setting of reserves? That is to say, how frequently do you true them up on the life insurance side? Secondly, are you experiencing death rates among older people, men and women, that is greater than the assumptions embedded in your reserves?
I didn't see what Transamerica said, or obviously I don't sit in their shoes, so I can't comment on that. What we do, we just did it. The third quarter unlocking practice is one in which we look from a GAAP perspective at all our assumptions, including mortality on all of our interest-sensitive business. That's GAAP accounting. That's what we do. From the standpoint of have we seen something out of bounds? I haven't seen the latest numbers, but I see them fairly regularly. We look at it from an issue age as I believe it's 70 and greater. So it's not 85 and greater, but issue ages of 70 and greater. We are well within our pricing assumptions.
All right.
We're not seeing what apparently Trans, for whatever reason, said, saw. This is where you have to think about what was the assumption. Because there's two parts to an actual to expected ratio. It's what actually happened and what you expected to happen.
Right.
We've long been pretty focused on that expectation and making sure we get that as right as possible, including outside reviews, et cetera.
Thank you.
Okay, we have time for one more, and then we'll take our break.
Hi, Daniel Hanson with Jarislowsky Fraser. Thanks for the discussion. For Mark, just a question. You gave some scenario analysis for different 10-year Treasury rates. Kind of notably absent was if rates go down, which they've certainly spent a lot of time below current levels over the past three years for whatnot. How do you think about that? You put a low probability there. How do you think about that?
Let's define rates go down a couple of different ways. One, think about our expectations. Again, without getting into a debate about our assumptions, we actually priced in a lower environment than we're in today, with an expectation over time that interest rates would rise. It did start at a lower point and then goes higher. We've already got some of that in our 12%-15% assumption in the first place. If you do rough math there on those, you say about for every 40 or 50 basis points of change in interest rate, you see about a 1% change in return. That rule of thumb holds for a change or two. If it gets way outside, it's not going to hold.
Finally, as demonstrated by what we've done in the past, if we find ourselves in a long, prolonged environment, we'll change. We'll change ahead of the industry, and we'll bring the industry with us.
Thank you.
Okay. Why don't we take a break and plan to be back here about 10:15 A.M. Thank you.
Love of a newborn baby. My world is alive. Down in my heart. Although we are miles apart. If you ever need a helping hand. I'll be there on the double. As fast as I can. Don't you know that there ain't no mountain high enough. Ain't no valley low enough. Ain't no river wide enough. To keep me from getting to you babe. Don't you know that there ain't no mountain high enough. Ain't no valley low enough. Ain't no river wide enough. Ain't no mountain high enough. Ain't no valley low enough. I'm changing lanes and talking on the phone. Driving way too fast. Interstate jams of stunners like me. Afraid of coming in last. Somewhere in the race we run. We're coming undone. When days go by. I can feel us crying. Like a hand out the window in the wind. The cars go by.
It's all we've been given. We better start living right now. The days go by. Out on the roof, just the other night. I watched the world flash by. Headlights, tail lights, running through a river of neon signs. Somewhere in the rush, I feel we're losing ourselves. Days go by. I can feel the days go by. It's all we've been given. You better start living right now. The days go by. Oh, where are we now? Yeah, the days go by. Oh, where are we now? We think about tomorrow and it slips away. Oh, yesterday. We talk about forever but we've only got today. The days go by. I can feel them flying like a hand out the window as the heart goes by. It's all we've been given. You better start living. You better start living. You better start living right now.
The days go by. I can feel them flying like a hand out the window in the wind. The heart goes by. It's all we've been given. You better start living right now. The days go by. Oh, where are we now? Yeah, the days go by. Oh, where are we now? Oh, take them by the hand, the yours and mine. Take them by the hand and listen right. Take them by the hand, don't let them walk right by. Oh, come on. Come on now. Yeah, come on. Oh, where are we now? Don't let another day go by. A million miles away. Your signal in the distance. To whom it may concern. I think I lost my way. Getting good at starting over every time that I return. Learning to walk again. I believe I've waited long enough. Where do I begin? Learning to talk again.
Can't you see I've waited long enough? Where do I begin now? Do you remember the days we built these paper mountains? Sat and watched them burn. I think I found my place. Can't you feel it growing stronger to the touch of us? Learning to walk again. I believe I've waited long enough. Where do I begin? Learning to talk again. I believe I've waited long enough. Where do I begin now? For the very first time. Won't you pay no mind? Set me free again. To be alive. I'm on the other side. That fell and died. A whisper to a riot. That sacrificed the knowing to survive. A bird that flies. Another state of mind. I'm on my knees. I'm praying for a sign. Forever, whatever. I never wanna die. I never wanna die. I never wanna die. I'm on my knees. I never wanna die.
I'm dancing on my grave. I'm running with the fire. Forever, whatever. I never wanna die. I never wanna leave. I'll never say goodbye. Forever, whatever. Forever, whatever. Learning to walk again. I believe I've waited long enough. Where do I begin? Learning to talk again. Can't you see I've waited long enough? Where do I begin? Learning to walk again. I believe I've waited long enough. Learning to talk again.
I did my best to notice when the call came down the line. Up to the platform of surrender, I was brought, but I was kind. Sometimes I get nervous coming at the open door. Close your eyes, clear your heart. Cut the core. Are we human? Or are we dancer? My sign is vital. My hands are cold. I'm on my knees looking for the answer. Are we human? Or are we dancer? Pay my respects to grace and virtue. They're not for no one says it will. Give my regards to soul and romance. They always did the best they could. So long to devotion. He taught me everything I know. Wave goodbye and wish me well. You've got to let me go. Are we human? Or are we dancer? My sign is vital. My hands are cold.
I'm on my knees looking for the answer. Are we human? Or are we dancer? Will your sister be all right when you dream of home tonight? There is no message we're receiving. Let me know, is your heart still beating? Are we human? Or are we dancer? My sign is vital. My hands are cold. I'm on my knees looking for the answer. You've got to let me know. Are we human? Or are we dancer? My sign is vital. My hands are cold. I'm on my knees looking for the answer. Are we human? Or are we dancer? Are we human? Or are we dancer? Are we human? Or are we dancer? It might seem crazy what I'm about to say. Sunshine here, take a break. I'm a hot air balloon that could go to space.
With the air, like I don't care, baby, by the way. Because I'm happy. Clap along if you feel like a room without a roof. Because I'm happy. Clap along if you feel like happiness is the truth. Because I'm happy. Clap along if you know what happiness is to you. Because I'm happy. Clap along if you feel like that's what you want to do. Here come bad news, talking this and that. Yeah. Give me all you got, and don't hold it back. Yeah. I should probably warn you I'll be just fine. Yeah. No offense to you, don't waste your time. Here's why. Because I'm happy. Clap along if you feel like a room without a roof. Because I'm happy. Clap along if you feel like happiness is the truth. Because I'm happy. Clap along if you know what happiness is to you. Because I'm happy.
Clap along if you feel like that's what you want to do. Hey, hey. Bring me down. Can't nothing. Bring me down.
If you need help, you can know me. If you bring me down, I bring you down. If you bring me down, you can know me. If you bring me down, in love with you. If you bring me down, you can know me. If you bring me down, I bring you down. Clap along if you feel like a room without a roof. Because I'm happy. Clap along if you feel like happiness is the truth. Because I'm happy. Clap along if you know what happiness is to you. Because I'm happy. Clap along if you feel like that's what you want to do. Because I'm happy. Clap along if you feel like a room without a roof. Because I'm happy. Clap along if you feel like happiness is the truth. Because I'm happy. Clap along if you know what happiness is to you. Because I'm happy.
