Good morning, everyone. I'm Jay Gelb. I'm the Head U.S. Insurance Equity Analyst here at Barclays. We're very pleased to have with us this morning Dennis Glass, who is President and CEO of Lincoln Financial Group. Lincoln benefits from a strong presence in U.S. life insurance, annuities, retirement savings, and group insurance. Lincoln has delivered strong earnings per share growth as well as ROE improvement despite the impact of sustained low interest rates. Let me turn it over to Dennis.
Jay, thank you very much. Good morning, everybody. Pleased to be here. We appreciate your interest in Lincoln. We certainly appreciate all the contributions, Jay, that you make from your position. You have our slides. I think I'll just talk about a few points on the slides over the next few minutes. We can add some Q&A. Let's just position Lincoln for those of you who don't know us, and I'll start by saying we sell only retail products in the U.S. life insurance industry and the emphasis on retail products in the U.S. life insurance industry and within the U.S. life insurance industry, specific segments that have the most growth opportunities. We differentiate ourselves from the competition in a couple of ways.
First and foremost, we have one of the most comprehensive distribution platforms and recognizably better than most of the competition. That's an important part of what we do. We have a big solution set that permits us to pivot as consumer preferences change and as capital market conditions change from products that don't have good returns or good demand to those that have good returns and have good demand. We're recognized by the rating agencies as having some of the best risk management practices in the industry, particularly with respect to our income guarantee benefits in the annuity business. Finally, our balance sheet is as strong today as it's ever been. Like many financial services companies, it got damaged a little bit during the crisis. Our RBC, our cash at the holding company, the strength of our statutory capital is good.
Coming back to the franchise, I think one metric that demonstrates the quality of the franchise is that even prior to and through the crisis until today, we've never had a year where we haven't had positive net flows overall at the company. Again, a very strong franchise combined with a balance sheet. If we go to the first page, you've seen this thing. You can read these numbers as well as I can. We had exceptionally good results over the past since 2008. Income from operations is up 20% first half over first half. I'm more compelled by the numbers in the column on the far right. Operating revenue growth was 6% compounded over the 2009, 2013 period. Operating earnings per share up 15% over that same period. How did we get 15% operating earnings per share on revenue growth at 6%?
Two factors contribute to that. Excellent expense management and probably one of the most robust share buyback programs in the industry. I'll get into that in more detail. Book value per share is up 8%, and our account balances are at record levels of over $200 billion and up 10% in that period of time. On the left-hand side of the slide, we talk about our earnings by business line. I think the business line results are more important from the perspective of how we source our liabilities than they are necessarily from an earnings perspective. The next slide talks about what are the drivers of earnings at Lincoln, because all of the insurance industry and all the products in the insurance industry really have three sources.
They'd be four, investment spread, fees on assets under management, mortality and morbidity earnings, and in our case, we make a profit on our riders fees. Taking each one of those investment spread, we've seen that grow over for that same time period by 7%. It would have been a little better than that if we didn't find ourselves in such a low interest rate environment from 2009 to 2013. I'll talk later on in the morning about upside potential from higher interest rates. Fees on assets under management. This looks just like an asset management company. We have $120 billion separate account businesses. We collect fees on that. Those fees have compounded. The earnings from those fees have grown at a 19% compound annual growth rate, again, in that four-year period.
That's driven by bond prices increases and getting more fees on higher bond prices, equity market prices increasing. That's getting more fees on our equity products. Finally, net positive flows. Again, I'll repeat, we've never had a year since before the crisis and up until today where we haven't had net positive flows. Mortality and morbidity is about 25% of our earnings. You probably heard me say, if you follow Lincoln, that I'd like to see that as a little bit higher percentage of total earnings over time. It's been negative in this period of time here, predominantly because of lower earnings in our group business, and I'll address that in a minute. The rider fees are 5%. The growth in that hasn't been meaningful in this time frame. This is a good overall earnings growth story from the primary drivers.
