Ladies and gentlemen, welcome to Lincoln Financial Group's 2013 conference for analysts, investors, and bankers. Please welcome Senior Vice President of Investor Relations, Jim Schifreen.
Thank you. Good morning, everyone. Again, welcome to our 2013 conference for investors and analysts and bankers. Let me start by saying thank you today for your participation, including those joining us via webcast. Thank you for your interest in Lincoln Financial Group. We have a full schedule today covering a variety of topics, and we'll look to wrap up as close to noon as possible, but certainly leaving time for your questions. Slides for today's event are available on the investor relations page of our website, www.lfg.com. I do want to introduce all of the speakers upfront today as we will quickly transition through today's program. Let me do that with a brief summary of today's agenda, which we have split into two segments.
We'll begin the conference with opening comments from our President and Chief Executive Officer, Dennis Glass, followed by focused business discussions from Will Fuller, President, Lincoln Financial Group Distribution; Mark Konen, President, Insurance and Retirement Solutions. Mark in the first half of the morning will cover individual life and group protection; Chuck Cornelio, President, Retirement Plan Services. We'll have a short question and answer period covering those specific business presentations before taking our break. After the break, our Chief Investment Officer, Ellen Cooper, appearing at her first Lincoln Investor Day, will provide an update on the general account. Mark Konen will return along with Randy Freitag, our Chief Financial Officer. They will cover a number of annuity topics. Preceding our final Q&A, Randy will conclude the formal presentations with his financial overview. Then we'll adjourn for lunch.
Before we start, I want to turn your attention to the safe harbor statements in the appendix of the handout, which covers the forward-looking statements made here today. Forward-looking statements include projections and any other statements providing information about future periods. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from current expectations. These risks and uncertainties are described in the cautionary statement disclosures in the appendix and in our forms 10-K, 10-Q, and Form 8-K filed today with the SEC. We will be using non-GAAP financial measures in today's presentations and have included an explanatory note on how we use these measures and the reasons we believe they are useful. Reconciliations of these non-GAAP measures, including income from operations and return on equity, to their most directly comparable GAAP measures are also included in the appendix.
With that behind us, I'd like to take this opportunity to introduce Dennis Glass to start off the conference. Thank you.
Thank you, Jim, and good morning to everybody. I had a chance to shake a few hands, but not everybody's hands. Let me just say thank you again for taking the time to dig deeper today into the Lincoln story, which I think is a very, very positive one. We're going to have some very engaging discussion and presentations with good information. I also hope in the Q&A sections that we have been able to provoke some good dialogue and talk about what we've been doing. 18 months since we were last together, a lot has gone on. During that period of time, I'm happy to report that our share price is up 75%, which is the second-best performance in our peer group. In that same period of time, our dividend has increased 140%.
As you know, I've been talking about my view that we've been relatively undervalued, particularly if you look at the metric regression of ROE to price to book. I am pleased that our relative outperformance has closed this gap, but at the same time, I think we have a strong opportunity to outperform our peer group in the coming years. During the same period of time, a lot of change has occurred. You talk to us mostly on a quarterly basis, we roll things out quarterly. When you step back and look what's happened over this 18 months in terms of sales mix changes, product design changes, risk management changes, the amount of work, effort, and action that's taken place is really quite impressive, I think. We'll spike some of that out this morning.
During the last 18 months, we've listened very carefully to the questions that you have about our operations and some of the concerns and positive things that you've been saying. We've worked very hard, I hope the information that we have this morning, by the way, I distinguish between information and data. Sometimes you come to these meetings and there's tons and tons of data, there's no information. I think we have plenty of good information in our presentations this morning, all of which has been organized, at least in part, organized around being responsive to your concerns. Finally, the morning gives us the opportunity to confirm our strategic views and reinforce our execution capability.
I'm very optimistic about the prospects for the industry as I look forward. This is driven by several. The first of which is, of course, the capital markets are much more friendly these days than they were 18 and 24 months ago. Remarkably strong equity markets, modestly improved interest rates, a little bit more modestly, more than modestly, if you think of the lows that we saw, and expectations for the 10-year to be at 2.25% by the end of the year. The capital markets are more favorable, and I think will continue to move in the direction favorable to the industry. We have a good economy. Again, I think the economy has potential for faster growth. I'm optimistic with what's going on, and that's good for our business.
We all know about the favorable demographics that sort of put our products in the sweet spot of products for financial services industry and customers over the next decade. That's a positive thing. Again, why I'm optimistic about the prospects for the industry. Let me take a second and focus on something that's even more interesting. That is, as we all know, consumers' appetite for certainty and security is much higher after their experience during the financial crisis than it was before because of the volatility and the loss of equity and home values that they saw. Customers are really more interested in certainty and security. These product attributes are best provided by the insurance industry. Again, more interesting than that is consumers continue to buy our products even as the features in those products have become less rich.
Said another way, I think a more powerful way, people are willing to pay more for what we sell, and that is great in any line of business that you find yourself in. Moving to a couple other issues that I think indicate the prospects, again, are good for the industry. I think there's a more rational, competitive environment than we've seen for a long time. When I say that, I look specifically to the tremendous repricing that's gone on in the Guaranteed Universal Life business in response to the environment, low interest rates in particular. When you move over to the VA business, we're not in any kind of feature war like we were three, five years ago. Benefit reductions are occurring, price increases on the guarantee riders and so forth.
Much more competitive, healthy, competitive environment than we have found ourselves in at certain times. Finally, the regulatory environment. A lot of risks have been taken out of the industry as we've solved some key problems. One of them that comes to mind, of course, is AG38. That was resolved in a very satisfactory way, the industry and regulators working together. It was particularly strong resolution on a retrospective application of the new rules. I think on a prospective application of the reserve requirements, it's still a little bit higher than what I think it should be. Having said that, we also have another regulatory approval, which is principle-based reserving. That's all about from a more economic perspective, right-sizing reserves. I think when that's implemented over the next several years, that some of the sting from the AG38 higher reserves will be removed.
Finally, the captive discussion. You're all aware that the regulators have put their microscope on the structure of captives and the use of captives by the industry. It's been controversial. My view is, I think it's a pretty well-informed view, but things could go in different directions. My view right at the moment is that what we'll end up with, and I think this is positive, is better guidelines around the type of captives that will get reserve credits, as opposed to captives not being available at all. When I look at the type of guidelines that we might see, I actually think that Lincoln's typical captive structure can possibly, and likely, will set the standard for the new guidelines. Better capital markets, better competitive environment. Regulation is going in a reasonably good way. Demographics are going in a way.
Again, all things that are good for our industry. Let me zero in on Lincoln. Our focus, as you know, is individual life, individual annuities, group, and Retirement Plan Services. We're good at those businesses. We have scale in most of the businesses. We're building scale where we don't have businesses. Excuse me, where we don't have scale. Let me talk about what I think the growth opportunities are in those business. In the life and VA business, these businesses are being driven by these demographics and the buying habits that I just mentioned. We think life is ±5% over the coming years, and annuity is ±10% over the coming years. I think those are reasonable expectations on your part. The annuity business has embedded in that 10%, some reasonable growth in the equity markets.
In RPS and group, as you know, we focus on small to mid-size employers, segments that third parties believe have twice the growth potential as the overall market. In those two markets, we're talking about growth in the 8%-9% range as to overall growth of those particular business lines, broadly speaking, of 4%. 5% for life, 10% for annuities, 8%-9% growth for our group in Retirement Plan Services businesses over time. We've been investing heavily, as you all know, in both the RPS and group businesses. Actually, and you'll hear more about both of these later in the morning, we're over the hump on the strategic investments in RPS, but we have a little bit more to go on the group business, and again, Mark will spike that out in his conversation. We're in the right markets with the right products.
As part of our strategic dialogue, stick with me for a couple of minutes on this, Randy will get into it in more depth in a second, I'd like to focus you away for a moment from earnings by line of business to earnings by margin source. I want to do that because the earnings by margin source gives a little bit better view of what's driving our future earnings potential, and it gives a little bit better view of the overall balance that we have, broadly speaking, from the different earnings drivers in our company. Let me list these out, and again, Randy will have a slide on this. Source of earnings, 5% from VA rider fees, 32% from base equity charges on our variable account balances, 38% from interest margins, and 25% from mortality and morbidity. Again, these numbers are in your books.
Let me talk about a couple of those. First, let's start with the rider fees. Rider fees consistently cover our hedge costs and combine that with our consistently strong economic hedge performance. In my mind, this permits me to put a circle around the VA guarantee risk and sort of set it off to the side so I can come back and look at what are the other drivers of earnings in the business. Set the guarantee issue off to the side. 95% of our earnings come from sources of margins that don't have the VA guarantee associated with them. 32% from base equity charges on our variable account balances. We've disclosed that for every 1% increase in the broader stock market averages, our earnings are driven up by $5 million annualized.
So far this year, we've seen about a 13% increase in the overall market averages. At this point in time, that means based on that mathematical relationship, that our earning power on an annualized basis today is $65 million a year higher than it was on January 1st. You can see that equity markets have a big impact on the potential for growth of our earnings. The second and last point is that 38% of our margins come from interest spread, okay? Lower interest rates are pinching that margin, and we have to deal with it. I would say that not all of those liabilities are at their minimum, so the 38% is not quite as big as the problems it might sound at first, and Randy, again, will talk about that in a minute.
We've managed the spread compression very well over the last couple of years. We'll have some slides about that. Let me add that we have levers to deal with it as we go forward, and again, this morning, we'll talk about it. When I step back and look at this overall source of earnings from margins, I'm comfortable with the risk profile, we do remain focused on a couple of things. First one is we do want to grow the margins from mortality and morbidity away from interest rates and equity, interest rate margins in particular. We think that will help quite a bit with beta and things like that, in as much as capital market margins are driven a little bit more by capital markets and have a higher beta associated with them. How are we doing this?
We're doing it by growing the group protection business, which is all about mortality and morbidity. Importantly, we're shifting our life sales mix to more mortality-based products. We have two streams of efforts to move the mortality margins up relative to the other margins. Another consequence of the overall strategy, and this is important, we haven't articulated it this way before, is that our sales mix is migrating to shorter guarantee products away from longer guarantee products. In other words, our sales have a less total contribution from Guaranteed Universal Life and VA guarantee sales. Let me put this into perspective. In the last five years, there's been a significant change. In 2008, 50% of our sales were in shorter guarantee products. In 2012, about 70% of our sales were in shorter guarantee products. We like that trend. We're managing to that trend.
Importantly, I think that market dynamics, what we see going on in the competitive environment, will permit that trend to continue. Again, I think that's good for us long term. Having said this, there's nothing wrong at all with either of our guarantee business. Let me focus on the annuity business for a second. Let me say it as clearly as I can. The health of the annuity business at Lincoln is strong, and nothing I have said qualifies my belief in the quality of this business. We've been transparent about the business, and this morning we'll provide even more analysis, including policy behavior sensitivity, equity market impacts on profitability, and comparison to our competitors on key risk metrics. Let me say that generally, our pricing has been stronger and the benefits we provide less rich over time.
The morning will underscore that our VA strategy and the quality of our book is differentiated in the marketplace. Let me come back to assets and yields for a second. Interest rates are low, and we are assuming modest changes in the next three years. We do have substantial room to add risk to improve returns because since 2009, and you've heard me say this before, we've been in a risk-off position. Specifically, we have two areas, big investments below investment grade assets. Pricing is not quite right to jump into those right now with both feet, but we have about 6% of the general account in those kind of assets, down 4% from the high for us compared to an industry average of 8%. We have room when big investments are properly priced to add that to our portfolio to raise our yields.
Alternatives, hedge, and private equity. We have about 1% of those asset classes in total in our portfolio, our general account, compared to an industry average of about 3%. Again, a lot of room to invest in those assets. We've had good results from those asset classes, and Ellen will get to that later this morning. Regarding capital management. You all know, we talk about it all the time, our capital position is strong. As a holding company, we have a good sizable ongoing free cash flow, providing the opportunity for continued capital management. Just as an update, we've already purchased so far this year, $250 million of our shares in the marketplace. We have good statutory earnings development, and this will be enhanced as we shift away from Guaranteed UL sales.
In terms of the strength of Lincoln and differentiated capabilities, I'm going to end on distribution. The final theme, the size and scale of our distribution franchise is a differentiating strength for Lincoln. 8,000 retail advisors, 600 wholesalers, 500 work site specialists. The combined reach of this comprehensive group has resulted in nearly 60,000 independent agents who have choice among their competitors, choosing Lincoln products for their clients, 60,000 advisors in the U.S. In addition to scale, though, it's critically important that this distribution group be made up of talented people to help drive our overall product strategy. This is critical. Let me give you two examples. You'll hear more about it. Pivot in our life products, changing our product strategy and delivering into the marketplace. We've changed the mix of GUL sales from 64% of life sales a few years ago down to 18% today.
Smart product design, along with a talented and big reach on our distribution side. I think even more stunning is the movement to risk management fund strategies in our VA business. Risk management funds are better for the client because they take volatility out of their subaccount performance, and it's much better for Lincoln because it lowers our hedge costs. Our distribution force was able to go from 0% of sales on risk managed strategies to 78% in 12 months, again, underscoring the quality and the reach and capability of our distribution. We're going to continue to build on strategic investments in distribution, looking to expand this already powerful resource, a key to our success. Let me close by sort of summarizing my thoughts. Again, looking forward, I'm quite optimistic about the industry and even more optimistic about Lincoln's ability to drive shareholder value.