Clap along if you feel like that's what you want to do. One, two. If you bring me down, you can know me. If you bring me down, in love with you. If you bring me down, you can know me. If you bring me down, I bring you down. Clap along if you feel like a room without a roof. Because I'm happy. Clap along if you feel like happiness is the truth. Because I'm happy. Clap along if you know what happiness is to you. Because I'm happy. Clap along if you feel like that's what you want to do. Because I'm happy. Clap along if you feel like a room without a roof. Because I'm happy. Clap along if you feel like happiness is the truth. Because I'm happy. Clap along if you know what happiness is to you. Because I'm happy.
Clap along if you feel like that's what you want to do. Oh. Everybody, let's go. Clap your hands now. Everybody now. Hey, hey, come on. Yeah, yeah. Hot night in the city. Ain't no water in the well. Mama ain't gonna sleep tonight. She gonna break on out of a spell. I'm telling you, baby. It's driving me crazy. Baby, if I don't get out of here, I can't be blamed. What I'm gonna do to get me out of this place. Let's go. We're breaking down the door. Let's go. We're taking over the floor. Let's go, let's go. Like whenever before. We're gonna go till we just can't go no more. Let's go. We're breaking down the door. Let's go. We're taking over the floor. Let's go, let's go. Like whenever before. We're gonna go till we just can't go no more. La, la.
Everybody say oh, oh. La, la. Everybody say oh, oh. Friday night, the music's loud and it's time to have some fun. Waited all week to kick it off. We ain't crashing till the dawn. Better catch your breath and splash some water on your face. We ain't going home till all the roof falls off this place. Dial it up, match it up, put it up loud. Pump it up and watch it crowd. Crank it up. Crank it up now. Crank it up. Crank it up now. Come on. My mama didn't raise no quitter. Come here, baby, let's do it right. Crank it up. Crank it up now. Crank it up. Crank it up. Crank it up now. Well, I've got the feeling that tonight's a brilliant one. We can.
The heart is a globe. She pops through the stony ground. There's no room. Space to roam in this town. You're out of luck. There's a reason that you have to care. The traffic is stuck. You're not moving anywhere. You thought you'd found a friend. To take you out of this place. Someone you can lend a hand. It's a terrible day. A beautiful day. You got a road you feel like a beautiful day. Living can wait, we're on the road. She got no destination in her mind. She don't need no imagination, we know they will shine. Even if that is something ain't true. It's been all over. It's been all over you. Take me to that other place. I know I'm not over you. See the world in green and blue. See China right in front of you.
See the canyons opened wide. See the tuna fleet filling the sea out. See the bedroom fires at night. See the ark she was on slip slide. See the birds who were leaving last night. Until the flood, all the colors came out. It was a beautiful day. Don't let it get away. You say. Take me to that other place. I know I'm not over you. What you don't have, you don't need it now. What you don't know, you can feel somehow. What you don't have, you don't need it now. Don't need it now. It was a beautiful day.
We're going to ask you to start migrating back to your seats. Okay, thank you. In this second half of the morning, we're going to hear from Mark Konen on annuities. He'll be followed by Ellen Cooper on the general account and investments. Then Randy will come up and wrap things up with a financial overview, and then we'll again return to Q&A. With that, I would like to introduce Mark Konen again.
Thanks, Jim. Welcome back, everybody. My kingdom for a clicker. Here it is. Let's talk about the annuity business. Lincoln's annuity business is a high-quality business, frankly, one that's different from many of our peers. It's one we continue to grow on our terms and one that delivers strong financial performance. We have a long history of managing this business effectively, and I see no reason why that won't continue to be a great opportunity for Lincoln. Our consistent disciplined approach, sustainable products, distribution excellence, focus on risk management, has yielded a quality block of business, which has resulted in outstanding financial performance, steady growth with strong returns. And we're positioned to continue that growth. Favorable demographics, retiree population is growing, people are living longer, and we have new solutions designed to address growing tax concerns. First, financial performance. The graph on the left, steady, consistent earnings growth.
Equity market performance has helped. However, sales and net flows have also been a big contributor to this. $19 billion of net flows across that period of time, and not one negative flow quarter during the period. A true testament to the benefits of selling through the cycle. The graph on the right, strong returns, whether you look at it excluding or including our hedge results. Returns north of 20%. Minimal ROE impact from below-the-line items, again, evidencing the quality of our hedge program. How do you achieve these results? The formula is simple. Simple to articulate, hard to execute upon. Not only does each piece of the value chain need to be rowing in the same direction, but frankly, the oars have to be hitting the water at exactly the same time. We've demonstrated the ability to do that. The formula, sustainable product solutions.
We didn't join the arms race. I'll show you that in a minute. We've had that consistent market presence. Remember the $19 billion of steady flows. We have a diverse portfolio meeting a variety of consumer needs. Second element, best-in-class distribution. Will already covered it, but it bears repeating. Unparalleled depth and breadth, bringing our solutions to market. I got to say, as a manufacturing guy, it's one hell of a weapon to go to war with. Finally, disciplined risk management, whether it's our industry-leading hedge program, whether it's our leading-edge policyholder behavior modeling. After all, we're in the risk management business, and everything we do needs to be focused on effectively managing that risk. The diversity in our portfolio contributes to that quality block of business.
We continue to focus sales on our high return VA with living benefits, has an attractive risk-reward profile. Our recent reinsurance transaction not only validated our approach, but also served to mitigate and spread our risks. You see that in that chart on the left, light blue color of 24% of our current sales are in that reinsurance agreement. At the same time, we're focusing on our non-living benefits. That yellow bar that you see growing currently 22% on a year-to-date basis. It's that balanced mix which promotes growth and diversifies our earning sources. Don't lose sight of the pie on the right, where over 40% of our $120 billion or so of account values don't have a VA living benefit. Let's take a look at one of our recent solutions that's helping to further diversify our mix and meeting a growing consumer need.
Our Lincoln Investor Advantage. We introduced this product in June. The recent tax law changes made it the right time to do so. It was a successful launch by many measures, $100 million of sales in 100 days. I can tell you the momentum continues to escalate. It has broad and excellent investment options. Importantly, it's uniquely positioned to combine the tax deferred accumulation element with a tax efficient exit strategy in i4LIFE, where our policyholders are able to achieve the tax benefits of annuitization while maintaining access to their account value. This solution clearly contributes to our non-living benefit diversification. Importantly, meets a growing consumer need, one that advisors are also hungry for, if you remember that chart that Will talked about in the 9,000 producers already selling this product.
Let's turn back to living benefits for a minute and look at how our formula for success manifests itself against our peers. There's a lot going on here, let me explain these charts for you. For each company, the chart illustrates the guaranteed income rate at the point income would begin. Let's look at an example. If you look at the top right-hand corner, you've got someone that buys the product at age 60 and begins taking income at age 65. This is the minimum amount that they're guaranteed by Lincoln. If you look at Lincoln's little red dash there, it's roughly 6,200 or 6.2% of the beginning deposit. You see all our competitors and their hash marks. That's the current level of the benefit.
The bar shows, well, how has that benefit changed over the last decade as people have changed products, come in and out of the market, that kind of thing. The width of the bar shows the range of the guaranteeing income being offered, that has been offered over the decade. The wider the bar, the larger the range that that has been over time. A few key takeaways. First, you can see that today we're pretty closely aligned, all of us, with one or two exceptions, but essentially, pretty rational market, a good place for the industry to be. Second big takeaway, we've been more consistent than anybody else on the chart. If you look at our bars, they're shorter than everybody else's. We haven't had wild swings in benefits. Thirdly, our peers have come back to us.