A lot of times in the marketplace, people attribute to Lincoln a higher dependency on interest rates. I think if the industry were to array their earnings in this format, Lincoln would not be an outlier to the extent sometimes I think it is viewed as an outlier in terms of its dependency overall on interest rates. Now let's talk a little bit about the franchise. As I mentioned at the outset, we have one of the most comprehensive distribution organizations in the United States in the markets that we participate in. Lincoln Financial Distributors has 604 wholesalers. Importantly, those 604 wholesalers drive business through 65,000 independent agents. That number of agents buying Lincoln's product when they could buy anybody's product went up 11% last year. Just one indicator of the strength of our distribution organization.
We have our own retail organization, Lincoln Financial Network, which helps our worksite, which is a combination of our group business and our retirement consultants and advisors. Overall, a very comprehensive distribution organization. Why is that important or what some of the advantages that we've seen from it? Obviously, when you have a product, you got to get it to market, so distribution is important. It's also important that you have comprehensive distribution, smart distributors, because from time to time, you'll have to pivot from product to product. Some of the big pivots that we've achieved over the past couple of years include in our Life Insurance business, we've gone from 65% of selling just guaranteed universal life to a much better and more diversified sale of products. I'll show you that in a minute.
It's not only the ability to have products, but it's the ability of the distributors to convince the people that are actually selling those products to switch from one to another. Another example of that would be in the group business where we've been predominantly an employer paid versus an employee paid business. Our emphasis is now more towards employee paid where there's higher margins and better growth. Once again, the strength of distribution to be able to implement that change has been demonstrated. In our variable annuity business, again, I'll talk a little bit about this. We're making a shift from more guaranteed business to less guaranteed business, and we're accomplishing that simply by changing the incentives for our wholesale organization. The strength of distribution, the ability to bring the right product to the market at the right time, is a differentiator for Lincoln.
Let me go into the annuity business. We talk about our VA business as in our block of particularly our income guarantee businesses as being one of the best in the industry. We've provided a lot of statistics on that. I think it's pretty well understood that that is the case. We have a major shift going on. Major is a little bit strong. We want to shift the amount of guaranteed business that we do to a 70%-30% split. We'll continue to do 70% guaranteed business, but we want to sell 30% of non-guaranteed business. I'll talk a little bit more why that's the case. We're going to do that organically over time just with the power of our distribution.
Also we'll be adding to our portfolio, and we just added to the portfolio a product that is accumulation oriented, and that will help with this shift change. Good mix of business. The business that we've put on the books is high quality business. We're very happy with it. Over time, we'd like to do just a little bit less guaranteed business and a little bit more non-guaranteed business. We can get to that 70%-30% position quite quickly. My screen has gone blank here, so I'm going to have to look down there. Let me talk a little bit more about the annuity business. The annuity business has been tapped as a pretty volatile business for the industry. Part of the explanation for that is some of the competition has had charges to their annuity business stemming from two things.
One is the difference between policy holder assumptions in the pricing and policy holder behavior. If those two things drift apart, you're going to have charges to your earnings because of that if it's just apart in a negative way. The second thing is that hedge performance hasn't been as strong as it has been at Lincoln with the industry, and that contributed to earnings volatility for some of the competitors. We have not had that volatility. What we try to array here is both sort of operating income ROE and then taking everything into consideration, some of it which goes below the line in the way we do our accounting. You can see that this is a very high ROE business. It's consistently a strong return on equity business.
Of course, in 2009 when the markets were dropping off, we saw a little bit of a drift. 15%, 23%, 25% in the life insurance business is pretty strong. I really want to focus you on the lower right-hand side of the slide and that our earnings volatility has been quite muted in the variable annuity business. Only 3% over that period of time. Only 3% of our earnings have been affected by sort of the volatility of our annuity earnings. That would, I think in the industry be a pretty low number. The takeaway from this slide is high ROE business. It's a great growth business, and the earnings volatility is really a lot less than I think the perception of the business is in the marketplace at Lincoln.
Again, that comes from the fact that our block of business has always been sold with relatively low benefits to the policyholders as compared to the competitors. It's always been reasonably priced, and we've had this outstanding economic hedge program that year in and year out has produced very good results. To finish up on the Annuities, the big movement shift in emphasis, 70% guaranteed, 30% non-guaranteed. I think over time that'll be helpful to our beta high ROE business at this moment, and fairly low volatility for the income stream. Let me go on then to the next major business that we have in the life insurance, and a couple of points on the life insurance business. Today's marketplace for return on new business sold is about the best I've seen it over the last 20 years that I've been in the business.