We're in the right market segments. We're moving product design smartly. Our overall risk management is rated best in class by the rating agencies already, and it's improving. We have room to add risk to raise investment yields. We have a strong capital base and free cash flow, distinctive distribution, and a seasoned management team. Combined, these attributes and opportunities will drive operating performance and shareholder value over the coming years. Now let me conclude by moving to my team's more in-depth discussion of these points, starting with Will Fuller. Thank you very much.
Thank you. That's good?
Thank you, Dennis. Good morning, everyone. Thank you for being here. Let me just start with the distribution topic in saying that we are as much a distribution company as we are a manufacturer. That has been a conscious, strategic decision by this management team and has required significant investments over the years, and will continue to drive significant investments, as Dennis alluded to earlier. It is core, and we look at distribution as core to how we enable our strategy and how we deliver shareholder value through that. I'm also optimistic about Lincoln and based on, in many parts, of a lot of the accomplishments that we've made since the 18 months we were last together. We have meaningfully shifted our sales mix in life and variable annuities. We are successfully selling products where consumers are paying more for those guarantees.
We've expanded significantly our small market RPS distribution and getting paid off for those investments. We've added strategic partnerships like Primerica and JPMorgan Chase, further rounding out our platform. As Dennis mentioned, we've increased and continue to increase not only the number of advisors that are selling Lincoln products in the industry to 60,000, but we continue to attract more retail advisors to our platform. We're one of the few companies in the industry, over the course of the last five years, that has been able to attract higher advisor affiliation. We continue to see trends that are favorable to our business. These are some of the areas I'm going to spend on today, and let's start with trends.
When you do business with 60,000 advisors and you do business with really all the leading distributors in each of the segments in the marketplace, from professional service companies and consultants to wirehouses and banks, you can get a real sense of what's happening in the marketplace. Simply put, we are seeing in retail financial services, which is the markets we're in, serving the retail consumer, an industry that is in a virtual state of shift. Whether if you're a wirehouse, you're shifting from a transactional model more towards a planning model. If you're a bank, you're transitioning from a lending and deposit-based model, more towards the planning model. What's driving this and these examples are really demographics and what we see are changing consumer needs and preferences.
I think the crisis has some element to do with it, but certainly what's more powerful are the demographic trends. Let me consider this data point. In America, every day, 10,000 people are turning 65, and this will occur every day for 20 years. That is a powerful example of what is happening in the consumer marketplace. From that, we are seeing three major themes that cut across the partnerships in the industry that we're in. A theme around income, a theme around advice, and a theme around risk. Let's talk about income for a moment. We've seen a shift from a 30 to 40-year focus in our industry around accumulation of assets for retirement to one that's evolving to a focus of decumulation of those assets to support a retirement lifestyle. Every consumer needs a plan.
Advisors and intermediaries need to become more proficient in being able to provide that plan, decumulation is very complex and also very different from a pure linear accumulation of assets to a goal. Add to it not just the capital market issue, but the other issue is longevity and the issues that happen in a consumer's life when you're living longer, the unexpected cost of healthcare, as well as the capital markets and the economic forces that affect those issues. Consumers and advisors are adjusting to these needs, and they need a plan. This major theme of advice is really about having a plan. Consumers are seeking out this advice more often and more frequently, whether they're partnering with a professional directly, whether they're going to a direct company like a Charles Schwab or a Fidelity or a Vanguard.
The theme of advice, the value that these intermediaries are offering customers is real, and they're tools to help them build that plan and help them prepare for the type of lifestyle that they need. That is here to stay. The last point of risk, I think, is also meaningful. I think the crisis affected it pretty significantly. We've gone from an orientation of risk tolerance, seeking out a competitive rate of return, to a sensibility of risk in a more beta orientation of risk management. Right? If you look at the net flows inside the mutual fund industry, if you look at the major winners of assets inside even the mutual fund industry, you will see those that are offering a risk management theme, whether it be BlackRock, PIMCO, or some of the other market leading companies.
This orientation of risk management means that consumers, advisors are seeking out certainty. They're seeking out safety. They're seeking out guarantees. It supports the comment Dennis made that consumers and advisors are willing to pay more for the guarantees that we, and the certainty and the outcomes that we are able to offer. When you step back, and when you look at our manufacturing ability, our ability to create solutions for tax-deferred retirement accumulation, retirement income, safety, and protection, then you combine that with the way we go to market with wholesale and retail distribution, both at scale, you can see why we view these trends as positive. You can see how we've shaped our strategy around them, and that we believe that we will disproportionately benefit from others in the industry over the long term. Distribution enables our strategy, as we talked about.
The focus is being a market leader in all our lines of business where we compete on our terms. I know you've heard that from us before. You will continue to hear that. We access these nearly 60,000 advisors through our two platforms. Both are at scale. LFD is our wholesale business, the largest wholesale operation in our industry. LFN is our retail platform, second largest independent retail operation in the industry. Again, both at scale, both have talented people in them, both have proven results, and both are operating within our allowable structure embedded inside of our products. It's something that we're very proud of. We access these advisors through a strategic partner strategy. We have a strategic partner model. If you step back, we're really a B2B company.
Our strategic partner model is really all about partnering with the leading firms in the industry, the best of the best firms in their particular segment. I cite some examples of a subset of our strategic partners here on the slide. We like to focus on partners where we see more attractive growth segments within them than we do the overall industry. We like partners where we can offer a wide variety of our solution set, so we can get that mix of business. That's great. We like partners that when we focus our attention, we focus our resources, we can earn a higher share and a higher ranking there than we do in the overall market. You see that that's the case here.
We seek out partners that offer opportunities to expand new product lines, expand shelf space of existing product lines, or help us enter new segments. Some examples of that since we last met is our strategic partnership with Primerica, which offers Lincoln access to the middle market consumer segment, really for the first time. Very successful launch. In the first 12 months alone, nearly $400 million of fixed and indexed annuity sales there. The major expansion in RPS is a classic example of our strategic partner strategy. This business is a natural extension to what we already do. Just think about it. It's advisor sold. It's offered through retail firms like Merrill Lynch. It requires a disciplined wholesale process to get the offering to the market and to the end buyer, the employer. We have that.
We have established relationships with firms, we have established relationships with advisors, and we have a best practice, highly disciplined, process-driven wholesale operation inside of LFD. Since we began the investment in RPS, you see that we have launched in really the major players of the industry, the major firms that are the major players in the industry. Consequently, we invested and grew the sales force by 50%, and you see accelerated sales levels, which will continue to grow as we become, and we penetrate and become more mature in these new partnerships. Our investments in distribution for the small market RPS business is paying off. Now two weeks ago, we launched Merrill Lynch as a retirement plan services partner. That was a significant milestone for us.
Because they're the largest player in the small market, and Bank of America, the parent, is the largest small business bank in America. You can only imagine that Merrill Lynch doesn't need another product. They have their choice and their selection of really any product in the industry. In fact, they have told us many times, "We don't need another product." What they do want to do is increase the awareness and the participation of their own advisor base in small market retirement plans. 75% of Merrill Lynch advisors do not engage in this business. This is the value that we bring to the table. This is where we can add value. We bring hundreds of our wholesalers across annuities, MoneyGuard, life insurance that have thousands of relationships with advisors, that have thousands of activities like seminars, training sessions, and appointments.
We can leverage that reach to cross-sell, cross-promote, and help take the retirement plan business to segments of Merrill Lynch advisors that wouldn't happen without that ability. That's what makes us attractive to Lincoln. What's interesting is 10% of our sales, just to give you a little statistics and information, 10% of our sales last year in small market came directly from an annuity wholesaler referral. Nearly 15% of our sales this year come from an annuity wholesaler referral. Just an example of how our model comes to life for the RPS business. Now continuing with the strategic partner theme, we also own one in Lincoln Financial Network, our retail business. LFN is our number one strategic partner in sales. They offer our entire portfolio. They are a leader in each line of business that we have, as you see here on the slide.
No firm has shifted the product mix better and faster than LFN, which really demonstrates for us another advantage of why we have a retail franchise. In the midst of an industry that has become increasingly complex, we've kept the LFN business model relatively simple. It's about independence, and it's about financial planning. Through that model, we have been able to attract more advisors. You see the growth here, fairly consistent before crisis, during, and after. Again, we're one of the few companies in the industry that have been able to attract more advisors. Keep in mind that advisor counts in the industry are declining. To be able to grow in a declining market is really impressive. A big part of that is another shift of advisors to the independent model.
That is the segment of the market that's actually growing faster. That's the segment that we're in, we will benefit from that, and we believe that trend will continue. There's interplay between our LFD business and our LFN business that I think is important. What we learn from attracting advisors, what we learn from having a strategic partner firm of our own, attracting advisors to it and interacting with them in their business, are lessons learned and insights that we can then take in and take out to other strategic partners and help attract other advisors to partner with Lincoln. Firstly, the best practices that we learn in the industry dealing with other strategic partners, we can bring in to our LFN management team and strengthen how we run that business as well.
Investing in the retail business and attracting more advisors will continue to be a focus. We believe this is a great business for Lincoln to be in. When you combine our wholesale and our retail businesses, what does it mean for Lincoln? I started by saying distribution is core to enabling our strategy. Our strategy is to be a market leader on our terms in all our lines of business where we compete. When you pull it all together, what do you have? What you have is consistent results and a proven operating model throughout different types of business cycles. We're growing advisors that sell Lincoln products consistently, this will continue to grow.
We have had through a consistent market presence in our business lines, even though we have raised prices, reduced benefits, even though we focused on shifting the mix of those sales, we've maintained very consistent levels of deposits by line of business as well as net flows. This statistic, 28 consecutive quarters where we've had a minimum of $4 billion each and every quarter of deposits in 16 quarters of minimum of $1.3 billion in net flows is an example of what our strategy coming to life. It's about consistent, it's about good mix, and it's about dollar cost averaging in terms from a risk perspective into these businesses over long extended time frames. The pivot strategy. Since we last met, we talked 18 months ago about the pivot strategy, about the focus to shift the sales mix.
Dennis mentioned we have successfully made those shifts to higher margin sales in the variable annuities with Risk Managed Funds as well as in life. This is not over. We like to say, I think there was a Winston Churchill comment that we're not at the beginning and we're not at the end. We're at the end of the beginning. This is something we're focused on every single day. Every member of my management team, every wholesaler in the marketplace, sleeves are rolled up, focused on pushing this initiative forward. It's not just about the sales mix. It's also about your ability to maintain your consistent market presence and leadership. You see, not only have we been able to successfully shift, but we've been able to do that with consistent market rankings and consistent market share over time. A good example of how this comes together.
In closing, leading franchises in retail and wholesale. We're with the right partners. The strategic partner model is something that Lincoln is distinctive for. We continue to grow advisors that partner with us to sell our products. We continue to grow advisors and attract advisors to our retail business, and that will continue. These demographics that we talked about are really in our favor. Looking forward, I'm confident that we'll continue to be able to drive our company strategy and continue to deliver the results that our shareholders expect and frankly, that we expect of ourselves. With that, let me bring up Mark, and he'll cover life and group protection.
Thanks, Will. Good morning, everybody. As Will said, I'm going to start off talking about life and group. I'll start off with the life insurance segment. What I'll talk to you about today is really the strength of our franchise, how that's enabling us to power through the challenges the industry faces, what we're doing to improve and protect margins, what we're doing to create opportunities out of those challenges that we all face. When you think about it and step back, there's still headwinds. Maybe the wind's not blowing quite as strong as it was, but it's still in our face. That's nothing new. You see them up there.
That ability of our franchise to power through, to manage and grow despite those challenges, to sail in the right direction, if you will, even though the wind is in our face, that's what I want to talk about. There's probably a nautical term that describes that sailing into the wind. I grew up in Nebraska. Not a lot of sailing goes on, so I don't know what it is, but I think you get the point. When you think about our franchise, really, what is it? It's that distribution power that Will talked about. You name a channel in the life business, we're there. Not only are we there, but we're a dominant player there. We're a dominant player with a set of broad solutions, those solutions that have evolved in response to the changing market.
That evolution has been done with a key eye to that discipline, that discipline risk management that is a hallmark of Lincoln. At the end of the day, what you have is a broad set of solutions, still important, still relevant in the life insurance marketplace. If we take a look about what has been happening, what are our actions? This slide up here, it shows what has happened to the 30-year Treasury over time, over roughly the last 5 years, as well as our significant pricing actions. Every one of those little slash marks is a significant action along that way. I chunk it up into three buckets, if you will. Starting out really about almost 5 years ago now, we talked about the need to diversify our product offerings.
We really upped our game in the Term Insurance market, as well as invested heavily to grow our MoneyGuard franchise. Along came 2011 and the headwinds picked up. Interest rates, as you see, began to dive, and we took decisive actions on those products that were most impacted by those interest rates, raising GUL prices, lowering MoneyGuard benefits, et cetera. At the same time, making enhancements to things like our indexed UL portfolio and our Variable Universal Life. We come into 2012 and on into today, and it's all about the pivot strategy. More solutions, meeting more consumer needs, reducing reliance on interest margins. In fact, making lemonade from those lemons we've been handed. We simply led the industry. Our size, our scale, allowed us the wherewithal to anticipate and react to changes in the marketplace. How'd it go?
Pivot sales, VUL, indexed UL, Term Insurance. 31% of our sales in 2011, up to 46% of our sales in 2012. Now in our most recent quarter, past the 50% mark, 51% of our sales in the first quarter of 2013. Solutions relevant across the spectrum. Don't miss that our MoneyGuard and our GUL products still remain relevant for a segment of the market. As Dennis mentioned, prices have gone up, benefits have gone down, yet people are still buying those products. Something they're comfortable with, something we're comfortable with. That's the power of the franchise. That change in sales mix, how does it compare to the industry? If you remember, as we came into 2012, we told you that we were not going to chase sales if we didn't think we could get the returns that we needed.