You might say, "So what?" Well, the proof's in the pudding, right? That consistent presence and diversified solutions do in fact, make a difference. On this chart, Lincoln looks better than most in terms of our low net amount at risk or NAR in actuarial jargon. NAR represents guaranteed benefits in excess of account values. The lower the NAR, the majority of benefit payments can be met with policyholder money. Again, while favorable market performance has helped, frankly, our approach of rational benefit levels, prudent product design, no wild swings, and selling through the cycles has made a huge and significant difference and contributes to the quality of our block versus our peers. We've talked about the financial performance. We've talked about the quality of our block. Let's take an outside-in look at our future growth potential.
As you've already heard and know, unless you've lived under a rock, consumer demographics are in our favor. There is a growing consumer base of retirees and those preparing for retirement, right? We also are seeing the loss of death benefit plans, uncertain future federal benefits. Compound that with Americans living longer, the annuities that our industry provides are uniquely positioned to provide the benefits consumers want. Namely, to address their retirement income security concerns. Oh, by the way, with taxes going up, we also have solutions to help address growing tax concerns. Investor Advantage that I talked about a minute ago. Once again, if you compare us to our peers, we have a broad array of solutions to meet a variety of consumer needs. This chart illustrates the solutions that we and the other top nine VA companies offer in the market.
If you have a green dot, you've got the product. If you don't have a green dot, you don't. No surprise, given the formula, we have more green dots than anybody else. Our broad portfolio differentiates us from our peers, addressing the key risks of longevity, taxes, volatility, inflation, driving growth in our products with and without living benefit guarantees. In wrapping up, Lincoln has a quality block of business. I think I've demonstrated that. Delivering outstanding results, strong returns, steady growth, and we're positioned to continue that growth. It's because of that formula, our broad array of sustainable product solutions, best-in-class distribution, disciplined risk management, all the oars hitting the water at the same time. We are and will continue to be a successful long-term player in the annuity business. With that, let me turn it over to Ellen Cooper, our Chief Investment Officer. Thanks.
Hi, everybody. I'm going to start by building on this theme of consistency and consistency as it relates to our investment strategy. Our broad general account investment strategy, first of all, starts and is predicated, driven by asset liability management and the discipline around that. We do have the flexibility to add incremental risk, and I'm going to talk to you today about how and where we're doing that and what it means in terms of the overall portfolio. I'm going to touch on three broad themes. The first one is that we maintain a well-diversified and high-quality portfolio. You've heard all throughout the day today about diversification. In the investment portfolio, we are also very focused on that diversification. The second point that I'm going to make is around spread compression, which again, you've heard all throughout the morning. Our spread compression is abating.
I'm going to show you two areas where we are seeing easing. One is from the runoff of the existing portfolio, and the second one is around our new money yields. You've heard Dennis and Randy talk about our proactive investment strategies repeatedly in the earnings calls, and I'm going to drill into that today as well. We're going to focus on new money yields and, in particular, some transparency into our yield-enhancing debt program that you've been hearing about, and also into our alternatives program. Theme 1, well-diversified and high-quality portfolio. The upper pie is showing you the broad overall diversification of the investment portfolio. We have a $92 billion general account portfolio. It is broadly diversified across asset classes and across sectors. The bottom half of the chart shows you the overall distribution by quality.
What you can see here is that we maintain a high-quality investment portfolio with an average credit quality of A minus. Our below investment grade allocation stands today at 5.4%, and about 80% of that below investment grade exposure is in NAIC 3 or so-called BB below investment grade, the highest of the high yield. We also stand with a net unrealized gain of about $6.9 billion. That's predicated on the long duration of our assets and our disciplined asset liability management practice. Now let's segue into theme 2. Theme 2 is around spread compression and spread compression abating. The first point here is around our existing portfolio. Now, let me first orient you to this chart because there's actually a lot here and some important takeaways. The bottom of the chart is showing you the expectation of the annual runoff of our investment portfolio.
What you can see here in 2014 is that our expectation is that 5.7% of the existing investment portfolio is expected to run off in 2014. When you look up at the top, this red line here, what it is showing you is the average expected yield of those runoff assets. In 2014, we're showing you that the average yield of the 5.7% of the portfolio that's running off is 5.9%. When we think about spread compression, we ended 2013 with a portfolio yield of 5.2%. 5.7% of the portfolio expected to run off, expected average yield of that 5.9%, and at the end of the third quarter, a fixed income portfolio yield of 5.1. As we fast-forward, we look at the expected level of payoff from 2015, 2016, and beyond, we look at the average yield of the runoff of the portfolio.
What you can see is that the expected yield of the runoff versus the fixed income portfolio yield is coming much closer together. One of the places where we were experiencing spread compression, which was from the runoff of our higher-yielding assets, is abating. It's easing the pressure. Okay. The second part of the spread compression story is from new money yields, we've been talking about new money yields quite a bit. Let's look at the relationship between our fixed income portfolio yield and the new money yields that we've been achieving. Okay. Orient you to the chart. What we've done here is, first of all, we're going to show you actuals, then we're going to show you what we consider to be a very conservative forecast, simply for illustrative purposes.
If we start by looking at the solid blue line here, the solid blue line is showing you our fixed income portfolio yields historically. At the end of 2011, we had a fixed income portfolio yield of 5.6%. The solid green line is showing you the average new money yield each year. In 2012, our average new money yield was 4.2%. That was 120 basis points below where we ended the year in 2012 with a portfolio yield of 5.4. Spread compression year-over-year of 20 basis points. Let's fast-forward to 2014. 2014, at the end of the third quarter, our average new money yield is at 4.4%, we're investing at 70 basis points under the fixed income portfolio yield of 5.1. You can see that we're closing the gap.
As we project forward into our forecast, what we have done here is we have assumed that new money yields will stay flat. We don't actually believe that, I'm going to get to that in a moment. We're showing you this for pure illustrative purposes, that if new money yields stay flat, if we stay in the current environment with an average new money yield of 4.4% through the entire year of 2015, we will be 60 basis points under the expected portfolio yield with a 10 basis point move in the overall portfolio yield. Again, easing spread compression. If that continues on through the year of 2016, still with a new money yield of 4.4%, we now have a 50 basis point gap between our new money yields and our fixed income portfolio yield.
We illustrate this, Randy is going to take these exact assumptions and show you the overall impact as it relates to earnings in his presentation and touch on this even in further detail. We illustrate this point to show you that we're prepared to manage through additional spread compression. I do want to make the point that we do believe that the U.S. is continuing to grow, that we do expect to see above-normal growth from an economic perspective, and that we do think at some point within this period of time that we will see the Fed hike rates. It's out there. We just don't know exactly when. If that happens, if fixed income yields begin to normalize, we obviously will invest new money at higher rates, further easing the spread compression.
Again, potential upside for us should that event occur sometime between now and the next two years. Very important to us are our new money yields. We have been achieving strong new money yields in light of this low-rate environment. I'm going to segue now to look at our proactive investment strategies with some more transparency into our new money yields. I'm going to start, again, with orienting you to this chart on the left. Here, what we're showing you are quarterly results of our new money yields. Dennis and Randy have also been talking to you about this on our earnings calls. What you see is, first of all, the red line is showing you the average 10-year U.S. Treasury each quarter. The blue line is showing you the average new money yield in that particular quarter.
The difference, of course, is the spread over the 10-year Treasury. We have been achieving new money yield in the 180 basis points to 200 basis points level over the average 10-year Treasury, a very strong result in this current fixed income environment. How are we getting there? Well, we are actually benefiting across all asset classes that we're investing in it. Every little bit helps. It's all around the margin. We're going to show you how we got there in the third quarter. We start with the average 10-year Treasury of 2.5%. We talked about disciplined ALM. We're investing a little bit longer. Therefore, we have an additional 31 basis points coming from matching to our liability duration.