2009, 2010, interest rates, the 10-year dropped from 3% down to 1.5%. All of the business that was being sold by the industry at that time was being sold at high single-digit returns. You may remember we're pretty focused on return on capital, and we actually slowed our life insurance sales so that the capital that have otherwise gone to new business-- Excuse me. Otherwise, have gone to financing new business we used to buy back our shares when our shares were at a discount. Today, where we find ourselves is that the overall competitive environment is very good. We have, over the last couple of years, repriced the entire portfolio, and the returns that we're getting on new capital are in the 12%-15% range.
On new business, capital associated with new business, which is pretty much as good as it gets in the insurance industry. Just sort of emphasize the dramatic change that's occurred. Again, three or four years ago, you were getting 9% or 10%, the industry was, now you're getting 12%-15%, or at least Lincoln is. The blocks of business that have traded hands, even in the last 12 months in the business, are trading hands at discount rates of 8%. Buying blocks of business used to be a better idea than selling new business. Today, by 400 basis points, at least, you're getting a better return on selling new business than buying somebody else's blocks of business. We're very excited about this.
The other thing that shows up here is that we used to be dependent more so on guaranteed universal life. Today, again, with good pricing, we have a much more diversified portfolio of sales. Good diversification, lower risk, best returns that we've seen in a long time on capital associated with new business. The life insurance business is a good, solid performer over time, sort of in the middle single-digit range of growth. We talk about our assets growing in the 4% or 5% range, our mortality, gross mortality growing in the 4%-5% range. It's a good business, but it's not going to rock the world in terms of in growth. Let me go now to our Retirement Plan Services, the third part of our business, and this has been a turnaround story for us the last several years.
You can see, if I turn the slides, that we've had deposits growing at 8% over this period of time. Account values have grown at 10%, deposits, net flows plus the lift in the equity and debt markets, driving those account values. I talked at the outset about being in the United States markets exclusively, but selecting the markets that we focus on, and we select the markets based on higher growth potential. In the retirement business overall, if you included company size and plan sizes of the entire industry, the growth rate would probably be 4%-5%. If you look at the markets that we're participating in, we have a very significant healthcare position. That market expected to grow around 6% according to McKinsey. We're in the corporate small end of the market.
Plan size is from $10 million to maybe as high as $400 million is sort of our target. 8% expected growth. We just entered into the government market. Again, 8% expected growth. It's important that you pick the markets that you want to compete in because there are segments in the United States that have better opportunities than the whole market does overall. How are we getting our growth? Significant investment in distribution, 25% increase in our small market sales force. A lot of the business in the 401 small market is sold through the wirehouses. We're very effective with our wholesale organization there. I just make two comments about comprehensive distribution in this particular case. We just got added by Merrill Lynch. Merrill Lynch needed another provider of small case 401 product. Well, they didn't need another provider of 401 small case product.
Why did they bring Lincoln into the fold? It's because of the power of our distribution and our ability to cross-sell for Merrill Lynch out of the VA business into the RPS business. I think 40% of our business is generated by cross-selling from our annuity wholesalers to our RPS wholesalers. Comprehensive distribution is an important part of how we make a difference. In this case, it allowed us to get on one of the biggest shelves that's in the industry for the sale of the product that we sell. We would not have been able to do that absent this overall comprehensive distribution organization that we have. We're focusing on the bottom line. A lot of our earnings here comes from investment spread.
Falling interest rates has made it a little bit difficult. We're having to manage the bottom line and trying to protect our spread as much as we can, a little bit by lowering the guarantees on the business through negotiations with our customers. Good business, deposits growing well, little pressure from interest market protection spread compression. Let's talk about the Group Protection business. In this business, we have strong distribution, combination of reps selling the business through brokers and our enrollment organization. The combined strength of those two, about 360 Lincoln employees. We target the 100 to 1,000 employee segment. I keep coming back to this. Being in the U.S. isn't enough. You have to participate in the right markets and the right end of the market.