We signaled that to you. We really grew where we wanted to grow on those pivot products. We declined where we knew we would decline, GUL, MoneyGuard. In spite of that, in spite of our flagship product, GUL, dropped more than 50% 2011 to 2012. Despite of that, we remain number one in the markets we play in. Power of the franchise, compelling product solutions, a kick-you-know-what distribution system that can drive the change in strategy. It's a simple formula. It's powerful, it works. Let's talk a little bit about why you should care. What this chart does is looks at, okay, what are the returns currently from this new mix of business, if you will? Hypothetically, what would they have been if we'd done nothing?
If we'd done nothing and we were sitting here today with the reserve regime that we now have, with the interest rate environment that we now have, with today's economic conditions. Had we done nothing, you can see our expected new business returns would be about 300 basis points lower than they are with this new pivoted portfolio. Pivoted portfolio, looking at a forward curve assumption, 10%-12% returns. All of our competitors can talk about what they I can tell you what our pricing hurdles are, et cetera. What we've tried to do here is kind of forget about what people assume about interest rates. Let's look at a couple of examples. From a forward curve perspective, you see the returns 10%-12%.
That forward curve we've used starts at a new money yield of 4.35% and grows over time to a 5% yield. If I look at today's forward curve, today's forward curve would imply something 25-35 basis points higher than that assumption. Right now it's a conservative assumption, and you see the 10-12. Strong returns. Even more importantly, look at that prolonged low. That 8%-10% return, that prolonged low is assuming we earn 3.75% forever. 3.75% forever. Today, that 3.75%, it's about 75 basis points or more lower than what we're actually achieving with new money. Another very conservative assumption. On that basis, a very respectable, in my opinion, you'll decide for yourself, 8%-10% return. The actions have protected the franchise for our consumers with a broad set of solutions, for distributors, and for you, the shareholders.
The protect and pivot strategy, again, is working. Let me shift gears for a second and talk about in-force. That disciplined approach that I just talked about on new business, we use that same discipline as we work the in-force. Let's start with spread. You all know the previous actions we've taken. We've taken actions on credited rates in the life business. We've implemented various investment strategies. As Randy signaled to you, go forward, we look to have modest spread compression, 10-15 basis points a year because of that credited rate lever. We've pulled that about as hard as we can in the life business. We've continued to look at investment strategies, our most recent one a year or so ago being the Treasury lock program that you're aware of. Go forward 10-15 basis points of compression.
Importantly, this point about new business pricing, let me just spend a second on that. We have decoupled, if you will, our new business outlook and our new business expectations and returns. We decoupled the assumption about what kind of yields we can get from what the portfolio is earning. In other words, we're not borrowing profit from the existing portfolio to subsidize, if you will, the new business portfolio. That will help to alleviate the erosion of spread. I don't know for sure because I don't sit in those companies, my guess is not very many people of our competitors have done that. Again, I believe we lead the industry. Insurance is not the only deal, right? I mean, investment spread is not the only deal in the life business. There's other important assumptions. Our GUL pricing has a lapse assumption that is conservative.
Average is about 2%. You see it running here, experience higher than that. Mortality consistent, enabled by our industry-leading underwriting. Something we don't talk a lot about but is clearly a differentiator in the marketplace. Stable mortality experience, good lapse experience. Bottom line, experience better than we expect on those two key attributes. Let's put it all together. Let's look at our GUL in-force. I'll walk through the chart in a second, but before I do, let me put a couple of things in context. First, our GUL book of business represents less than 20% of our life insurance business. 18%, as you see up here. It has a dedicated investment portfolio because it's a long liability. The average life on our portfolio is north of 20 years, 23, 24, something like that.
60%-70% of the product cash flows for the entire book of business over time have already been invested. They've already been invested in those long portfolios. They've already been invested because people have already given us the money, or with things like our Treasury lock strategy, we've essentially locked in the future yields. Now let's walk through the table. If you look up there, you see our pricing target. As we priced the products, we had a 12% return expectation. Even though 60%, 70% of those cash flows have been invested, 30%-40% of them haven't, right? As well as some of the return expectations when we priced it didn't come true as we moved through time. If you think about what has happened to interest rates back on that first slide I was talking about, catching a falling knife, right?
That has caused about 200 basis points of erosion in our expected returns. On top of that, capital solutions on our guaranteed UL business in particular, while still available, have become more expensive than maybe originally priced in some of those older blocks. That's deteriorated about 100 basis points. Flip side of that, talked about our experience in mortality, our experience on lapse, that's better than we expected. That gives us 100 points lift. As you end up, you get adjusted returns expectations in the 10% range. Admittedly, not where we originally priced. Given that significant headwind, I think it's a solid return profile, thanks again to the size, the scale, the wherewithal of being a market leader. In closing, industry faces some good, industry faces some bad.
The power of our franchise, that disciplined approach to protecting margins, that ability to identify and seize our growth opportunities to make lemonade out of those lemons, I think allows us to continue to grow on our terms and for this business to remain relevant, balancing the needs of consumers, distributors, and shareholders. Future prospects are bright. Let me turn and switch gears and talk about another important business for Lincoln. Group protection. It's important for Lincoln because of the mortality and morbidity aspect we're looking for, that diversification of source of earnings. We have a long track record in this business of being good at it, being very knowledgeable about how to work in this space, and we believe it has a strong growth potential, especially in the segments we look to play in.
Today, I'll talk about how we're investing for that to capture that growth, as well as both near term and longer term levers we're pulling to improve profitability profile. Before diving in, the investments that we're making are expanding the sales force and the product suite. We've done a lot of that already. I'll touch on that in a minute. Strong results so far, as well as making additional investments, which I'll talk about. On the profitability side, we're increasing prices, both on new business as well as on renewals. We're growing the voluntary market, which has a better return profile for us, and we're continuing our focus on managing claims and expenses. Investing and looking to grow profitability. Before we dive into that, let's talk a little bit about the market. In total space, relatively modest growth, 4% expectations.
That's somewhat obviously dependent upon what happens in the economy, et cetera. That 4% is the overall growth expectation for the market. Where we're focusing, where our strategic focus is, growth rates expectations are roughly double that. In voluntary, there's a lot going on, right? Healthcare reform, Affordable Care Act, whatever name you want to put on it's an historic opportunity. It's moving fast, it's also evolving. It's somewhat amoeba-like. While we don't sell many products that square off squarely into the Affordable Care Act, we sell the products that sit beside that. What happens in the healthcare space has impact on us. Again, it's evolving, but there's some clear trends. Those trends include employers being squeezed are looking more and more to pass the cost of benefits on to employees, a la voluntary.
Brokers, the main independent folks that sell our products and sell the health insurance products into the marketplace, they're getting squeezed on the healthcare side. They're looking ways to remain relevant with their client base, as well as to make sure they have good revenue source. Enter voluntary. Employees are looking to really buy more of their benefits at work. Enter voluntary. Finally, it's an under-penetrated space. That's why we are investing to capture a disproportionate share of the pie. The other business we're looking at is, of course, our sweet spot. That small and medium size, less than 1,000 employee, that's our core market. That's what we've built this business on. There's a lot going on, right? Healthcare reform, Affordable Care Act, whatever name you want to put on it's an historic opportunity. It's moving fast, it's also evolving. It's somewhat amoeba-like.
While we don't sell many products that square off squarely into the Affordable Care Act, we sell the products that sit beside that. What happens in the healthcare space has impact on us. Again, it's evolving, but there's some clear trends. Those trends include employers being squeezed. There's a lot going on, right? Healthcare reform, Affordable Care Act, whatever name you want to put on it. The historic opportunity, it's moving fast, it's also evolving. It's somewhat amoeba-like. While we don't sell many products that square off squarely into the Affordable Care Act, we sell the products that sit beside that. What happens in the healthcare space has impact on us. Again, it's evolving, but there's some clear trends.
Those trends include employers being squeezed are looking more and more to pass the cost of benefits on to employees, a la voluntary. Brokers, the main independent folks that sell our products and sell the health insurance products into the marketplace, they're getting squeezed on the healthcare side. They're looking ways to remain relevant with their client base, as well as to make sure they have good revenue source. Enter voluntary. Employees are looking to really buy more of their benefits at work. Enter voluntary. Finally, it's an under-penetrated space. That's why we are investing to capture a disproportionate share of the pie. The other business we're looking at is, of course, our sweet spot. That small and medium size, less than 1,000 employees, that's our core market. That's what we've built this business on. That's what we're really good at.
You can see our leading positions in those various product lines. We'll continue to invest there and continue to look to capture significant share. Now a little bit on the investments. As I've said, we've already made a lot of strategic investments in this business. Most of it has been focused on our distribution side and our solution set. Much has already occurred. We've added reps. We're giving those reps more products, things like critical illness, accident, universal life. We're providing the reps with more support. We reorganized the distribution system and put management closer to the action. We've added worksite specialists and other voluntary capabilities. Look at this chart for a second. We've had an 8% average growth in our sales force, at the same time, actually growing already industry-leading productivity.
Managing that productivity, continuing to grow that force, continuing to give them solutions and tools they need, that's how the momentum will continue. We've had good momentum. We expect that same formula to continue to work for us in the future. We're not only investing in distribution. We're investing across the value chain in this business. People, process, technology. Really focused on improving the employer and now the employee, remember voluntary, now the employee experience. Give them what they want, give them when they want it, and how they want it. Face to face, phone, web, et cetera. Along the way, technology will improve our process efficiency and allow us to absorb the future growth. Now, what's the economic impact? In the near term, those investments, another word for investment is expense. We will see GAAP expenses roughly about 2% of premium. Decide that for you.
In return, we'll end up with outsized revenue growth and margins improving over time. Now let's shift to profitability a little bit more. Loss ratios above expectations, 2012 and first quarter 2013. 2012, it was LTD and severity, i.e. size of claim. In the first quarter, we had group life mortality bite us a little bit. Plenty of actions to improve profitability are underway. I should point out that Lincoln's not alone in this. This is an industry-wide issue. Three-fourths of our competitors experienced above normal claims experience in 2012, mostly in the DI severity area. Same time, about three-quarters of our competitors saw the need to change their discount rate, i.e. that interest rate headwind, change their discount rate on their disability block of business. Prices need to go up. We're pulling a number of levers. First one is that pricing.
We're increasing prices on both new sales and renewals. Upper single-digit increases in the new business area, mid single-digit on renewals with higher increases where warranted by experience. I'll say early signs are encouraging, I'll get back to the fact that the industry needs this. It's not a Lincoln issue, it's an industry issue, which makes getting price increases a little easier. Not easy, a little easier. We're doing that. We're also managing claims. More effective processes. We've decreased the span of control in our claims area, brought, again, management closer to the decisions. We've upped our game on our return to work programs, as well as looking at old blocks of claims and seeing if, A, can we get those folks back to work?
If we can't, is there an economic buyout, if you will, that makes sense to both the client as well as the company, see if there's anything to be had there. Of course managing expenses, which is always something that's ongoing at Lincoln, as well as technology comes on board through those investments, we'll be able to increase efficiency. Finally, accelerating voluntary sales. That's good from where the market is and where the market's going. I talked about the trends. It's also good from a profitability perspective. Our margins are better. Expense ratios are higher. It's harder to get that business, loss ratios are lower, overall, better ROE expectations. At the end of the day, what will this business deliver? Strong returns, outsized growth. That's why we're committed to the business. That's why we're making the transformational investments.
That's why we're focused on growing the profitability, I have every expectation that we'll achieve those long-term results. With that, let me turn it over to Chuck to talk to you about Retirement Plan Services.
Morning, everyone. Let me add my thanks for your being here this morning. I'm going to touch on a couple of themes that are general to the industry before I talk about Lincoln specifically. This business is all about top-line growth at an accelerated speed and on how to turn that growth into earnings. There are, of course, things going on in the industry that affect all of that, not just what we do here at Lincoln. Retirement issues have become even more important to Americans now than they were before. Both Will and Mark have talked about the demographic shifts and folks de-accumulating their retirement savings. I must tell you, particularly below the age of 55, there is a much stronger awareness that retirement savings are critical to the future of folks that are working today.
While the baby boomers are a huge cohort, I would also remind you that two cohorts behind them, the millennials that are just now entering the workforce, that's actually a bigger number of people than are in the baby boom generation. Here's a statistic that shows what I mean. Today, 41% of pre-retirement assets are now in retirement plans, and that's a pretty big shift from the traditional home ownership and relying on Social Security. That's a really great demographic for our retirement business because the trends there are moving in the direction of continuing to accumulate assets here. There's another big one, and this, of course, involves politics, which is the government space is behind where we all are. They're still primarily defined benefit providers to state, municipal, county, city, and of course, the federal government. They're all in defined benefit plans.
That's changing because the government entities know that they cannot continue to provide benefits at that level. There are 11.2 million employees at the state and local level in the U.S. We hear sometimes about the federal government. There are about 2.8 million, 2.9 million of them. That's a blend of ages and workforce types. Those government entities are going to have to start to think about how do we slow down the growth in our liabilities, and how do we move more to defined contribution plans? That will change sort of in a lumpy fashion as the politics come along with the various locales. The government plans, which are tax codes 457 plans, have roughly $195 billion of assets in them today. In about five years from now, that number will jump to about $300 billion, which is roughly a 50% increase.