Our core strategies, our public fixed income, investment grade, our syndicated private investment grade, our commercial mortgage loans are all giving us an additional 120 basis points of spread. We have a series of hedges to protect us from the low rates that gave us another four basis points. That's our core. Our yield-enhancing debt strategies on top of that in the third quarter gave us an additional 25 basis points. Add it all up, 180 basis points over the average 10-year Treasury, which gets us to a 4.3% new money yield. Let's take a look at one of our proactive investment strategies, which is our yield-enhancing debt strategies in a little bit more detail. When we talk about yield-enhancing debt strategies, obviously these are strategies that are enhancing yield.
I want to emphasize, though, that approximately 40% of that yield-enhancing debt strategy is investment grade. These are not solely below investment grade strategies. Our split on average has been about 40% investment grade and 60% below investment grade. On average, each quarter, from an asset perspective, about 10%-20% of our new money purchases have been in these yield-enhancing debt strategies. On average, we have been achieving an incremental 15 to 25 basis points each quarter from them. There are four main strategies that we have been executing on. The first one is investment-grade direct private placements. This is a complement to the syndicated private placements that we have been doing for a long time with a long and successful track record. The second is non-agency RMBS, where we see attractive yields and attractive capital treatment. The third is below investment-grade public.
Here we add this because we have the flexibility to invest when we think yields are attractive and we think the underlying fundamentals are good and strong. If we don't, we won't invest. As it relates to below investment-grade privates, here we have a very solid strategy where we're executing with very attractive yields, with very good illiquid premium in the below investment-grade private space across multiple managers with diversified sourcing platform, a really good, strong story for us. Here we're seeing good covenants and higher expected recoveries relative to their counterparts in below investment-grade public. Overall, very good incremental addition around the edges, around the margin, that adds about 15 to 25 basis points for us.
The other thing that you've heard us talk about in terms of proactive investment strategies is our alternatives portfolio, and I want to spend a moment diving into that as well. Here we started focusing on growing our alternatives portfolio in 2012. What you can see is that from the year-end 2012 until the end of 2014, third quarter, we've grown the overall alternatives carrying value by a little bit more than a 17% compounded annual growth rate. Our plan is to grow the portfolio to approximately 1.5% of the overall investment portfolio, and we're going to continue to do that in a very disciplined and consistent way. The performance has also been solid and strong this year. We have an annualized income yield, year to date, of 15%.
The contribution to net investment income yield, this is over and above the fixed income portfolio yields that we looked at on the previous page, have been 17 basis points so far this year. That's again at the total portfolio level. We talk about diversification. We looked at broad diversification in our overall investment portfolio, and we are very focused on broad diversification in our alternatives investment portfolio as well. We're diversified across strategy and across sector. We're diversified as it relates to our allocation of hedge funds versus private equity. For example, in our hedge fund bucket, which you see up here, that allocation is comprised of more than 25 individual strategies in it, all very much diversified. In terms of growing the alternatives portfolio to 1.5% of the total investment portfolio, that is less than half of the average of our peers.
Not only do we have capacity ourselves to incrementally grow and have capacity for risk, we also have capacity as it relates to comparing ourselves to our peers. On the topic of risk capacity, while we are adding risk, we also have, since 2011, lowered the overall allocation to below investment-grade assets as a percentage of the overall portfolio. At the end of 2011, we stood at 6.3% of below investment-grade assets, and with the addition of assets in the yield enhancing debt program, we stand at the end of the third quarter 2014 at 5.4% with below investment-grade assets that we are very comfortable holding in our portfolio. When we compare where we are from a risk capacity perspective relative to our peers, we looked at risk assets as a % of surplus.
Risk assets broadly defined as below investment-grade bonds, alternative investments, and real estate divided by surplus. What you see is that our peers on average have two times the risk assets that we do. Again, we're very comfortable in terms of what we're holding for ourselves and also when we compare ourselves to our peers. In conclusion, three themes. We maintain a well-diversified and high-quality portfolio. Spread compression is abating. Two places, higher yielding assets running off from the existing portfolio and the relationship of new money yields to the portfolio yield. The third theme, proactive investment strategies, executing on all fronts across our new money yields in our yield enhancing debt program and growing our alternatives program. With that, I'm going to hand it over to the one and only, our CFO, Randy Freitag.
Well, thank you, Ellen. Thank you to all my fellow speakers today. I think, hopefully, you've been able to learn a lot about Lincoln today. Thanks for all your efforts. Thanks to the efforts of all the Lincoln team that has participated as we put these presentations together. Thank you for your attendance. We always appreciate you coming to spend the time with us. A special thanks on my part to Jim Sheeren . Not that I'm counting, but I've been in this job for, let's see, three years, 10 months and 20 days now. One of the things that has made that very easy and pleasurable is the fact that I've had people like Jim with a significant amount of experience to help me understand what's expected of a Chief Financial Officer. Thank you, Jim. Chris, believe nothing that he says about me.
None of it's true. Let's get started today. I'd like to start today just by talking about my overall themes. There's a real reason that the financial overview comes at the end of this day, it's really because everything that I'm going to talk about is really the end result of everything else that you heard today. Whether it was Dennis talking about overall strategy, whether it was Will talking about distribution, Mark and Chuck talking about the businesses, or Ellen talking about the general account, it's really all the actions and the strategies and the tactics that they talk about that allow me to get up here and talk about the fact that we have created four businesses that are producing a diversified set of drivers that have created consistently strong results over time.
It's those four businesses that allow me to get up here and talk about the fact that we are positioned for growth as we look forward. It's those four businesses that allow me to get up here and talk about the fact that we are generating significant amounts of capital that we can put to the highest and best use. That's why I come last. I really like this slide. I really like this slide for a couple of reasons. One, I think it does a really good job of summarizing the last five plus years of financial performance at Lincoln. I really like it because it's such a great story. Essentially, this is my brag slide, right? Great performance over the last five plus years at Lincoln.
Without going through each of the numbers, each of the statistics in any great detail, let me just say that whether you're talking about the short term or the long term, whether you're talking about the top line, the bottom line, or the returns, whether you're talking about the income statement or the balance sheet, what do you see? What you see is consistently strong results. EPS that has grown 15% a year with relatively little volatility. Returns that have grown nearly a full five percentage points. A balance sheet that has not only grown significantly in size, but that has seen the risk relative to that size shrink as RBC has increased over 50 points. Truly a powerful story of financial performance over the last five years here at Lincoln. Okay. That's it. I'm done bragging.
Let's talk about how we make money, and I hope you appreciate this approach. We rolled it out, I don't know, about a year ago. I think that this source of earnings, view of earnings, really gives a good lens into the risks and rewards of the businesses that we operate in. Once again, I'm not going to go through this entire slide in great detail, but I'll make a few points. First off, let's talk about this mortality, morbidity component. Over an extended period of time, we would like to see that component of our earnings approach 33%. We'd like to be about a third of our earnings. This year, it's traveling at about 21%, and if we were to adjust for the fact that our group margins are a little depressed this year, we'd be at roughly 27%.
Still a little below our long-term target. That's why when Dennis talks about if we were to look at M&A, we would probably be focused first and foremost at that particular component of earnings. Ultimately, it may take some sort of inorganic growth to reach that ultimate target that we'd like to get to. Once again, over an extended period of time. We're in no rush to get there. Secondly, let me talk about that slice of earnings that we make from variable annuity guarantees, because sometimes people don't quite understand this. This essentially represents the difference between what we charge for the guarantees that we issue and the cost of going into the capital markets and hedging those guarantees on an economic basis.