Here, in the segment that we compete in the largest proportion, we're expecting 9% growth or at least McKinsey is expecting 9% growth for that business. If you added all of the different size employers together up at the big end where The Met and Pru compete, the overall growth rate would probably be half of the 9%. We're also trying to expand a little bit into adjacent segments. Employee paid, we've talked a lot about that. With the addition of exchanges and the changes going on in distribution of insurance in the U.S., the employee paid worksite marketplace is becoming much more important. We're participating in that. Unfortunately, we stumbled a little bit here on profitability in 2014. I think in the first half we've certainly not achieved the kind of earnings that we're accustomed to in this business. Why did that happen?
The pricing that we did in the 2012-2013 time period didn't anticipate an increase in incidents that we've seen. Candidly, we should have probably been more aggressive case by case at trying to get better prices than we did during that time period. The recovery opportunity is to reprice about $1 billion worth of premium that was underpriced in that 2012-13 period. That's going to take some time to occur. You can see on the chart, that yellow line, we're talking about the full impact of the pricing not occurring until 2016. In a later slide, I'm going to talk about upside potential in this business from an earnings perspective. That upside potential, which is 5%-7% of $2 billion of premium, doesn't necessarily coincide with the 2016 recovery or repricing that we're showing here.
We expect to be doing a lot better in 2016. The 5%-7% overall premium might take a little bit longer than that. Strong franchise, great distribution, good product, shift from employer paid to employee paid, higher margins, better growth, and a recovery opportunity because earnings got actually hammered a little bit because of increased incidents and us not getting as much pricing as we should have. I'll come back to it. We have a strong franchise. We're a recognized player in this market. All of the things necessary to get that kind of a recovery in earnings are in our control. We've changed management at the top. We're strengthening management across the board. I'm quite confident that we will return our earnings levels to what we have seen in the past and even more. That completes the discussion about the franchise.
Again, I want to start back at the beginning of my speech. We have a very strong franchise. Business is good. We've never had a negative net flow period, which is, again, one demonstration of the strength of the franchise. We lead with distribution, only retail products. All of the businesses are getting good returns on the capital. The group business will get good returns, but all of our businesses are good. The franchise is really very strong and doing well. You saw that reflected in the earnings on the first couple of slides. Let's move from franchise to balance sheet and capital management. Just a little bit on the general account.
The comments that I'd make about the general account are that since the crisis, we've repositioned our credit exposures and we're in a much more diversified position today than we were going into the crisis of 2008 and 2009. I think what we say here is the average rating is A minus. Below investment grade is 5.5%, and it was quite a bit higher than that as we enter 2008, 2009. The net unrealized gain position of $7.5 billion, I forget what percentage that is of the overall general account assets, but it's a high percentage relative to our competitors, and that's because overall we have a little bit longer duration of our liabilities and extend, therefore, our investment maturities when we're making purchases. That's appropriate. Obviously, interest rates have been down for a little while. It hasn't impacted our compression by that much.
On the first slide, we talked about a 1% drag on a 7% earnings growth over the 2009-2013 period. We'll continue to see, and we outline this and give the math around what low interest rates will do to our spread compression in our 10-K, and I encourage you to look at that. A couple of the offsets that we are in a position to be able to achieve is because coming out of the crisis, we tightened up and got out of risky asset classes almost completely as we tried to improve the overall quality of the portfolio. What that does for us today is leaves us quite a bit of room to thoughtfully get back into not high risk assets, but opportunities in the marketplace that we didn't have before. Example is a couple of things that we're doing.
We're extending our reach to do private placements through partnerships with Prudential, as an example, who generates private placements. We're doing a lot of investments in low liquidity assets. Today, low liquidity assets are being sold by banks and other institutions that need more liquid assets. We're taking advantage of that opportunity. We're reinvesting in our alternatives, both private equities as well as our hedge assets. We've been generating about 20 extra basis points each last quarter because of these opportunities to get into different asset classes and the expanses of our reach in there. We've mitigated to some extent, the overall impact of lower interest rates on our spread earnings. Probably not important to mention is that a couple of years ago, we put a very big interest rate swap on the books anticipating lower interest rates.