Finally, in the tailwind section, pure record keeping is, as you know, primarily a commodity. Employers and employees are interested in communications and education to help them understand how to move towards their retirement. What's important about that for us is that plan sponsors pay for that. That adds margin above just pure record keeping, and as you'll see in a minute, we're a very strong player in the value-added provision of retirement services. Like all other industries, there are a couple of headwinds. The low interest rates are affecting earnings across this industry. The life insurance part of the retirement plan business is a large provider of Stable Value assets. As we've talked about every quarter, that's something we focus on heavily, as do our competitors, and we'll talk more about that in a couple slides. The regulatory environment is moving around.
There are three or four trends here that we have to watch carefully because it could affect the future business model. One of them is that the SEC and the Department of Labor will both, at some point soon, propose that any advisor who touches a retirement plan will be treated as a fiduciary. I don't know what the outcome of that is, but that would radically change the advisor's ability to help people retire successfully and then work through retirement. We're watching that closely. That proposal was withdrawn once last year. It will come back in some form in the next year or so. We've been through fee disclosure now. Fee disclosure shows more clearly to both plan sponsors and plan participants what they're paying for plans.
We are seeing the beginning effects of that because in the early months after fee disclosure, basically, it had no impact. First, in the small end of the market, advisors are going to start having to justify their value-added propositions about what they're adding for the fees they charge the plans. In the mid to large part of the space, we're going to start to see more active outreach by plan sponsors to do RFPs and look and see if their fees are still reasonable, and we're going to see that in the industry. Finally, taxes. The $960 billion tax spend, as they call it in Washington, is caused by tax deferrals on contributions into retirement plans.
It would not be at all surprising as they're looking for additional revenue about what happens to the treatment of that deferral of taxes going forward, and it's possible that some of that will be touched. However, I can also tell you that there's that growing awareness in Washington, as I already mentioned, that people need to save for retirement, and disabling some of that might not be the smartest thing in the world. Lincoln's very active in this space. We do that through our trade associations, and we have a Washington office, and we work very hard to stay involved in these issues. The industry is characterized by much greater tailwinds than headwinds, and they are of a much longer nature than the headwinds, which are somewhat shorter in duration.
Despite all those little headwinds, I think we are poised particularly to succeed in this market. Let me talk a little bit about Lincoln here. Last time I talked to you about this business, I told you we were doing a series of activities to change the strategy to focus and execute differently than we had maybe in the past. We've done four things, primarily. Brought on top industry talent, both from the insurance part of this business and the investment management side. We've identified specific markets to focus, and I'll talk about that. We're excited about those markets. We've expanded distribution. Will talked about the small market, but if you take the mid to large market and the small market together, we've doubled our distribution force in the last two and a half years.
We've changed out our record-keeping platform, which sounds a little mundane, but I'll tell you in a minute why I don't think that's quite so mundane. We think this is all working out. The leading indicators in the retirement business at Lincoln are very strong and really poised to generate great future growth. We have huge positive momentum here. You can see some of the rankings that we have in this business and what the mix of the business is on the slide behind me. Where are the growth markets in retirement? The total retirement market is expected to grow roughly 5% over the next several years. We're focused on three markets, though, that grow faster than that. One of them is the healthcare segment, providing retirement plans to healthcare systems and employers.
We rank number three there in terms of assets under management, we've had a 21% growth of those assets since 2010. We're experiencing great success in the corporate market. Let me remind you, we do not play in the jumbo space. We're somewhere between about $1 million and about $750 million, depending on the type of plan. The jumbo space is a pure record-keeping play where margins are extremely thin, and we don't play there. In the smaller end of the market, where the returns are much better, we are very focused on improving our reach there and our growth, and it's been very large. Since 2010, we've grown deposits in the small market 401 space about 20% a year for the last three years. We're turning our attention to the government market. I already talked about this.
Lincoln has several billion dollars of government market assets in our book, but we have not added new business there for quite a long time. We decided to sort of stay out of it. We did some research about this and found it's a perfect market for our value-added, high-touch model. It has the characteristics we like to see on returns, and our current product set needed almost no change to succeed in the government market. We added some distribution capability here this year. About the second week of January, several people came in who focused solely on distributing through consultant firms and directly into municipal and state plan sponsors.
Here again, we're playing in the smaller end of the market, so we're not going to be bidding on the State of New York's retirement plan, but you might see us in counties, cities, and the like. From a standing start, we had three folks, and already this year, 30% of our mid to large pipeline is made up of government business. That's a very promising start for us. I can also tell you we've already sold several cases in this market. Last year, our pipeline had 0% in the government market, which tells you where I think that market is headed and how we can succeed there. These are the fastest-growing markets in this industry, and we think with our service and value proposition, we're poised to succeed in all of them. This slide's a little busy, but let me talk a little bit about this.
We are focused on four areas of strengthening the franchise. We have a significant advantage in the high-touch service model that is becoming prevalent in this industry. We have over 300 advisors and retirement consultants, not enrollers, retirement consultants, who can give individualized advice and counsel and education to plan participants and the plan sponsors who are interested in them. In addition, we have significantly strengthened our communication and education offerings into this market. In fact, we're now winning awards for these programs, whereas a couple of years ago, we didn't do enough of this. Why is this important economically? Plan sponsors pay for these things. It adds to margin, adds to our return in the small market, in the mid to large market, the healthcare market, and the government market. We've been very successful in the last couple of years in adding strength and scope to our distribution.
50% of our current pipeline is from consultant firms that have never done business with us before. We're seeing them turn up in consultant meetings. They're being very active participants in our communication areas, and they're coming to see us at plan sponsor forums. We're very excited about that. Will talked about the increase in small market distribution and the growth there in first-year sales. Let me add one point to his commentary. Right now, 30% of our sales are coming from LFD strategic partners, excluding Lincoln Financial Network. That number was much smaller. The Merrill Lynch start that Will talked about just two weeks ago is already off to a level of success we've actually never seen before, which has a lot to do with that LFD strategic partner model. We changed the record-keeping platform. We've moved our mid to large business on it.
We've got $22 billion of assets on that platform now. We've got 750,000 or so participants. This has two very important features for us. Top-line growth. Our old record-keeping platform was actually getting in the way of our sales. We were losing the opportunity for new business because the platform was so bad. That's changed, as has our attendant web offering, by the way. Sales increased. Secondly, and very importantly, we've got to be more efficient like everybody else, we expect that platform to begin to produce operating efficiencies in our operating areas. We're investing in additional technologies. In addition to the web, mobile applications in the retirement business are becoming very important for efficiency from our sales force to being able to show models to retirement participants, to being able to show them how to start to move into retirement.
Those web applications and mobile applications are cutting edge in certain cases here. Finally, our offering of products and services has continued to expand. We strengthened our offering in the small market last year by adding an NAV-based solution alongside our group variable annuity product. We did not have a product in that space. It has two advantages. First, it opens a new distribution channel for us, RIAs who can wrap fees around that product. Secondly, in the small end of the market, as plans get to two, three, four million dollars of assets, we didn't have a solution that could grow with those employers, and now we do. That product has return characteristics which are essentially identical with our group variable annuity products. We're very excited about that.
From a start of zero in the middle of 2012, by the end of the year, 26% of our deposits in the small market were coming from that product. We're very excited about its prospects for the future. We are the premier annuity provider in the United States, and as people start to decumulate or leave our plans, we want to keep more of them as Lincoln clients. Last year, we introduced the Lincoln IRA product about halfway through the year. We did not have one before. Sub-advised set of products. In the first five months, we sold $100 million of it. We also sell through our retirement consultants and planners our own individual retail annuities. We improved our Target Date offerings. We introduced the Risk Managed Funds into the small market, they took off almost immediately.
Our QDIA offerings have been strengthened by our partners around the industry that help us keep the low end of risk better for our clients. These enhancements in all these areas are really driving the success of this business in a way that we're really excited about. You're seeing it in our significant growth in our top line. These are industry-leading growth numbers. Total deposits grew by 20% since 2010. Our pipeline is at record levels. It's double where it was this time last year. Net flows are up $1.3 billion. You can see the early part of the slide in 2010, they were negative. That's turned around and is staying that way. That net flow story is not just about deposit growth. It's about something else that's very important to us, which is retention.
It's a lot less expensive to add new plan assets to plans we already provide than to acquire new ones. In the last year or so, we have, through a very focused set of efforts, moved our plan lapse rates down from 10% to 5%. How have we done that? We tier our service levels now. We have at-risk lists, and we go see plan sponsors and their consultants before they start to make a decision to leave us, figure out what we can do to keep them. We have also improved our service offerings through our new platform. At the end of the day, this has all led to a retention level, which is one of the best we think now in the industry. In the lower right-hand corner, our organic growth rate proves something else that's also very important.
Our business is growing faster now than equity market appreciation. That's a very strong story as we head forward. Even with the kind of equity market appreciation Dennis is talking about, we're seeing growth in this business that's faster than that, and that's an execution story for Lincoln. We're looking to continue to double our growth in deposits and net flows and assets under management as we go forward. This has not yet translated into growing bottom-line results for the company. There are two reasons for this. One is the interest rate headwind I've already mentioned. Since 2010, our earned rate on invested assets has gone down by just about 50 basis points. We've only been able to move our crediting rates down 29 basis points because we have $14 billion of assets with guaranteed minimum interest rates at about 3%. That squeezes earnings.
We're pretty much done with any of the things we can do to reduce the current in-force rates. We're not going to sit on the sidelines and let this happen to us. Over the last three years, we have released a series of products into the GMIR space, which has addressed the fall in interest rates since the beginning of 2011. Our current product set is at a 1% GMIR, which is as low as the statutes will allow us to go. We also have engaged in the practice of trying to work with enforced plan sponsors to align them with our views of what GMIR value ought to be. In other words, we're renegotiating the deals. We started doing this about a year ago. In the last 12 months, we've actually done enough renegotiation, improved earnings and margins on assets at about $1.2 billion.
We're seeing some impact here. Expenses driven by strategic investments. Those strategic investments peaked in 2012. They are declining thereafter. That's an important measure. Secondly, we've got to be focused on expense management and efficiency. I'm going to go back to the record-keeping platform. We expect unit decrease costs in our operations areas from that platform, and in fact, we will begin to see those declines in expenses in this year, and then it'll accelerate some going forward. Some of that will be offset a little bit by volume-related expenses on the upside, that unit cost increase is very important. We're looking at the headwinds, we're dealing with them, and we're trying to move forward in this environment to get the bottom line to start to look a lot more like the top line. We're going to increase those top-line results.
We're going to continue to increase distribution, the size and scope and scale of its reach. We're going to focus on that high-touch model because it's a differentiator in this business. Again, we're focused on the bottom line. We are achieving the returns you see on this slide. In the first quarter of 2013, we were actually at or above the high end of all of these return numbers. That's a very strong story in a business that does not generate a lot of need for capital, and we think this can continue going forward. We're executing on the strategy. We're in the growth markets. We're focused on execution in this business. We're getting a lot better at distribution penetration. I can tell you, I think that leads to future success for this business going forward. Thanks.
Thanks, Chuck. That was great. While we wait for Mark and Will to join us, we're going to do a quick Q&A and focus on these businesses. Would ask that you adhere to the one question, one follow-up rule, just out of respect for your fellow guests so we can get around the room. For the benefit of those on the webcast, we're going to ask that you wait till you get a microphone. Any questions at this time? Start with Jeff there in the center.
Thanks, Jim. Jeff Schuman from KBW. Just a quick question for Chuck. As we look at your business, you obviously have different buckets of assets, general account, guaranteed separate account, non-guaranteed separate account, other buckets. Can you give us any kind of just rough benchmarks in terms of how the ROAs should shake out for the different buckets as those change?
The guarantees, of course, in our business are only around interest rates. We have essentially no guarantees on the GBAs that are in the business. The ROA is a blend. What you generally find is that the Stable Value product generates a higher ROA than the NAV product. When you blend it all, that asset pool of Stable Value assets drives a big chunk of our total ROA number.
Any benchmarks for the different buckets?
We don't generally break those numbers out that way. I think we'll have to take a look at the information and give you a better sense for that. In the main, the Stable Value number provides an ROA that's two or three times higher than the AUM business.
Okay, thanks.
Go with Tom here.
Thanks. Tom Gallagher, Credit Suisse. One for Chuck, just in terms of translating the asset growth into earnings growth, can you just give us a rough guideline of where we stand on that? I think the retirement earnings have gone down over the last several years. Are we at an inflection point where you're actually going to start to see earnings growth?
Yes. Tom, to give you some sense of that, our growth earned back in earnings roughly half of what we lost in interest margin compression last year. I think we'll start to see, since we don't give forward guidance on earnings, I think you'll start to see the number on the bottom line start to change a little bit as we move forward over the next several quarters.
Got it. Then just for Mark. The pivot strategy in terms of how that's played out, I guess still roughly half of your sales are in MoneyGuard and GUL. Can you talk a little bit about how big of an issue the long-term care component is for you? Maybe size that a little bit, how big of a business that is for you. I understand it's a rider. Is it different than the other long-term care books that are out there, and if so, how from a structural standpoint?
Sure, Tom. About roughly half of our sales are GUL and MoneyGuard. I should say on the MoneyGuard, we are shifting almost a pivot within a pivot from more of a single premium focus to a flexible premium focus to deal, again, with the interest rate headwind. Same thing on GUL. Obviously, we're trying to move more to a level pay versus a single pay focus on that product. We've upped the prices or decreased the benefits on both, mostly driven by interest rates. Now, let me get to your long-term care question. MoneyGuard has a long-term care component, but because of the hybrid nature of this product, it doesn't carry the same risk profile as standalone long-term care insurance. The benefit is not as long. The benefit uses the other person's money or benefit first, the client, before we get into ours.