We charge roughly 110 basis points or so today. We go into the markets, we hedge those guarantees that we issue, it costs less. Essentially, we hold more capital for a variable annuity with a guarantee, we need to earn a little more money. That slice of earnings is what allows us to earn similar returns on these products as we would earn on a product without a guarantee. That's why you have that little slice of earnings there. Lastly, let me point out on the spread compression front. I'll go over this again, Ellen touched on it'll come up a couple times. We see that spread compression is continuing to decline across the organization.
It's really still impacting two businesses, the retirement business, 10-15 basis points of annual compression, the life business, roughly at 5-10 basis points of compression. Those numbers are down from where they were in prior years, you'll see that on subsequent slides. You have heard us over the years, if you've spent time with us, talk about a business model that can get to an 8%-10% sort of EPS growth rate. How do we get there? How do we get to 8%-10%? It all starts with the four businesses, the life business, the annuity business, the retirement business, the group business. It all starts with their ability to grow. It all starts with their ability to attract more business than leaves.
It all starts with their ability to generate capital that we can deploy to uses like share buybacks. When you look at the various components of those businesses, whether it's group premiums that are growing at 7%-9%, whether it's life insurance face amount, which grows 4%-5% or so, whether it's net flows that grow 3%-4%, when you add it all up, when you throw it in the pot, what you see is our franchise, just on its own, is growing at roughly 4%-5%. In addition to that, over the next few years, we have an expectation that our group margins will recover from the sub 2% range that we're at this year to the, as Mark mentioned, to the 5%-7% range over time.
That will occur over time, that will give us a little incremental boost to EPS growth over the next few years. Lastly, one of the benefits of scale, what you've seen us do over the years, is that we can get a little more efficient from an expense standpoint each and every year. Effectively, we target growing our expense base at a slightly slower rate than our revenue base. That's what we've done over time. That's what I would expect as we move forward, that adds a little increment. You have this organic component of growth, from that organic component of growth, remember, we have this large in-force book of business, which we've made a significant investment in. One of the great things about that is that significant investment yields a stream of distributable earnings into the future.
That distributable earnings stream allows us to do things like buy back stock. I expect to get, or we expect to get, roughly a 2%-3% boost from buying back stock over time. We've been a little above that for the last few years. Over time, 2%-3% is a reasonable expectation for this particular component. All of that comes from our businesses. In the middle, you have the impact of the capital markets. All that I've done here is in terms of the equity markets. If you assume the equity markets are going to grow, what I've shown here is 6%-8%. You can do the math because I've simply applied those numbers to our sensitivity, and you saw the sensitivity on the previous page, $8 million for each 1% movement in the S&P.
What you see is that you have an increment from equity market growth of 2%-4% to growth. Lastly, you have spread compression. We have a headwind from the fact that interest rates are lower than the portfolio yield, just like Ellen talked about. That headwind these days is roughly 2%-3% and declining. Now, you might remember that this number was 4%-5% years past. This is a headwind that is abating somewhat. You add all that up, organic components, the ability to buy back stock, what the capital markets do for us, and you get to, broadly speaking, a targeted EPS growth rate of 8%-10% here at Lincoln. Okay, let's talk about a couple of our risks, the key risks we face, starting with interest rates, because I think this is a really good story.
We've been talking about this for a number of years. For the past few years, the fact that we have been experiencing spread compression has been roughly a 4%-5%, sometimes a little above that, sometimes a little below, headwind that we've had to face as we've been trying to grow earnings. Now, we have faced this headwind, and remember that first page I went over. We've faced it and still grown EPS 15% a year, but nonetheless, it's been there. We have not been captive to it. We have succeeded despite it, but it's been there.
As things like Ellen talked about, the fact that we're investing much closer to our portfolio yield these days, are starting to come to pass, you're seeing that headwind decline to the point today, where as I mentioned, we're in that 2%-3% range, and we would expect that to continue to decline moving forward. We've talked about this for a while, but I don't know that we've ever showed it to you graphically like this. I've been up here and I've said this to a number of you, and I don't know that it has truly gotten through. This is what I'm talking about. Spread compression declines over time, and declines over time simply because our portfolio will get closer and closer to the new money rate that we invest at. There we are. You have a headwind from spread compression on the income statement.
What about the balance sheet? Statutory balance sheet, GAAP balance sheet. Great story. Same story that's been in place for a number of years. On the statutory side, whether you want to talk about a base case which has interest rates coming out of a scenario generator, so they generally grow over time, or whether you want to talk about a permanently low scenario, like a 2% scenario, what do you see? Significant reserve adequacy. Reserve adequacy that's actually increased over the last year. A great story on the statutory side. Very strong statutory balance sheet. How about the GAAP balance sheet? It's been referenced a couple times. We just went through our annual DAC unlocking process. Once again, we had minimal, actually, we had a small positive total impact from the assumption unlocking process. That is the fourth year in a row that that's occurred.
A great result when it came to the unlocking process. The GAAP balance sheet is in very good shape also. Strong balance sheet. This is not a balance sheet issue, the fact that interest rates remain low at Lincoln. This is an income statement issue, a headwind to earnings growth that is declining over time. How about the variable annuity business? There are two risks that I would point out that have the ability to create what I would call unexpected volatility in the variable annuity business. The first is around the setting of assumptions, policyholder behavior assumptions. If actual behavior turns out different from what we assume in our models, we have to change our assumptions, and that can create volatility. In our case, the fact that we have adjusted assumptions over time has actually been, in total, a net positive.
We've averaged, what, $14 million a year of positive impact. Some assumption changes have been negatives. We've had to lower lapse rates, for instance, on variable annuity guarantees. Some assumptions have been positives. For instance, the utilization of those benefits has been a positive. We don't ever really enter a product expecting it to think that we will hit every single assumption exactly. That's ridiculous. What we do know is that if we put our best and brightest people to it, if we bring in outside expertise, we're going to have a set of assumptions that, in total, represents a likely best outcome for that. Some of those we may miss on the downside, some we'll miss on the upside. That's what has occurred here at Lincoln.
I think it's a direct result of the disciplined process that Mark and his teams, Chuck and their teams put to the setting of assumptions. Additionally, I've shown here that our assumptions have reached the point, and the liability is in a position today where even if you thought about further changes in those assumptions, you're talking about relatively modest impacts on the income statement. We're in a pretty good shape when it comes to the setting of assumptions on our variable annuities. The second item is the performance of the hedge program, and Mark referred to this, I don't think I need to spend a ton of time on it. We expect some level of hedge breakage. We've had some level of hedge breakage. It's averaged about $40 million a year over the past few years.
That has had, in total, a 1% impact if you want to include that into our annuity returns. Additionally, if you look forward at some pretty severe scenarios, an expected level of hedge breakage is still very manageable when you consider that we sit here today with a book that has hedge assets that exceed hedge liabilities by $1.4 billion. It's pretty easy to manage a potential impact of $300 million in that particular environment. A really good story around variable annuity risk. Let me end by talking about capital management, starting with the generation of capital. You're all aware that we report our earnings using multiple accounting frameworks. Publicly, we report on GAAP. Over this period, the last three years and three quarters, we've made $5.1 billion of GAAP operating income. It's a great way.
It's very reflective of the performance of the company, but you can't spend GAAP income. The money we can spend, deploy into things like share buybacks and other purposes, is driven by statutory results. That's really in the middle bar that you see the sum total of our statutory results. Totals $4.2 billion over that period. 83% of GAAP results. There is some strain that occurs in the statutory world, but still, we're traveling at 83% of results. That's a good result. What have we done with that $4.2 billion? You remember earlier when I was guiding you to the 8%-10% targeted EPS growth, I talked about the fact that our businesses have this inherent growth of 4%-5%. That creates a growing capital need, right? They grow, they need more capital to support the business.