We are getting, as it says here, about 5 to 10 basis points incrementally each year because of the anticipation and the effect of that swap. All right. Asset portfolio, strong, well diversified, and interest rates are low. We've got some opportunity to mitigate the effect of that because of the investment into other asset classes. Let's go to capital management. Pretty proud of this slide. Everybody talks about being focused on asset management. We've actually bought back $1.9 billion worth of shares since June 30th, 2014. That represents 20% of our shares outstanding. Now we're able to do that for a couple of reasons. One, we generate a lot of excess cash flow at the holding company. Interest and dividends coming up from the subsidiaries up to the holding company. That's one reason we're able to do that.
As I mentioned, in 2008 and 2009, we cut back on life insurance sales a couple of hundred million dollars because we were putting that capital out at 8% or 7%, and we used that capital to buy shares back at a significant discount to book value. That's paid off very well. I use that as an example of our rightful focus on making sure that we're putting capital out at returns that are fair, reasonable, and good for our shareholders. We've increased our dividend over that same period from an annual payout of $12 to $168 million. Now, this is all very good, when you compare it in context to the increasing strength of the balance sheet, I think it's even more impressive.
While we return $1.9 billion to our shareholders, we've also increased our adjusted capital by almost a billion dollars, our risk-based capital by a couple hundred million dollars. Our risk-based capital ratio is highest it's ever been. The cash at the holding company at $600 million is as strong as it's been for years. A lot of capital returned to our shareholder, yet a balance sheet that is strong as it's ever been positions us along with that franchise that I've been talking about quite nicely. Let me quickly talk about some upside potential. Interest rates have hurt us a little bit. Again, 1% reduction in growth on spread versus what we might have done if interest rates were higher. Interest rates go up 100 basis points, fully impacted on our balance sheet, we'd get an extra $30 million.
Group Protection earnings, sometime 2016 or 2017, we should get back to our 5%-7% margins probably. It is hard to say if it would be 2016 or 2017, but we can get back to the 5%-7% margins at some point. That would take our earnings up to $100 million-$140 million versus the $20 million that we have reported in the first half of this year. I think that is upside potential. I come back to, I do think that our multiple is lower than it should be. Part of the reason for a low multiple, I think this perception of high variability in our Annuity business is a wrong perception. I have demonstrated our results are pretty good. The second thing is, I do not think people really recognize how much of our earnings look like an asset management company earnings.
I talked about investment spread about 38%. The average industry multiple for that is 11. Fees on assets under management, which is 32% of our earnings. Again, it looks just like fees on assets under management that an asset management company would report. That is 32% of our earnings. We should get closer to an asset management multiple on that. That would be about 16. Mortality, morbidity at 11 is probably a reasonable return. You do the weighted average on all of that. Our multiple should be about 12 times. I showed VA riders at zero. I think we should get some earnings on our VA riders. We are just trying to be conservative on this slide. We are trading around 9. I think we should be based on the sum-of-the-parts valuation closer to 12.
If you look back historically, our earnings per share are as high as they have ever been in our 110-year history. We are trading at $55. The share price high was $74. At one point, we were getting much better valuation on lower earnings than we are getting on higher earnings today. With that, we have about eight minutes left. Let me just quickly recap. Demonstrated results, 15% operating earnings per share growth over the last four years. Strong franchise, demonstrated results in our franchise, great capital management, strongest balance sheet we ever had, and upside potential both in the two areas, interest rates and Group Protection recovery and earnings, as well as I think there should be a multiple kick based on our sum-of-the-parts valuation. Jay, with that, I will turn it back to you.
Thank you, Dennis. Let us move to the ARS, and while that is being cued up, Dennis, on the group business, to get back to that 5%-7% margin by 2016, 2017, would you envision that is a steady state of progress you could see over the next few years or might that be more back-end loaded?
We're going to have a steady state of progress in terms of repricing that $1.18 billion of premium, Jay, I can't predict the incidence and how that might fluctuate. I think we'll get there. We'll see recovery by 2016. I'm not sure it'll be already all the way to the 5%-7%, probably be a little bumpy in between now and then.