In other words, they're buying a hybrid benefit, which has cash value, which they could get, or it has a death benefit, which they could get, or it has a long-term care aspect, which they could get, but they can't get all three. They're buying three, they can achieve one, whichever one they so desire. That mitigates the long-term care risk quite a bit. In fact, our sensitivity test would tell you that if you up the morbidity assumption, i.e., either usage or severity of the claim 50%, it only knocks the ROE down a couple of points because of that nature. It also is a limited duration. It's not a forever duration. Those are the main aspects of what makes it different than traditional long-term care insurance. Does that make sense?
That does. Just, sorry, just one follow-up, if I could. Your comment on, I think slide five, where you mentioned the cost of capital solutions has taken 100 basis points out of your ROE. Can you comment on what you mean by that? Because I believe your recent LOCs that you've done for the last few years are only costing you 100 basis points, which seems quite low. How is that more expensive?
These are all vintages. I'm talking about all the in-force Guaranteed Universal Life that slide, that waterfall chart, was all the Guaranteed Universal Life in-force that we have as of December 2012. It's a lot of different vintages of the book. Some of those early were priced at pretty low capital cost assumptions. We've done some that have cost more, some recently as we've turned this stuff out that have cost less. When you throw it all together, it's about 100 basis points impact on that return. All we did was how did we originally price it? How is it evolving? What's the delta?
For Mark, I had a clarification question and then a follow-up as well. On the expense ratio, I believe you said that we're seeing a 2% increase as a result of the investments for growth. I don't recall if you guys have said how long that the expense ratio will remain elevated.
Yeah. Two comments on that. One, what we talked about was $150 million investment over three years. Doesn't mean it goes to zero in year four, but what I've sized there was $150 million over three years. That's the 2%. I'd also point out, as I mentioned, but it probably needs repeating, it's not like we just started on 01/01/2013 with those investments. We've been making investments, maybe not quite at that clip, but close to that clip. It's not like 01/01/2013, all of a sudden you're going to see a 2% more drag because of expenses. That's been happening already to some extent.
Great. Thank you. The only follow-up I had then was the growth potential for voluntary products, the impact as you talked about that healthcare reform might have. This is not a Lincoln question so much as it is an industry question. I wonder if you could talk to the risk that higher employee spend on major medical, on health insurance, as well as perhaps the tax increases that come along with that. What is the risk that we crowd out some employee spending on voluntary and other group products?
As I mentioned, it's an amoeba-like evolution, right? We know it's going to evolve. Quite how it evolves is still yet up in the air. I think there is actually an opportunity here. You're right that we'll have to decide how the employee may have to decide how to break up that dollar of spend a little bit more, and he or she will make the choices. As employers maybe move to high deductible health plans, which is a shift in the marketplace, that brings in a very real opportunity for many of the products we're talking about, Critical Illness, accidents. I think there's actually a good chance that we can create a space where we actually grab a little bit more of the overall pie.
Okay. Let's go to Eric over here, and then we'll go to Eric over here. No, he's right next to Ellen. Sorry.
Thanks, Jim. Eric Berg from RBC Capital Markets. Mark, just one question. You mentioned that experience factors have actually been a positive in your Guaranteed Universal Life insurance business, adding one percentage point to the internal rate of return. That was surprising to me because there were many years in which, prior to the financial crisis, the industry suffered from much lower than expected lapse rates. That was sort of the big problem, or certainly one of the big problems with Guaranteed Universal Life, that people were holding on to them at a much greater rate than the industry contemplated. Isn't that affecting Lincoln? If so, why do we see a positive rather than a negative effect on experience? Thanks.
Sure. Industry leader in that space, right? Number one GUL writer up until last year for many years. When you have that wherewithal and that need to have that wherewithal, you better know how to set your assumptions. If I look at that average 2% lapse rate that we have, if I parse that out into early vintages of GUL, so go back to the early 2000s when we first started doing this business, those were more cash value accumulation with the guaranteed backstop. Those had higher lapse expectations. As we moved into more of a pure guarantee product, so a real protection product, not an accumulation product, we assumed very low lapse rates. Lincoln, once again, led the industry. Our lapse rates on those vintages went down into the 1%-2% range max. We didn't have the issue you talked about.
I can't speak for our competitors, we anticipated very low lapse rates, and that's what we got. In fact, we actually got a little bit higher than those anticipations.
The 2% that you're showing is for all vintages?
All vintages.
Okay.
That's the average.
Okay. Thank you.
Hi, Eric Bass from Citigroup. I was just hoping you could talk a little bit about competition in the group spaces. We've seen a lot of insurers have articulated some of the same benefits that you're seeing in terms of attractive returns, and particularly in the voluntary space. How do you see that playing out, and how does that affect your ability to grow?
Right. Yes, I think that there are certainly a lot of people talking about what we're talking about because it is the market shift that I described, and others are seeing it. I will tell you that we first started talking about it about three years ago. I think that was ahead of most of our competitors. One exception, you can think of who that is, and I'd say is our most formidable competitor in that space. As we look to do that, and as we look importantly, especially in where the spaces we play, at the combined offering we can give. Not only will we be there with voluntary, but we'll be there with those core products that we're already known for in the marketplace.
Because of healthcare reform and all of that noise, people are going to try to separate the wheat from the chaff, if I can use a farm term, and I think we'll be part of that wheat because we'll be there decisively with a comprehensive set of solutions. I like our chances. Competition will be fierce. I think we'll be one of the winners.
All right. Just to follow up, any commentary you can give on pricing and-
In the group space?
Broadly across the group space, yes.
In the group space? As I said in my comments, so from what we're doing, and again, early indications are favorable, although it's by no means easy, is we're trying to up prices on new business in those higher single-digit ranges and in renewals mid-single digits. We're fighting to get that done, and I think because, again, because of the industry position, we're not the only one that saw increased severity. We're not the only one dealing with a lower discount rate on disability. Others are having to make similar pricing changes, which makes it easier, not easy, but easier for that to stick in the marketplace.
Okay. Let's take Mark there.
I'll stick with Mark. Slide five, good slide, GUL IRR walk.
Yep.
You gave a sensitivity on new business. I'm just curious, what would the IRR be if rates stayed and new money stayed where we are today? I guess I'm thinking about the 30%-40% of free cash or cash flow that you'll ultimately have to invest to support that product.
I'm not sure I understand your question, and I got to remember what's on slide five. You're talking about the walk?
Yeah. My assumption is that the 10% ultimate IRR on the block follows the forward curve in terms of kind of new money on the thirty or forty-.
Oh, that 30% to 40%.
If rates stayed where we are, what would that IRR be?
I don't have that size. If they stay at today's low rates forever, I don't have that size at the moment. I couldn't tell you. It would be lower. Maybe you could kind of infer something from the delta in the new business returns. Although it wouldn't be that dramatic, obviously, because 60% of it's already in the bank.
Okay. Maybe a question for Chuck on the retirement plan. I guess the lapses is an interesting chart, 9.9%-5.6%. Can you just talk about pricing trends over that same time period? Obviously, we hear from your competitors about, let's just call it 10% average fee compression on renewal. I'm just curious what you're seeing and how much that's helped in the retention of policies.
There is a competitive dynamic going on in the mid to large market, not the small market, where competitors are coming down market in that space. Some of the smaller guys are coming up. As firms go out for looks at their fees, there has been some compression. We have a pretty balanced and tough model about trying to stick to our returns. The cases that we've worked on to retain are those cases that fit the return profile I showed you on the last page. There have been cases
Barb, we've gone ahead and walked away from them if they're older cases that didn't have the kind of return profile we were looking for. I don't know. I can't tell you that ours is necessarily 10%. They have come in. They have come in. When you have sort of the value-added services that you can add on, for example, those retirement consultants, we can renegotiate those deals and charge by the day for them, then that's an added margin that's added to the fee that the plan is paying. In other words, you're beginning to vary your cost. Yeah, it has come in some. I can't tell you what ours is. We haven't looked at it in that fashion. Yeah, there's been some compression, but again, we're pretty rigorous about we're not going to renew assets just to keep them.
We're going to let them go if they're not at the right return levels.
Just a clarification. On the $1.2 billion that you talked about as being able to reprice the minimum crediting rates, I assume that's just on new money plus, or is that also on the existing money that they have with you?
It's go forward.
Go forward. Okay. Thank you.
All right. Let's take one more. Michelle?
Thank you. I had a follow-up to one of the earlier questions, which was on the spending in the group protection segment. $150 million over the course of three years is actually a lot of money relative to the earnings base in this segment. I was hoping that you can help us with the magnitude of benefits you would expect to get out of that spending. I realize that we will get both a slowdown in spending as well as the benefits from some of that, and I realize we're not going to get that overnight. If you can help quantify what we can see there, that would be very helpful.
Yeah. As some of my colleagues have already pointed out, we don't give guidance. Here, let me give some additional color. Okay. There's the expense. What are we going to get for it? We're going to get the revenue growth, especially revenue growth in the voluntary segment. If you think about a lot of our forward growth, we'll continue to grow in that core market, but we'll also grow in voluntary. I talked about the improved margins that voluntary has vis-à-vis our core block of business. That's one place where we'll see margin improvement. Second place we'll see margin improvement is obviously from just the decrease in the spending over time. Finally, from the improved efficiencies that some of these technology investments will give.
If you look at that slide, value of that $150 million parsed out across the value chain everything from continued distribution investment, although a large part of that's behind us. More now in the technology and the servicing and making us easier to do business with and making us more efficient in doing business on both the core group as well as the voluntary space. The $150 million doesn't go away after three years but drops fairly dramatically, and you start to see the improvement in the margins. One last sizing piece, roughly, that $150 million costs us about 2% of ROE near-term.
All right. We're going to take a quick break. I'd like to be back here in about 15 minutes, a little after 10:30 A.M. Thank you.
Good job.
Oh, how you feel, brother?
Feeling good.
You feel good?
Feeling good.
There go my bone brother. How you feel, man?
I'm feeling great.
I saw your name. I don't want no people to know you're in here. How you feel, fella? Yeah, jam. Sure getting down. Look here, now. We're going to have a funky good time. We're going to have a funky good time. We're going to have a funky good time. We're going to have a funky good time. Now take them up, Red. We got to take you higher. Ow. All right. You want to do it again.
You want to do it again, huh?
Yeah, let's go on back. We got to take you higher. Ha. Hey. Brother.
Yeah.
I want everybody. Let's make sure about two choruses. You might want to wave in. Let's go and do that with this now, all right?
Yeah. All right.
I'm going to get that fellow with the long horn over there. Tell James Horn on me.
Yeah, James Horn. Let's go.
Fred, can you take us higher?
Yeah.
Take us higher. Fred. Fred.
Get up.
Fred. You ever think I'm about to fret? Hell, no. You know what? When I hear a groove like this. Oh, they got the tricks. Yeah, baby. Yeah. Yeah. Like way up yonder, man. It's bad. That thing. Look here, ever got a groove like this? You know. You know. You know. I need the tricks. Got the tricks. Want to teach you. Got to get you. Get the job. Job to job. Need to get you. Got to spit in the bread. You know, I believe, hey, bread time. Brother, I'm getting ready to wave y'all in. You know what? I feel so down. I need to get down. In order for me to get down, I got to get in deep. In order for me to get down, I got to get in deep. Need to get in deep. Dog the deep. Down deep.
Funk some beats. Shaking beats. Down deep. Ow. Ow. Ow. Get on down. Boogaloo, see that beat? That make you think about Megan, the big M. Look here. Look at that. You over there. Who's that guy? You better bang one west way. All right. What we got to do. Got to have a funky good time. Oh, yeah. Got to have a funky good time. Oh, yeah. Got to have a funky good time. I didn't know you were singing, player. Oh, yeah. Don't moan so much, brother, don't moan so much. Got to have a funky good time. Take them out, then. We got to take you higher. Wait a minute. Who you say that was up there? Man, he look familiar. I know I seen him somewhere. That Maceo can do whatever sing over there. Maceo. Maceo. Who? Maceo. Look at that.
Maceo wants to go. Oh, yeah. Hey, Bobby, why do you like soul food? Because it makes me happy. Have a piece like you used to take. Have a piece like you used to take. Have a piece like you used to take. Have a piece like you used to take.
Ladies and gentlemen, please take your seats. Our meeting is about to resume. Okay. At this time, I'm very pleased to introduce Ellen Cooper, our Chief Investment Officer, and Ellen will take us through the general account investments.
Excellent. Thank you, Jim, and good morning, everybody. It's great to be here and be part of the Lincoln management team. I'm going to spend a few minutes today talking about our overall investment management organization and some of the themes that Dennis highlighted for you earlier today. First of all, as you can see, I have leveraged a slide from my colleagues around tailwinds and headwinds. As it relates to the investment portfolio, as you know, we have a very high quality and well-diversified in-
Okay. At this time, I'm very pleased to introduce Ellen Cooper, our Chief Investment Officer. Ellen will take us through the general account investments.
Excellent. Thank you, Jim, and good morning, everybody. It's great to be here and be part of the Lincoln management team. I'm going to spend a few minutes today talking about our overall investment management organization and some of the themes that Dennis highlighted for you earlier today. First of all, as you can see, I have leveraged a slide from my colleagues around tailwinds and headwinds. As it relates to the investment portfolio, as you know, we have a very high quality and well-diversified investment portfolio with a significant unrealized gain and significant relative to peers. We're going to show you that in a few slides. We also have the ability and the capacity to take more risk, as is evidenced by the significant de-risking that we have done since the crisis, and we're going to show you that as well.