The sale of the businesses we're in is capital intensive. In fact, over this period, we've put $1.2 billion of capital behind those businesses to support the growth that I referenced. That left $3 billion, which we sent up to the holding company, where we first took care of things like interest expense and anything else we needed to do up there. When we had money left, we've deployed it. We deployed $2 billion into share buybacks. We put $400 million into shareholder dividends, and we put another $300 million into de-levering. De-levering has been a story for the past three years and three quarters. It's not a story for the next three years and three quarters. We're in very good shape from a leverage standpoint.
Another positive thing when you think about capital generation, and this is looking forward, is that once again, the sale of insurance business, I don't want to delude you, is a capital intensive business. We invest money, and we get a stream of earnings that are going to come into us for the next 30 or 40 years. I think it's a great proposition. Life insurance is a capital intensive business. Historically, the sale of life insurance has cost us about $1 of investment. $700 million of life insurance sales, a $700 million investment that we would make. Through the refocusing and the pivoting of the portfolio, we've shifted to a less capital intensive mix of business. This is largely the fact that guaranteed universal life, which is a very capital intensive business, has come down.
We're at the point today where that overall capital intensivity is at $0.85 for each dollar of sales, or roughly $100 million of less strain on an annual basis. This means that we have to do fewer reserve financing transactions. We used to average about one a year. We'll average maybe one every two years now, but it's made up by the fact that we don't have as much strain from the business we're selling today. That's a good trade-off, by the way. Great story on how we've generated capital. Let's dig a little more into how we've then deployed that capital. As I mentioned, we have done significant amount of share buybacks over the last three years and three quarters. In fact, we have bought back 21% of our share count that existed at the beginning of that time period.
We've done it at under $30 a share, significantly below where the share price is today. It's been a great investment. Not only has it been a great investment, we have consistently outpaced our guidance. Every year, typically in the fourth quarter on that call or so, I'll give an indication of what I expect or what we expect as a company for next year. Well, each and every year, we beat that because always at the end of that note, I'll say, we'll do everything we can to exceed that. Well, we've been able to do that. Each and every year, we have exceeded what we said coming into the year. This year, we will do another $150 million-$200 million in the fourth quarter. That will take us to $600 million-$650 million for the year, well above last year.
Once again, just signifying the success we are having at creating cash that we can deploy to its highest and best use. We are also focused on shareholder dividends. We've increased our shareholder dividends significantly over the last four years. Next year, we'll be up to an annualized outlay of a little in excess of $200 million. We're bringing that dividend back up to be a competitive element also. A great story, not only on the amount of capital we've deployed, but in how we've been able to do it. Lastly, let me just end by talking a little bit about how we compare to our peers, because it is not uncommon for me to pick up reports, to get questions that would seem to indicate that Lincoln does not allocate as much capital as our peer companies. I don't know what reports you're looking at.
This is the data I have. This is it. Share buybacks and dividends. Over this period, we have averaged 47% of our GAAP operating earnings, we have put into those uses, versus this peer group averaging 44%. I feel very good about the relative performance of Lincoln's ability to deploy capital. I feel very good about our ability to continue to deploy capital. We have a really strong balance sheet. I just went over that. We are generating free cash flow across our businesses. We are selling businesses that are less capital intensive than they were before. We're in a great position to continue to deploy capital, as you might expect. That's the end of my presentation. I hope you enjoyed it all. With that, I think we're going to go to Q&A. I think Mark and Ellen. Are we all coming up?
Mark and Ellen.
While we're waiting, let me just say thank you. Thank you to Dennis and Randy for the kind words. I've been at Lincoln for over 33 years, and it's been a truly rewarding experience. For that, I'm in your debt. Thank you to everybody here, both on both sides of the aisle. Best and the brightest in the industry, both at Lincoln, among the investors, the analysts. It's made me a better person. For that, thank you. With that, let's do some Q&A.
We have a question here with Erik.
Thanks. Erik Bass from Citigroup. Randy, if you could just help us think about what you would use as sort of a run rate earnings base to build that 8%-10% growth off of over time. Obviously, we know the unusuals that you've called out, but other things, whether fluctuations in mortality or alternative investment income that you might normalize for.
Yeah. What I would remind you is 8%-10% is sort of the long-term expectations of growth. There'll be some years it might be a little lower, some years it'll be a little higher. In terms of an expectation where you would grow off, I would just look at what we're making this year, any normalizing adjustments we've made. If you start there and you think about an extended period of time, that's ultimately what we would expect a CAGR to look like over a period of years.
All right. Maybe Ellen, if you could talk a little bit more about your expectations for the alternative investment portfolio going forward. Obviously, you're growing the portfolio, so the income contribution's growing from that. It does seem as though returns have been pretty strong over the past two years. Maybe what you would expect in terms of returns going forward.
Correct. We've had a very strong performance year in our alternatives portfolio. As I mentioned, our expectation is that we will grow it over time, likely the next two years, to get to 1.5% of our total investment portfolio. In there, we're targeting an expected return in the 9%-10% range. We know that these asset classes are volatile. They're all mark-to-market. On average, 9%-10%, when we have a year to date like we do now at 15%, this is a great thing and just a great headwind for us.
Bob Glasspiegel, go in the corner, and then hopefully here.
I'm going to ask the same question I asked last year, Ellen, you gave me the right answer last year. You articulated a strategy of re-risking the portfolio overall, you did a really good job of explaining why you can do it. You have a balance sheet that's strong, you have a lower risk portfolio than your peers as you measure it. I guess the question is, should you be re-risking the portfolio given that yields are low, spreads are low, alternatives have cranked out great returns, stock market is high? I guess the question is, how low would interest rates have to go? How low would spreads have to get to? How high would the market multiple have to get to where you say re-risking is the wrong strategy? You were right last year to re-risk from a performance perspective.
Where do you get nervous that that's not the right thing to be doing?
I'll answer that question as follows. At this red hot moment with rates where they are and also good credit fundamentals. Just a good overall fixed income story, which is where we're doing most of our investing outside of the alternatives portfolio that we just talked about. We continue to see attractive yields in these yield-enhancing areas. Some of it has to do with the illiquid premium and the fact that we have capacity to take illiquidity onto our balance sheet in the cases where I gave around the direct private placements and also in the below-investment-grade privates.
What's interesting about the below-investment-grade privates, by the way, which is a small allocation but an important allocation to us, is that it's illiquid in that space, the yields there do not move as we see fixed income yields and Treasury rates moving up and down. The opportunity set there is really coming from a different place. We're going to continue to invest in these programs knowing that we have the capacity for risk and knowing also that we have the flexibility to turn it off if we think that the risk-return profile is no longer attractive. I can't give you a definitive answer right now, what I can tell you is that we're constantly watching this from a return perspective, also from a risk perspective. We're very focused on downside.
We're very focused on making sure we have appropriate protection, we're thinking about mitigation of potential credit losses at any time in the future. If we think that something doesn't make sense in our portfolio over the long term, we'll stop.
What about on duration? I recognize that you match for the most part, is there any sort of low level of interest rates that make you nervous about your duration needing to shorten it?
The answer is no. We talked about the fact that we have a long-term investment strategy with disciplined asset liability management. We do not try to make interest rate bets at all. We don't do it. What's important is that the products are priced appropriately, that our products are taking into account the interest rate environment that we're living in, and they are, that we invest accordingly relative to the liability duration. We're not trying to play that game at all.
Thank you. Yeah. Humphrey here, then Seth. Right there.
Humphrey Lee from Dowling & Partners. A question for Randy in terms of the capital generation. The 49% conversion rate for 2014 was without the benefits of reserve financing compared to previous years. As you continue to pivot your product mix, how much would that 49% trend over the next several years?