Okay. All right. First question on the ARS is if you don't currently own shares of Lincoln or you might be underweight, what would cause you to change your mind? We can start the clock ticking. 10 seconds for folks to key in. Half of the respondents saying higher interest rates in the U.S. would drive people's decision to become more constructive on the stock and also what you just talked about, improved Group Protection profitability. What do you think about that, Dennis? You think too much attention is paid to the rate story when it comes to Lincoln?
I do a little bit. I think the 50% is strong. For one, I just said that we make $1.5 billion a year. I think Jim Brown figure is maybe $1.4 billion. I forget what we made in 2013. 100 basis point increase in interest rates only increases, I mean, it's nice, $30 million after tax, it's not enormous. I think the math on equity growth in the equity markets is that for 1% increase in the S&P 500, I think we kick in an extra $9 million of earnings. If the equity markets were rocketing, we'd be generating a lot more upside potential in the earnings than what would come from 100 basis points rise in interest rates. Again, that fees on assets under management, don't underestimate the power of a strong equity market or, of course, in reverse, a declining equity market.
It's a pretty big deal.
Okay, next question please.
Higher interest rates help. I'm all for 100 basis point increase in interest rates.
All right, thanks. We can start the clock ticking on this one as well. Several major variable annuity writers are writing less business. The question is: Is this now a good time for Lincoln to accelerate their sales? Let's get the audience view on this. A couple seconds to key in here. The answer is consistent with I think what you think, Dennis. 60% saying yes, 25% saying no, 15% couldn't make up their mind in 10 seconds.
Yeah. From a pricing standpoint, the risk/reward return on that business in the middle 20s or lower 20s is as good as it's been for a long time. That's in part related to the fact there's low volatility and the cost of purchasing derivatives is low. It's a great time to be in the business. You saw reinsurers coming in just for the income guarantee piece of the variable annuity business, money from outside the industry coming into the industry, which is significant in and of itself, but even more significant because it demonstrates again that the quality of Lincoln's business, people coming into the industry for the first time want to do business with Lincoln. That's good. In terms of market share, I want to be clear on this. We don't try for market share in the annuity business.
The governor on the amount of annuity business that we do is a balance sheet issue. That is because we hedge economics, but we don't hedge for statutory capital calls. Under some severe capital market conditions, we could have temporary calls on the statutory capital because of the statutory capital format. What I'm talking about here with 70-30 split between guaranteed and non-guaranteed, the size of the balance sheet, the magnitude of that risk, we have a pretty good clear runway for good growth in both the non-guaranteed and guaranteed business. Jay and I were talking a little bit before the session, and he was talking about what a lot of Americans are seeing today as some of the tax changes are affecting your marginal tax rate.
The old sale of a mutual fund inside a tax-efficient wrapper without guarantees, and we just brought out a new product for that, is a much more consumer-friendly sale today. Actually, we brought this product out just 60 days ago, and we've already sold $50 million of it. A VA wrapper around mutual funds, the way the business used to be sold, is becoming more popular today just because marginal tax rates are so much higher. Good business.
Okay. Next question, please. My confidence that Lincoln can exceed a 12% operating return on equity in 2015. 46% saying hi. That's pretty good. Okay. Yeah, the company's operating at about that level now. Any thoughts on that?
We don't give predictions to earnings guidance. All I can say is we earned 12.6 in the first half.
Great. Okay. The final question for the ARS, please. Which should Lincoln pursue more of? We can start the countdown. Organic growth, acquisitions, de-levering, share buybacks, or dividend increases. The top two responses coming in. Organic growth is just over half, and share buybacks is about a third. That's about what I would have thought.
Yeah, I couldn't agree more with one in four as both the opportunity as well as the right place to be putting our emphasis.
I'm sure people wouldn't be upset with dividend increase either.
Which one is that? Is that zero?
Yes.
Yeah. Our program would be to, this is a board decision, but as we have over the last couple of years, continue to increase the dividends. I don't know what the level of dividend payout relative to the earnings will end up at, but certainly as our earnings increase, we'd like to see the dividend increase as well.
That's great. Well, please join me in thanking Dennis Glass from Lincoln.