In addition, we are finding value in select core and tactical strategies today in terms of how we are investing our overall new money. Of course, as you've heard today and as you've heard many times, we've got low rate environment. In addition, I also want to mention that as predominant fixed income investors, we are among many other fixed income investors. There is a supply-demand imbalance in terms of really wanting to have those risk assets in portfolios and limited supply that is yet a further headwind for us. Before we talk about the overall investment portfolio and also our strategies and what we're doing in this market, I want to spend a moment talking about how we here at Lincoln differentiate ourselves as it relates to our investment process, something that you may not have really heard us stress before.
Like many other insurers, and life insurers in particular, we of course start with our broad overall investment strategy. What does that mean? Well, it means that we are, of course, looking to maximize our overall investment returns. We're looking to do that within our risk tolerance, and we're looking to do that, of course, in a capital efficient way and, of course, relative to our liabilities. We have very strong, disciplined ALM inside of our organization. From that, we define our overall long-term asset allocation and investment strategy. We look at what our forecast is in terms of overall new money and what our views are around the markets and what our views are as it relates to tactical opportunities in markets that are intended for life insurance companies. Sorry, looks like we've had a power problem, but that's okay. We'll go on.
We call that tactical asset allocation. As we define our tactical asset allocation and where we're going to go for the value plays inside of our investment portfolio, we go to manager selection. Now for Lincoln, manager selection means going to external managers to source for us the various different asset classes and the various tactical places where we believe that there's value. We fundamentally believe that this is a differentiator for Lincoln. Why do we do it? Well, as many of you or as some of you may know, I actually came from an asset manager, I very much believe in this overall model, and I think it again adds real value. First of all, of course, we look for asset managers that know how to customize for life insurance companies.
We look for asset managers that, of course, are going to generate performance. We fundamentally believe that it's cost efficient for us. Most importantly, it allows us to be nimble, and it allows us to be tactical. We can move in and out of asset classes and opportunities faster than if we needed to actually build a team or fire a team. In addition to that, there are times when an asset class itself is so nuanced that there's benefit by going to multiple managers for the same asset class because they have different sourcing platforms or different ways in which they actually are able to generate return. The intellectual capital is always slightly different. Again, we benefit from that, and we utilize it quite well. We look at this both across our core strategies and also across our enhanced strategies.
The asset managers, of course, are involved in security selection. All of these assets are on balance sheet, and we are integrally involved in the assets at the security level that go onto our balance sheet, but we rely on the asset managers to actually pick them and generate the performance for us. Now I'm going to turn to talking about our overall investment portfolio. High-quality portfolio, predominantly fixed income. Average rating A-minus. Highly diversified within the fixed income sectors, across issuers, across geographies, and across overall sectors. Very disciplined approach around staying diversified. I also want to talk about what I mentioned earlier in terms of risk capacity. To demonstrate the risk capacity, we have significantly de-risked the overall portfolio. As you can see, from 2009, where our below investment-grade fixed income security percentage was close to 10%, we stand at 6% today.
When we look across our peer universe, we can see that the average allocation there is around 8%. When you think about the large number, the large AUMs of insurance companies, a 2% differential in absolute dollars is a pretty big number. To further reinforce the point about risk capacity, the significant losses from the financial crisis are behind us, as is evidenced from our trend in realized losses. When you look at our unrealized loss, and this is something that you've heard Dennis and Randy both mention in a number of our earnings calls, we are very much ALM-disciplined. We do not look to time these rate risk bets at all.
We stay disciplined to the purpose of being able to manage assets relative to liabilities, as is evidenced by our significant unrealized gains in our portfolio, and higher than our peers. As you can see, at the end of fourth quarter, which is the last place where we had reliable public data, our unrealized gain as a percentage of assets was 12.7%, and that's compared to a peer average that's in the 8.5% range. As we move to the first quarter, our unrealized gain stood at a net $8.7 billion. I want to shift now to talk about tactical strategies and where are we finding the value. Well, we're finding the value in a variety of places. Again, you've heard us talk about this on earnings calls. In yield-enhancing tactical strategies, there are three places that I want to highlight.
When we look across these strategies, they're adding about 15 to 20 basis points per year into our new money yields. Direct middle-market loans, real estate, mezzanine debt, and you've heard us talk about alternatives, both in terms of private equity and also the hedge fund space. In core assets, we continue to see some very significant value in private placements and also in our commercial real estate mortgage loans. Now, in the private placements, again, this is another example of the leverage and the differentiation of using multiple managers. Here we have more than one manager out there with different sourcing platforms, and we utilize them to be able to have different names, further diversification in the portfolio, and different sources of return. Mortgage loans for us, it's a place where we have internally continued to underwrite mortgage loans. We have a long, successful track record.
We continue to find value in the space, and we are very prudent around our overall underwriting standards. A portfolio for us that has held up very well through time. I want to spend a moment talking also about our alternatives portfolio. Again, something that we've spent time talking about on earnings calls. We have a successful track record of producing meaningful returns. Meaningful returns, albeit variable, as you can see. What we illustrate for you here is quarterly returns from the beginning of 2011, we show quarterly returns, as you can see, that are volatile, variable. Annualized returns 2011, 2012. The portfolio has done very well. The portfolio achieved strong returns. Here again, we fundamentally believe in the importance of diversifying the alternatives portfolio.
When we talk about hedge funds and we talk about private equity, within the hedge fund portfolio itself, we have significant diversification among strategies and among managers. In our private equity portfolio, we also have significant diversification across strategies, across vintages. As we continue to deploy capital to put it to work to enhance returns, we again will continue to stay diversified in the overall construction of our alternatives portfolio. I'm going to shift and talk about how our tactical strategies, and I talked about 15-20 basis points. How do we think about from a forecaster perspective, what our overall new money yields are going to be? A little of a busy slide here, and I'm going to talk you through it.
Keep in mind that what you heard earlier today from Mark and from Chuck were pertaining to their particular businesses. Mark's, of course, with longer duration. Chuck's, of course, with shorter duration. What you're looking at here is the aggregate overall Lincoln portfolio and its forecast of new money yields. I want to mention before we walk through the slide that we talked about having capacity to take risk. Having said that, we are conservatively estimating what our new money yields are. We fundamentally believe that we are still in a low-yield environment for some time. While we do have a slight increase in the forecast of our treasury rates through 2015, you can see that it is a very slight uptick. In addition to that, we estimate that spreads will continue to compress.
As a result, the enhanced new money yields will achieve, in our forecast, about 170-190 basis points above 10-year treasuries in aggregate. All of the numbers that you saw earlier today that talked about things like spread compression have this type of a conservative forecast built into it. We, of course, hope to achieve better than that. I want to stress again that we have risk capacity, but it's so critical that as we add risk, especially with what's happening out in the markets today and seeing potential stretching for yield, potential loosening of underwriting standards, that we remain disciplined in looking for those opportunities where we fundamentally understand the risk and fundamentally believe that the returns are there for the long term.
That's our mission, and we're going to stay with it, and we're going to stay conservative in our overall approach and how we build it into our overall forecast. What does it mean in terms of the overall portfolio? The overall portfolio, we believe, holds up well over time. What we've illustrated for you here, the top line shows the assets that are invested now with the portfolio book yield of 5.5%. As we forecast these assets forward and we just simply have them run off the assets that are invested already today, that portfolio book yield declines from 5.5% to 5.4%. Of course, we have new money, and we expect on average that we have about $10 billion of new money to put to work per year.
That's a combination of new pricing and new products, putting new money to work, and it's a combination of recurring premium from product that has previously been priced. Using the conservative enhanced new money yields that we showed you on the previous slide, we start with the 5.4% at the end of first quarter portfolio book yield. We forecast that by the end of the fourth quarter, that portfolio book yield declines to 5% and is in line with the guidance that you've heard Randy mention previously. We do expect decline. We do expect the portfolio to hold up well. It is already integrated into all of the other assumptions and estimates that you've heard earlier today. We continue to manage, again, through that tailwind and think about the capacity for re-risk in a thoughtful way. In conclusion, we have a differentiated investment process.
We utilize external managers to improve our overall performance and allow us to be nimble. We have the capacity to take risk now. We're going to do it in a thoughtful, controlled way when we think we're getting paid to take return. We are not going to chase for yield. We are finding value in select core and yield-enhancing strategies. We do expect the portfolio yield to hold up well in this low-rate environment. At this time, I'd like to turn it over to Mark Konen and to Randy Freitag.
Hello again. Now we're going to switch and talk about annuities. What we will show you today is that we have a high-quality block, and we'll show you how it's different from many of our competitors. We'll show you why we believe this is a good business for Lincoln. Strong growth, strong returns, one that we can continue to grow on our terms. I'm going to talk about how we run the business, our ability to sell through various market cycles, and the benefit of doing so. Then Randy will come up and look a little bit under the hood, talk about our leading-edge risk management, and our ability to weather various economic cycles. Growth on our terms. What does that mean when we think about the annuity business? Here's the formula. Again, simple but hard to execute.
Sustainable product solutions plus best-in-class distribution plus disciplined risk management equals consistency in the marketplace. Sustainable product solutions. We didn't join the arms race pre-crisis. During the crisis, we made no hard rights or no hard left. In post-crisis, we continued to protect margins and manage growth. Best-in-class distribution. Will's already talked about it, but it bears repeating. Unparalleled depth and breadth. I talked about it on the life insurance side, no different here. The ability of this distribution system to drive the strategies we're looking to implement is second to none. Finally, disciplined risk management. This one's pretty easy to talk about in the main. We don't bring a rider to the market that we can't hedge, and we hedge every rider we bring to the market. That's just our approach. Validated as one of the top VA hedge programs by both Moody's and Standard & Poor's.
Now, as Randy will talk about, we lead on policyholder behavior modeling. All of that equates to a quality block of business, differentiated and unique in the marketplace. The proof's in the pudding, right? Let's look at some of the pudding. First, what makes up the annuity business? Let's look at operating income, which is your left pie over there. First off, about a fourth of it is not VAs. It's fixed and indexed annuities. A fourth of our total is not the VA business. That has a stabilizing effect on the overall returns of the book. If I look at the account value side, roughly $100 billion at the end of the first quarter. Again, 40% of that $100 billion is not VA with living benefits. Again, a diversifier. The other 60% is the VA with living benefits.
If I look at that block of business, we now see that Risk Managed Funds make up about 75% of new deposits. Funds that are good for the consumer, funds that are good for Lincoln. That 75% of deposits has driven that little red slice from 0 12 months ago to 8%, you can think about how that slice of the pie will continue to grow. We have a product mix that can respond to shifting market demands. Another view of the quality of our book, let's look at returns. Strong returns and strong capital behind those returns. Our 2012 average GAAP equity is just north of $3 billion, about $3 billion and $0.01. The VA required capital embedded in that $3 billion and $0.01 is at 98 CTE. Our returns, you see them up there.
Even when you put in the VA non-operating elements, the stuff below the line, if you will, high teens flirting with 20% returns. Pretty strong. That product mix and our return profile is an enabler of that sustainability. A consistent approach doesn't mean doing nothing. What you see here is that we've made changes as the market has changed. Staying true to that formula, that disciplined growth objective that we hold dear at Lincoln. What this chart shows is where we were in 2010 with our GLB benefits, where we are in 2013 with our GLB benefits. Our Risk Managed Funds are key to that sustainability over time. Again, benefit to customers while reducing our edge costs. We refreshed along the way, in fact, 28 different actions in those 3 years on our VA book of business between launches and product changes.
Again, consistency doesn't mean doing nothing. I'm going to give you several examples of how this formula, our approach, manifests itself against our peers. First, we're going to look at guaranteed income levels. This up here is based on the top 5 GLB riders in each year from 2008-2012. It shows the average of 3 typical scenarios. What are they? Someone that buys a product at age 65, starts taking income right away. Somebody that buys our product at age 60, starts taking income at 70. Somebody that buys the product at 65 and starts taking it at 70. We show the average of that, or this chart shows the average of that along key riders of the rider. You can see that the red line is near the bottom.
In other words, the amount of benefit we give to the consumer, great benefit, but near the bottom of that chart. We don't lead with benefit. We place less emphasis on those downside guarantees, more emphasis on upside potential. Again, that best-in-class distribution is able to tell that story to differentiate focusing on consumer value in the main, in the total, versus the best features, quote. Again, this approach contributes to our sustainability and our consistency. We've looked at the consumer benefit. Let's look at the benefit to the shareholder, i.e., profitability. Like the last slide, this slide, the source is Oliver Wyman, a respected global consultant most of you have probably heard of, with deep experience in the VA risk management space.
They do a quarterly analysis of industry VA profitability, looking at the top VA contracts and trying to make a profitability comparison on an apples to apples outside view. They use a market-consistent approach and look at the present value of future profits. What this chart has done is taking those five years of quarterly analysis and averaging them over that five-year period. What you see, if you look at the Lincoln red up there, the black dot is our average profitability compared to peers, and then you see the spread. What you clearly see is we are above average each and every time across the peer group. That's that disciplined risk management and product design, another key enabler of our consistency. Let's look at how we've done in the marketplace from a sales perspective.
Our sustainability and consistency has produced the lowest sales volatility in the industry since 2008. Let me walk you through this chart. Let's take the Lincoln bar, and then you can extrapolate to the rest. Again, we looked at quarterly VA sales for that five-year period. We looked at what's the average sales over those five-year periods. That's the $2.4 billion in that denominator. We looked at what's the most sales we ever had in a quarter, what's the least sales we ever had in a quarter. What's that delta? What's the variability in sales divided by our average? We're at 58%. We have the lowest variability. You can see some pretty big numbers up there in some of our peers. I'll let you look at those at your leisure, but they're wide. Why does that matter?