Humphrey, I'm very comfortable. 49% this year, averaged 47% over the last few years. We don't have a reserve financing this year, but as I mentioned, we have less strain on the new business that we're issuing. I don't see that big a difference between a year that we did a reserve financing and this year where we're not doing reserve financing. Very comfortable in that 45%-50% range that we've been traveling at, and I think it's a reasonable expectation.
Okay. Another question for Ellen. In terms of the spread compression, for the forward projection, do you assume any prepayments that will occur that will push you to invest earlier at a lower rate? In that case, if we were to expect some prepayment activities similar to recent years, how would that spread compression picture change?
Right. We have been seeing elevated prepayments. We do think that if we stay in a low-yield environment, that in that projection, by the way, we were very conservative around prepayments. We do think that if we see rates rise, that some of the reason why we see prepayment activity is predicated on low-rate environment, but not all. Some of it is around corporate actions or other reasons that have nothing to do with low-rate environment. We do think that if we see rates rise, that we will initially see some stop around the prepayment activity that will have a very temporary overall headwind. As soon as the new money yield rises and is closer again to where the portfolio yield is, we'll make up for that gap.
Seth and then John.
Hi, thank you. Seth Weiss, Bank of America Merrill Lynch. Randy, just wanted to ask a question on the reserve adequacy and the strength of the balance sheet. The slide that you have on the reserve adequacy, it looks like it's actually improved since the last time you gave this, about $1 billion in both the base case and 2% flat environment. Maybe if you could just give us a little bit of color in terms of what's led to that improvement, considering that I believe since the last time you did this presentation, the 10-year yield is right around the same level as where it was June last year, and I think corporate spreads have tightened quite a bit since then.
I think it's just the fact that we've grown. We're bigger than we were the year before. That bigger in-force, once again, gone on in a disciplined way, a good ALM match approach, which generally benefits those analyses when you look forward. I think it's just the fact that we've added new business that's profitable new business, and that's given us a greater present value of expected profits. I don't think it's any more complex than that.
One quick follow-up on potentially AG 38 reserves. I believe last year at this time, you talked about potentially $500 million of charges, but in outer years, maybe 5-plus years out, if rates stay low, maybe you could just update us on what type of charges we might see when we look forward today.
We see nothing with rates at today's level. I have zero expectation for adding to reserve with rates at this level.
How long will we have to see a flat rate environment before seeing any type of charges there?
The window that I'm looking at, I don't see reserve charges.
Thank you. John Nadel from Sterne Agee. A couple of quick questions. One, going back to the individual life presentation just for a moment, the retention of more mortality risk over the last several years versus historically, how do you think about the retention on a single policy size perspective? I think we've seen, at least from one and maybe from a few competitors over the last year or two, volatile mortality results really driven less by incidents and more by severity of claim.
Right. Our current retention levels vary somewhat by product, whether you're talking single life or survivorship or term or that kind of thing. In general, it's a formula that start, we keep the first $2 million or so of risk, and then we grade into ultimately laying off all of the risk. Our maximum that we'll keep on any one life is $10 million.
Okay. Thank you. Just maybe a question on the portfolio, the yield-enhancing strategies. Do I have the math right that 10%-20% of new money investments are going into these yield enhancement strategies, and at least as of now, about 60% of that is into below investment grade components. 6%-12% roughly of overall new money going into below investment grade. I guess the question is that 5.4% of the portfolio that's in BIG, how high would you let that get to before that strategy needs to be shifted?
Yep. Good question. As we're doing that, we're also, of course, looking at the broader portfolio and making sure that we're appropriately de-risking and looking at any credit migration, et cetera. As we look at our projection forward, we expect to stay well underneath of our peers, of course, and underneath of 6%.
Okay.
We've projected forward to see that that's what happens.
You've got some incremental room, but you're going to leave some space for fallen angels or some kind of negative credit cycle.
Exactly.
Okay. Thank you. Just a real quick comment. I think this is one of the easiest investor days to understand business by business that I've ever attended. Thank you.
Thank you. Ryan in the back, then Tom in the middle.
Thanks. Ryan Krueger with KBW. Randy, in the past, you had talked about potentially bringing the RBC ratio down closer to 450 over time. Is that something that you would still anticipate going forward?
Overall, when you think about where we are from a capital standpoint today, this is how I've been saying this, if we wanted to do an M&A, I think we have room on our balance sheet to take some of our excess capital and put it into something like an M&A without risking putting our ratings at risk. Because from a rating agency standpoint, when you do an M&A, you're buying a stream of earnings. You can make that strong case. You're working on your strategy, et cetera. I think we can do something like that. In terms of share buybacks, I think what I'm very comfortable saying is that the free cash flow that we're generating, that's going to continue to be what drives share buybacks.
I don't think that I could go into the balance sheet, pull out a big chunk at time zero. I couldn't go in and pull out $750 million without putting something like my ratings at risk. I think it depends on the use, the strength of the balance sheet. Ultimately, I would expect, as I've said before, that the RBC ratio will trend down over time as we distribute capital using a 400%. That's ultimately where you would expect it to travel to over time. We've had a number of things that have benefited us over the last couple of years. It's one of the reasons I think we've stayed up above 500%. For instance, credit performance has been great. We've had some nice upgrades. Ellen mentioned the below investment grade percentages continue to come down.
We've had some anomalous events that have benefited us and kept us up. When I look forward, every time I look forward at a projection, I expect it to travel down slowly, that five, 10 basis points a year or five, 10 points a year. Okay?
Yeah. Tom.
Tom Gallagher, Credit Suisse. Randy, just on your page three, where you give the stress scenario on your reserves, on your life insurance reserves, and where it's done on a statutory basis-
Have you looked at that same assumption and overlaid it on your GAAP balance sheet and what the sensitivity would be, meaning 40 years rates unchanged? What would that do to your GAAP balance sheet?
The only thing I would point to, Tom, is actually the number I had on page. I didn't reference it specifically, but I think if the 10-year Treasury stayed down at 2% forever
We would eventually probably have to look at that long-term assumption. Each 50 basis points, I think as noted on there, is roughly $125 million. I think that's the one assumption that we would need to think about over a period of time if rates continue to stay low.
Is it linear? Meaning if we just took that assumption from your ultimate earned rate assumption embedded in GAAP.
Would it be as simple as just adding that or multiplying it to the 125 to get, or is there some other larger adjustment that would also need to be made?
No, I think it's fairly linear. It's fairly linear because when you're at a point where you're really not moving your creditor rates inside your model, right? That lever's all gone, it's 50, 50. It's very linear, the impacts, as we look at them.
Okay. Then Dennis, just when I think about the success you've had and how strong the variable annuity earnings growth is here, I think the natural logical question that comes up is there a gating percent of earnings that we should be thinking about if the VA business continues to be as successful? Meaning, is there a limit at which you don't want it to surpass as a percent of total company earnings balance sheet that we should be thinking about? I think certain other companies in the industry have talked about limiting the size of VA as a percent of total. Is that something that you all are thinking about?
Yeah, Tom, what we've been trying to do is change that question to what I think it should be, and let me finish that. That wasn't a criticism. Where do we make our money? We make a lot of our money on fees on assets under management. What we've been saying is that and then interest spreads. The capital market margins, if you will, we want to shrink relative to mortality margins. We don't think about it in the context from an earnings standpoint of whether they're variable annuity earnings or fixed annuity earnings or spread from the retirement business. We've got those three buckets, right? We've said how we're going to shift them around. Your question's a good one, how much guarantee business can you do, and what's the gating issue on that?
That's the balance sheet and how much risk from, particularly, in very severe tail scenarios, there's some temporary call on statutory capital. That's what limits the otherwise what would be unlimited ability to put guaranteed living benefits on the balance sheet. It's much more the constraint is the balance sheet issue, and specifically related to temporary statutory capital calls than it is earnings mix. We manage the earnings mix around those three buckets, fees on assets under management, and the other two that I mentioned. Does that help?
That does. Using that ratio that you're referencing, and I would agree it's better thought about from the standpoint of living benefit guarantees, probably from a balance sheet size standpoint.
Right.
Where are you on that, as it relates to, do you still have capacity under your existing footprint to grow that type of risk business?
Yeah. We're very comfortable that there is not any significant limit to growth because of that constraint. Let me say what significant limit is. We're probably generating sales growth in the limited, excuse me, in the guaranteed living benefits space of 8%-10%, maybe even a little bit less than that. We can do that for as far as we can see and not have the balance sheet constraint.
Thank you.
We test that question almost weekly. There's no capacity issue. We're selling our business on our terms at the rates that we're talking about. What Randy's talking about in terms of 8%-10% includes answering that question. We're pretty comfortable with what we're doing and our growth opportunity to continue to grow that business.
Thanks.
Okay, we're going to go with Erik. Can we get a mic over here to Stephen? If you're in the back, I may not see you as well. If you have a question, please get your hand up so we can get you a mic. Thank you.
Thanks, Jim. Eric Berg from RBC Capital Markets. My question relates to, pardon me, MoneyGuard, and in particular, whether the company with MoneyGuard faces the same challenges in long-term care insurance that your competitors have faced, or whether it's something that we really don't need to worry about. Relatedly, what have you been doing, what are you doing to protect the company from some of the challenges and problems that have been seemingly everywhere in long-term care? Thank you.
Yeah. It's a different animal at its very core, let's start there. The MoneyGuard, again, is a linked benefit product. The way I think about it is the policyholder's trying to lay off a couple of risks, right? Those risks, at the end of the day, they're only going to be able to cash in on one of the benefits. There's essentially an inherent hedge within the product. What happens? If somebody has a long-term care event with our MoneyGuard, the first few years, they're spending down their death benefit. Then they go into the extension. The second important thing, the extension or the money out of our pocket, if you will, is limited. It's not a forever. It's got a term on it.
Let me say one other thing, again, I don't live in those long-term care companies, but if you just read the headlines of what went wrong, they essentially assumed that a lot more people were going to lapse than lapsed. I think at the end of the day, that was the biggest deal. When somebody's holding an option, if that option is very attractive to them, you probably shouldn't assume that they're all going to cash it in for nothing, which is what a traditional long-term care allows you to get is zero. With MoneyGuard, you get your money back if you want it. The newer product, you have to wait five years to get all your money back, but you can get it all back. You have the death benefit. You have the long-term care benefit, which is limited.
The risk profile is dramatically different. We also assumed very low lapse rates when we did the product, just the way we did when we did guaranteed UL. It's the same folks that are pricing these products, we go into it eyes wide open. Stephen?
Hi, Stephen Schwarzman, Raymond James. I apologize in advance. A few. Randy, a couple for you first. I guess as we've all learned recently, there are various definitions of margin. The $9 billion that you're talking about, is that post the provisions for adverse deviation under CFT scenarios or before?
I mean, cash flow testing is generally a best estimate with some element of provisions for adverse deviation. I would think about cash flow testing as primarily your best estimates around mortality.
Sure
things like that. As I pointed out, our best estimate is not a 2% 10-year Treasury forever, but that's the stress scenario I showed.
Okay. Let's put it this way. After the provisions for adverse deviation that would go on there, the numbers would still be very significant?
Yes.
Okay. Then kind of continuing on in that vein, as you pointed out, AG 38, you said $500 million. You thought if interest rates stayed low for a while, now you're saying you don't see it. What changed?
Just once again, we've added new business. The business is just little rates are in a little different position. I think that 500, and I'm going back from memory, emerged in the 1.5% scenario when we showed it. It's just the environment that exists today has changed. I caution. The guys come to me or the team comes to me and says, "Here's the model. There's no impact." These are models, right? At the end of the day, there truly is no impact from the model. Could that model be off by a little bit because you have a small impact? I guess so. Truly the model that exists today, and I think it's just because of shift in business and a little different environment, there is not an impact that's emerging in that model. I always caution, be careful.
They are models.
Okay. A couple more, if I may. On page four, you show the 50% increase in lapses for VA.
Actually hurting GAAP income. I think everybody else in the world has told us that a decrease in lapsation or it would be the reverse, basically. An increase in lapsation would help everybody else's earnings. Pru, for example, just decreased their lapsation assumptions. They took a major admittedly below the line hit. You're different. How come?
Every fact pattern is different. It could be where our lapse rates are today. I don't know. I don't live at other companies. It could have something to do, Stephen, without knowing the exact specifics about just where the liability is today also. Our liability is actually a negative liability right now. That could have some impact on it. I'm not sure of the exact details. I think the fundamental point we're trying to make there is that even with relatively large movements in our assumptions, plus or minus, there are relatively small impacts.
Okay. Last point, you've done a great job of saying, "Look, here's the downside in adverse situations.
One of the reasons why investors are talking about insurance stocks and investing insurance stocks is what happens if interest rates actually go up. You've said it's better, but do you think about what the impact of earnings could be if the 10-year went to 350 or something like that over a couple of years? Ellen's smiling. I think Ellen has.
Essentially, that spread compression would be eliminated. As Ellen pointed out, I think we're investing about 60 to 70 basis points below our portfolio. If you get that sort of rise, you no longer have that spread compression component. If it goes above that, you may even get a little bit of pickup, even though the first thing I'd point out is the elimination of any headwind. The main risk that we were about in terms of rising interest rates is if they go way up really fast.
Sure. Yeah.
We maintain a portfolio of significantly out of the money hedges against interest rates. I'm talking things that strike when the 10-year Treasury hits 7%, 8%. That's the main risk. Up till then, what you find in our portfolio is a lot of internal hedging going on. Rising rates are not good for fixed annuities, but they're great for secondary guarantee UL is probably the best example I'd have for you.
Okay. Thank you.
You bet.
Let's take one more. Josh?
Hi, Josh Smith, TI Craft. A question for Mark and Randy, I guess. You talked about growing your mortality earnings by retaining a lot more business, you showed significant increases in both the new business and the in-force in Mark's presentation. Randy, can you talk about the added capital from that strategy? How much more capital you have to put because you're retaining more business? If you could just quantify that. I know you talked about shifting away from GUL, saving $100 million a year. How much would this add to your capital requirements by retaining more business?
Not at a level that you would even notice. I think the main driver of our growing capital need is going to be that 4%-5% inherent growth rate that I talked about. That's going to be the main driver of any growing capital needs. You're not going to notice on the margin an increased retention of mortality making any significant difference. You also have the added benefit that in terms of the RBC model, mortality is a great risk to take on because it has a covariance offset that occurs against C1 risks. It's a pretty favorable risk profile from an RBC standpoint.
What was the logic behind reinsuring a greater proportion in the past if it was to save capital?
Well, Mark talked about it.
Pricing. If we have our expectation of mortality and we're very comfortable with it and we are within those expectations. If someone else has a more aggressive expectation of what mortality might be, it might be worth laying off that risk at a fixed price.
Thanks.
Okay. We're done?
Yeah. All right. Well, first of all, let me thank my team. They put a lot of hard work into today's meeting. It's because when we come here, we know you're taking 4 hours. We want to try to do the best we can to make sure it's productive time for you. I was quite happy to hear that at least one vote was it's the best IR ever. Again, that's by design because we want to make it productive for you. I'm just going to say what I started out with saying, the key takeaway is consistent performance with upside potential. Thank you for being here. Thank you for your investment in Lincoln. See you at lunch.