Think about it like dollar cost averaging, selling consistently through all the cycles. That consistency is able to improve our long-term ROE because our sales aren't concentrated in any one period, which might be a market high. I should say that in second quarter, we'll probably see some elevated sales. We had some, as you know, the market's moving pretty quick. There were some market moves from some of our competitors. We made moves mid-May. When you announce a change, when you're upping your price or lowering your benefit, when you announce that change, distribution tends to accelerate sales into the period before the change. We saw some of that, so we will see elevated sales in the quarter, more likely bringing sales forward from what would have otherwise been. Don't miss this. We keep our consistent growth strategy in mind.
We're not chasing market share, but instead focused on improving margins. Finally, net amount at risk. When you look at that consistent presence, diversifying risk over time, it makes a difference. This is net amount at risk of our GMDB against peers and our GLB against peers. We don't talk much about our GMDB block of business, but it's high quality, low risk. 73% of it is return of premium. We haven't sold a roll-up GMDB since 2003. That's a decade ago. On the GLB side, inconsistencies in how competitors and we calculate that number makes this maybe not an apples to apples, but it's not apples to oranges either. Maybe it's oranges to tangerines or something. The order of the magnitude represents how Lincoln compares. We looked at GLB previously, a couple of slides ago, and we saw that we were less risky than our peers.
This is another proof point. 43% of our GLB account value has no roll-up, and our annual roll-up has never been greater than 5%. That leads to these small NARs because, again, of the consistency of staying in the market. When it comes to approaching this business, I'd say there are many ways to play. We've chosen the one I just described. Based on market and consumer reactions, based on our risk and profit profile, based on respected third-party opinion and analysis, we believe our approach is the right one. Randy?
Thank you, Mark. I'm admittedly biased, and I don't want to start off by getting too technical on you, but that's some seriously good stuff Mark just went through there. Those of you who know me know that I'm a person of strong beliefs, strong opinions, and you generally don't have to spend a lot of time guessing where I'd come out on a particular issue. Let me tell you what I think about the variable annuity business.
Because of the fact that I get to spend a lot of time looking at the data that Mark just reviewed with you, because of the fact that I get to spend a lot of time going over the type of data that I'm going to go over with you, because of the fact that every quarter I get to report on a business that makes returns in the 20% range, because of all those facts I believe that the variable annuity business is a very good business. There's other things I know, though. The variable annuity business is a business that, if operated inappropriately, can cause problems for a company. Heck, there are enough examples across our own industry of that to prove that point, aren't there? Problems you've never seen at Lincoln.
It's a complex business that requires all aspects of the business to work together, all pieces of value chain to work in coordination to give you that end result. Product design, distribution, risk management, all elements working together give you the sort of results that Mark just talked about. Good, steady, high returns, favorable risk profiles across the book of business. That's what happens when it all works together. I'm going to go over with you what I broadly would describe as the risk management aspects of the variable annuity business. I want to emphasize that risk management isn't something that just happens to occur at the end of the value chain. It's elemental to every piece and aspect of the variable annuity business. It's part of product design. It's part of distribution. It's hedging.
It's all of those things working together and in concert that give you the results that Mark just went over, that I'll go over with you. We don't have the best VA hedging program without having the best product design and the best distribution system in the industry. Everything we do works together, and it gives you the results we're going to talk about here. I'm going to start out by going over a couple of cash flow scenarios. Hopefully, this gives you the ability to compare our book of business to some other cash flow analyses that are out there in the industry. Hopefully it also gives you a lens, a way to look at this business that's a little different than the accounting that I know a number of you struggle with in the VA business.
Let's start with what I describe as a moderate scenario. Not huge growth in the markets, but sort of moderate growth, 5% a year in the equity markets. The results are what I describe as pretty impressive, which you're probably not surprised by. Fees we charge for living benefits are significantly in excess of the claims that we're going to pay decades in the future. When combined with the hedge assets, what you have is a guaranteed benefit that stands on its own. It stands there, it supports itself. Of course, in addition to this guarantee, we have this big book of base contract fees that derive significant amount of value for the organization also. In summary, what you have is an asset management-like business with a risk management overlay that by design and implementation supports itself. Let's turn to a more stressed scenario.
Equity markets fall 40% before resuming that sort of muted growth. Let me frame this scenario for you. What does this scenario sort of translate into? First off, it's significantly worse than we've experienced over the last five years. If you think about it over a longer period, 10, 11 years, essentially means you have flat equity markets over that 10, 11-year period. That's a couple ways to think about this sort of stress scenario. While the numbers are modestly different, the underlying themes do not change in this scenario. A couple items of note. Despite the drop in the equity markets, you'll notice that the value of the rider fees doesn't really change that much. Back to this whole concept of product design, smart product design, risk management being part of product design.
This is because of a really smart decision that was made long ago to link our rider fees, not to the account value, but to the guaranteed amount. You don't see that variability in rider fees because of that smart decision made long ago by somebody at Lincoln. Claims go up as you might expect, but when combined with the value of the hedge assets, what you have again is a guarantee that stands on its own, supports itself. This allows the base contract, once again, to add significant value without being needed to support the guarantee. Asset management with a strong hedging program, just as designed and implemented. Let's dig in a little on the results of the hedge program over the past few years. Take you back to those last two slides. There's a pattern in both those slides.
You've got fees up front, you've got a wave of claims that occur in the end. You shouldn't be surprised by those results. That's the essence of any product that we sell. Doesn't matter if you're variable annuity. Every product that we sell has that same pattern. That's the essence of what we do in the insurance business. We take in money up front. We promise that we'll do something in the future, return that money in the future. All right? That net cash flow that need to pay out claims in the future gets reflected as a liability in our results, which you have behind me is a comparison of those liabilities to the hedge assets generated by our hedge program. There are two views of the liability we need to think about.
There's both the economically focused ones that we target our hedge program at, and then there's the statutory view of the liability. The key point that you should take away from this slide is that at no point did the value of either of those liabilities exceed the hedge assets. At no point did the value of either of those liabilities exceed the hedge assets. In fact, in the most recent period, the value of those hedge assets exceeds those liabilities by roughly $800 million, giving us a significant cushion. This sort of result is reflected not only in the returns that we post in this business, but in the opinions of the rating agencies who spend a significant amount of time reviewing how we operate our hedge program and have a very strong opinion about that.
As you are probably aware, we updated our assumptions around policyholder behavior in the third quarter of last year. For me, it was really a validation of the thoughtfulness of prior product pricing, that at the end of the day, the sum total of all the changes we made was a big fat zero. Right? I think a lot of other companies have had impacts that are far different from a big fat zero. I believe that the changes that we've made, and I'll talk about in a little bit, really reflect everything that you've come to expect from Lincoln in the variable annuity business, and that's industry-leading behavior. We looked at both lapses and utilization, i.e., how policyholders utilize the benefit. In both cases, we collaborated with consultants to take a much more refined look at policyholder behavior.
We incorporated the latest and the best data to analyze how different types of policyholders behave. What we found is that there really are a number of variables that impact behavior, and using all of our experience, using the input of these outside consultants, we are able to really come up with a much more refined model that gives us a more accurate and robust picture of how the liabilities behave in the variable annuity business. On the lapse side, we ended up lowering base lapse rates and significantly increased the sensitivity of our lapse model. On the utilization side, we made some changes around utilization. On that front, I've been asked a number of times about these changes we made to utilization, and I've read in a number of reports.
The basic sort of tone and tenor or theme of the question is, how could Lincoln have made this change when others haven't necessarily made a change to utilization? Now, I've got a couple of comments on that point. First, we didn't make these changes in a vacuum. Right? We worked with this outside consultant, Oliver Wyman, who arguably knows more about utilization than anybody out there. When you take that significant amount of experience we have, when you combine it with that input from the outside firm, we just have a wealth of data upon which to base these changes. The second point is key, and this would impact, really, any assumption that you can think of. With assumptions, it's about where you start from that often defines the changes that you're going to make in the future.
Everything you've seen today about how we operate the VA business indicates a company that has acted very rationally and conservatively when it's come to this business. Our assumptions around utilization were no different. When we priced these products long ago, we had very little information on how policyholders would behave. As an actuary, and the people who design these products as actuaries, if you don't have 100 years of data to tell you what's going to happen tomorrow, you're very reticent to get aggressive. What do we do? We assumed extremely efficient policyholder behavior, and that put us at the far conservative end of the industry on this particular assumption. We started out in a very conservative place relative to where everybody was, and then we took this very deliberate and thoughtful approach to the changes that we made.
We didn't actually go all the way to where our data told us we could go. Once again, we were thoughtful, and we assume that policyholders will get a little more efficient as you move forward, as they learn more about these benefits, et cetera. Started off conservatively, thoughtful and deliberate approach. Let's focus in on lapses. There's some key takeaways that I'd like you to leave this slide with. First, we have really low base lapse rates, 1.5% on average if you're in the surrender charge period, 11% or so if you're outside of the surrender charge period. Those assumptions fit very tightly to our experience. You see that on the left side of this slide. Second thing I'd like you take away.
To those base lapse rates, we apply a very dynamic formula that lowers lapse rates dramatically as these policies move close to being in the money, because that's what our data tells us they'll do. Third, we allow base lapse rates to fall to a minimum level of 1%. How did we come up with 1%? We looked at this big book of business we've got, and we looked at the policies that were deepest in the money. We essentially looked at the people that had no logical reason, no earthly reason to lapse their policy. We looked at their behavior. We set our assumptions off of that. We looked at what we've actually experienced, and we went a little south. That's how we came up with 1%.
What I've seen, I will tell you, is that with that sort of assumption, 1% minimum, once again, we're very low relative to peer companies. Those assumptions are what give the sort of results that you see on this page, I'm betting that the numbers you see on this page are smaller than you expected when you think about this. I've tried to give you a complete view of the sensitivities here, we've looked at results not only based upon where the markets were at 3/31, but if the equity markets were to fall another 30%, because that changes the answer, I think you should understand that. I've also shown the sensitivity not just to elective behavior, such as lapses in utilization, but to non-elective behavior like mortality, because they all can impact the result. Let me orient you a little bit to this slide.
Left column is the results as the markets existed at 3/31, our actual book at 3/31. Right side is if the markets fall 30% in a moment. Left side of the slash is the impact on our liability, our rider liability. Positive number means the liability increases. Right side of the slash is the impact on net income. Okay? Giving you both views. You'll notice that for a couple of the sensitivities I've shown, in a big way on lapses, in a little smaller way on mortality, you get a big offset in operating income from those changes. You get a negative below the line, you get a positive above the line because lower lapses help your DAC models. That runs through above the line in operating income. A little bit about the results, and you can see the numbers.
I won't spend a lot of time with these. When you think about those lapse sensitivities based upon where we were at 3/31, if we're to lower those lapse rates, I showed you how low those base lapse rate assumptions are, lower them 50%, what do we have? We have a $10 million positive impact on net income. Anybody surprised by that answer? I was a little surprised when I saw it, I'm assuming you're probably surprised. Think about inefficiency. A 20% reduction, once again, a substantial reduction in inefficiency yields a relatively modest $45 million impact to net income. Mortality, I showed mortality because I don't think many people have showed sensitivities around this assumption, and it's important. It's one of the key assumptions. We have improvement in our mortality assumption embedded in our models, but mortality can change.
Who knows what's going to happen with health and how mortality will change, but we need to be ready for those possible changes. What you see there is that a 15% reduction in mortality, which is a pretty big change, I will tell you, once again, has what I would describe as a relatively modest impact on the bottom line for a business that makes in excess of $600 million a year. Small sensitivities relative to what I've seen from our peers. Small sensitivities because of those assumptions that I went over again on the previous page. Low lapse rates. Low minimum lapse rates already embedded in the models. Very sensitive models already give you the sort of impacts you see on this page. Turn it back to Mark here to wrap us up.
I share Randy's passion for this business. We have a quality block of business because of our sustainable product solutions, because of our best-in-class distribution, because of the disciplined risk management Randy just talked about. Bottom line, we are and will be a successful long-term player on our terms. Solutions that resonate with our consumers, powerful multi-channel distribution to deliver them, and for investors, the wherewithal to protect our very strong margins and to manage our growth. Thank you.
Okay. I want to wrap up today's presentation by speaking to a number of the topics that you've asked us about over the past 18 months. Topics where we get the most questions. Mark and I just covered the VA topic, and hopefully you understand in a much clearer way that the VA business, just like that belief that I talked about at the beginning, when operated in a responsible manner, is a very good business. There's three other broad topics that I'd like to discuss today. Earnings mix, both from a line of business standpoint, which is how I've talked about this with you historically, and also from a margin, a source of margin standpoint, which is a little bit of new information in there. Hopefully, you appreciate. Second, I'm going to review with you how low interest rates impact our GAAP stat balance sheets and earnings.
Key, I'm going to show you the important role that ALM plays in those results. Third, I'm going to dig into a number of areas around capital deployment, statutory earnings. If I hit a home run today, hopefully I shed a significant amount of light on these topics for you, answering all your questions, clearing the way for a whole new set of questions, I'm sure. Let's start with earnings mix, and to level set, we made $1.3 billion last year. That number, along with returns, have both returned to the level that they were before the crisis. Two pies on this page, both of them depictions of those $1.3 billion. On the left, broken down by line of business. On the right, broken down by margin source. I'll start with the pie on the left by line of business.
First point I want to make is on the annuity earnings component. Mark talked about this a little bit. There seems to be, I think because the annuity business is admittedly a big business for Lincoln, there tends to be an equivalency in a lot of the reports I read and a lot of the questions I get to our total annuity earnings being just variable annuities. That's not the case. Mark showed you. You see it here again. Over a quarter of our earnings actually come from traditional fixed annuity business. That means that the variable annuity business makes up a little less than a third of our earnings profile. Still significantly less than the component we get from life insurance, and a level of earnings that we're very comfortable with.
Second point I want to make focuses on the retirement and the group business, currently 15% of the total. Mark and Chuck talked about the investments. Those investments are focused on retirement group earnings three, four, five years in the future. That's the component we're looking to grow with those investments. While you're making those investments, you're actually negatively impacted. I would say that 15% total component is being negatively impacted or was negatively impacted roughly 3% last year from the impact of those investments in those businesses. Let's turn to the pie on the right. The source, the earnings by margin source. First point I want to make is about this 5% component, that red slice. That's the slice related to the VA rider fees. Dennis mentioned it. I mentioned it a little bit. We have a hedge program.
We have charges for these rider fees, which allow us to think about this component as a standalone piece covered by the hedge program. Just think back to those cash flow slides that we went over. What was the theme out of both of those? The theme out of both was that between the charges and the hedge program, that guarantee that we provide to the customer was covered, leaving that base contract to stand on its own. That allows us to think about this 32% component made up of VA and VUL base contract charges and retirement charges linked to the equity markets. Think about that component as a standalone element of our earnings.
I'll come back to this a little later to talk about the importance of that asset management-like component to offsetting some of the drag we talked about up in that 38% component that is interest spread. Inside of interest spread, and you heard a little bit about this earlier, in the annuity business, so we don't see much spread compression there. In the components that come from life and retirement, we do expect some level of spread compression going forward, 10-15 basis points on the life business a year, 20-25 basis points on the retirement business. Some level of spread compression in that component. As I'm going to talk about a little later, we've got this equity component that's providing pretty nice offset to that.
Last component to talk about is the 25% piece comes from mortality and morbidity. Once again, where we're investing, group and retirement. That slice, along with the retirement 4% slice, is where you'd expect to see an impact of those investments. That's out in the future. It's a diverse set of earnings that delivered those $1.3 billion of earnings that we experienced in 2012. Let's talk about some of the key elements impacting interest rate risk, starting with ALM. Excuse me. There's a sense, but you actually can see it in reality, you see it in our stock price, where there's some correlation between that and interest rates. The implication of that is there's a belief that if interest rates fall, the value of an insurance enterprise falls.
What this slide is doing is dispelling that particular myth, at least as it relates to the in-force book of business. It can dispel that myth if a company has very good ALM practices in place coming into the event of interest rates falling. If you didn't have ALM in place, you may be in trouble. I'm not going to stand up here and tell you that I want rates to stay low forever, but I can confidently tell you that I don't quake in fear if rates do stay low. I don't quake in fear because of the things we've done from an ALM standpoint in years past. A few items to note. First, we start with a very long duration asset portfolio, and this is the duration of our asset portfolio for the entire company.
It's going to be longer for life, a little shorter for annuities and retirement. In total, a very long duration asset portfolio with an equally long duration liability portfolio. Very close to each other. I think we're primarily familiar with what the concept of duration is. Right? What is duration? It gives you a sense of how something will move, how the value of something will move for a move in interest rates. If you have two items with similar durations, you should see their value move in a similar way when rates change. That's what you see in the graph on the left. Regardless of whether rates go up or rates go down, the value of those two lines changes by a similar amount.
We start at a macro level with very tight matching of our assets and our liabilities, which gives us the good result you see on the left. There's other things that we use ALM for, though. We use ALM really to support key decisions that are made on a daily basis across the company. A couple items that I'd note for in particular. A couple of years ago, we entered into $1.3 billion of treasury locks. About $300 million or so of those have matured with significant value. We still have, like, $1 billion of those things to mature in the future, where we've locked in a 6.5%-7% earned rate for our Guaranteed Universal Life business.
That's covering at the time of implementation, it was meant to cover roughly three-quarters of the future cash flows or the next five-year cash flows in the Guaranteed Universal Life business. Significant value derived from that particular decision. Second item is $100 million or so that we've invested in interest rate caps. This is a protection against rates going up significantly. We haven't really realized any dollar value from that, but I can tell you inside of an ALM model, you derive a significant amount of value. If you think about our book of business, what you see is that we have a very low liquidity Guaranteed Universal Life book of business and a higher liquidity annuity business. They really work together as rates go up.
They work really well together up to a level, maybe six, seven, eight%, that's when you start putting on your protection. The best and easiest way, most effective way to hedge is with your own book of business. GU on annuities work very well together until you get to high levels, that's why we've invested in these rate caps. Historically, the key valuation metric in the insurance business has been book value, excluding unrealized gain and the return that you make on that book value. Why is that? Because what we know is that unrealized gain on the assets essentially reflects the unrealized gain that should exist on the liabilities, right, if you've done a good job with ALM. Of course, as I move to the next topic, ALM is elemental to what? It's elemental to statutory reserve adequacy.
I've updated this slide from the last IRB with both the current results and for an even lower interest rate scenario. Here, I read about all the time, once again, sort of people who try to make an equivalency between one company and all the other companies. I read all the time that if company A or company B has put up additional statutory reserves because of the asset adequacy process, that surely Lincoln must have to do that also. I guess that would be true if we all had the exact same facts and circumstances, but we don't. These are the facts and circumstances that surround Lincoln on this page right here. Hasn't changed in the last 18 months.
Whether we're talking about the base case, low interest rates, or really low interest rates, we have reserves that are adequate when we run them through the asset adequacy tests that are required by the statutory reserving regulations. I was heartened at this year-end, Dennis referred to it, there was a new test that was put in place for AG 38, sort of a principles-based approach, that when we ran that once again against our Guaranteed Universal Life book, it validated the results that have been coming out for years, and that we did not have to put up any additional reserves because of that test. I mention that AG 38 because I think it's a good example of what I'd largely describe as the bucket of regulatory risk, which is really sort of, I think, the primary risk to these sorts of results.
I mean, these are the results with the rules that are in place today. We constantly work with regulators, I don't think anything's coming in this regard. If the rules were to change, obviously the results can change a little bit. As we sit today, very good result from the reserve adequacy process that we run every year. Let's now discuss a couple of the key assumptions that underlie our DAC models. Excuse me again. Our J-curve and our variable growth assumptions. Let's start with the J-curve, which drives the long-term investment rate assumption embedded in. That I can be very comfortable in the fact that even if we had to lower the assumption at some time in the future, let's say by 50 basis points, that sort of impact at $125 million, what is that? That's like 1% of book equity, $0.40 of book value.
Very comfortable that the models themselves are in a good shape and have relatively small sensitivities to any changes in the key assumptions. Let's turn to the variable growth fund assumption. Once again, I feel very good about where we are. We have a variety of growth assumptions that underlie different cohorts of business. They range from 7.5% to 9%. They're keyed to. That I can be very comfortable in the fact that even if we had to lower the assumption at some time in the future, let's say by 50 basis points, that sort of impact at $125 million, what is that? That's like 1% of book equity, $0.40 of book value. Very comfortable that the models themselves are in a good shape and have relatively small sensitivities to any changes in the key assumptions. Let's turn to the variable growth fund assumption.
Once again, I feel very good about where we are. We have a variety of growth assumptions that underlie different cohorts of business. They range from 7.5% to 9%. They're keyed to the underlying investments in the different cohorts. Most recent business we're issuing, which features a lot of the Risk Managed Funds business, we're using 7.5%. You weight together the different cohorts today, you get to 8.6%. As we continue to add new business going forward, that will move towards 7.5% over time. The other key point I'd make, we use a corridor approach, which assumes an immediate 14% drop in the equity markets. When you use that negative 14% drop along with the 7.5% to 9% growth, you have an effective rate inside your models of 7%, very reasonable in today's marketplace.
Last point I'd like to make, with a portion of our earnings linked to the equity markets, we talked about that back on that earning mix slide, we benefit when markets move up. S&P is up roughly 13% so far this year. 13 times five, that's about $65 million. You've got the impacts from low interest rates on this slide. $65 million does what? It offsets all the negative impact that we had projected for 2013, it offsets a pretty good portion of the negative impact we talked about for 2014. A little bit on captives. There's obviously been a lot of discussion around captives. It's a hot topic in the industry. I think that we have an approach to captives that at the end of the day, will be validated by the outcome of the current regulatory discussion.
I think that current regulatory discussion, just like Dennis mentioned, will essentially yield a new set of rules for captives, a new set of rules that are very similar to the way we operate our captives. What are the big themes around how we operate captives? One, we use long-dated funded solutions consistent with the long-dated nature of the liabilities they support. We use 12-year solutions for Term Insurance. We use 20 to 30-year solutions for our Guaranteed Universal Life. Four years ago, we were in a different place. We were using our short-dated letter of credit facility for a lot of our funding. Today, we're using none of it. Everything is long-dated. We're in a pretty darn good place when it comes to that. Secondly, we capitalize our captives just like we capitalize the rest of our company. Couple key points around this area.
All of our onshore captives are capitalized in excess of 400% RBC, just like our primary insurance entities. Another key point, on our offshore captive, which is where we run our hedging program. If we were to bring that thing back onshore, if we were to combine it with L&L, we would actually increase the risk-based capital ratio of L&L. A differentiated result. We're not going to do that. There are a lot of advantages to running that program, that aggregated program, where we do. We're not going to do that. But I think it's important for you to understand that we're not operating these captives in an irresponsible way. We're not operating these captives with limited capital. That's not why we operate captives. These two data points hopefully help you understand that. Let's talk about the statutory story a little bit.
Statutory accounting has a number of items that give operating income some inherent volatility. Year to year, you're going to see statutory results bounce up and down just because of the nature of statutory accounting. I think that when you're thinking about something like this, it's better to look at the average over a period of years, sort of average out those inherent volatility items. What I've shown up here is the five-year average of GAAP income, statutory operating income, net reserve financing relief, and dividends to the holding company. Reserve relief transactions are obviously linked to the sale of Guaranteed Universal Life and Term.
I will tell you that over this five-year period, we benefited roughly $100 million a year from the fact that we had a big book of reserve financing potential coming into this period that we had to do, and that we did during this period. If you adjust for that fact, what you're left with is statutory earnings that average about 70% of our GAAP earnings. It's a pretty good result. It's actually a result that I'm very happy with. I'd point out that statutory strain isn't necessarily a bad thing. We sell a lot of new business. New business entails statutory strain. We sell a lot of new business that's going to be deliver earnings for a long time in the future. I'd also like to make a little defense of capital intensive products. They have a very positive aspect.
Once you sell them, they're there for a long time delivering earnings. It's a little different than a very light capital intensive product, which typically has to be rolled over every one, two, three years. You sell something that's capital intensive, it's there for a while, delivering earnings. Reliable earnings for a long time. It's not about whether you just sell products that have a light capital intensivity or products that have a lot of capital intensivity. It's about the mix. Right? It's about the mix. This mix that we have, which delivers about on average 70%, I think is pretty good. It allows us to do all the things that we need to do when it comes to operating our company.
Allows us to fund the growth of the company, allows us to send dividends to the holding company, which allow us to deploy capital as we've done in a significant way over the last couple of years. Let's turn to statutory capital itself and the holding company. What you see on the top left is that over the last 9 quarters, the end of 2010 to the end of the first quarter, we've grown our statutory capital by $400 million. While at the same time, we've sent a significant amount of capital to the holding company. At the end of the first quarter, we sat with an RBC ratio of 480%, sort of at the top of our peer group. A rate we're very comfortable with, a rate that I can describe as a very strong capital position for Lincoln. A rate we're very proud of.
Benefiting from the strong markets, we've seen that average capital generation grow over this period relative to that five-year average I just went over. We've averaged about $900 million a year over this 9-quarter period. We've sent $1.6 billion of that to the holding company, like I said. At the holding company level, we have been consistently beating our guidance for $400 million of annual capital deployment. In fact, we've averaged $600 million a year for this 9-quarter period, with the vast majority going into share buybacks, $1.2 billion of share buybacks at an average price of $24.08 a share. Not a bad investment. Excuse me. Just as a quick update, Dennis mentioned it, but we've actually done another $150 million in the second quarter.
That puts us up to $250 million of share buybacks in the first half of the year, continuing that trend of strong capital deployment that you've seen on this page. The total deployment over the last 9 quarters, $1.2 billion share buybacks, $200 million of delivering, $1.4 billion. That's about $500 million more than the $100 million a quarter I guide you to. We've been able to go over and above because we've been able to leverage a strong cash position at the holding company that we came into this period with. We sold some assets. When you wrap it all together, what I'm telling you is that I'm very comfortable with the $400 million guidance that I've given. I'm also very comfortable that every person at Lincoln will do everything we can to do better than that guidance.
I'm going to stick with that $400 million, just as I have for the last two years and assure you that we're going to do everything we can, knowing that we have a very strong capital position we start from, 480%, to exceed that level. Simply put, strong earnings, a strong capital position has and will continue to yield strong capital deployment. I'll just wrap up with a couple comments. I'm very confident about the future at Lincoln. We're investing to grow the group and the retirement businesses. The VA hedge program is covering the guarantee risk. We've got equity-linked components of earnings that can offset some interest rate pressure that we're experiencing. We're well-positioned to withstand a low-rate environment, and we've got a strong capital position at the company.
With that, I'm going to invite my colleagues back on stage, and we will go to the final Q&A. Okay. I'm going to ask if you keep your hands up after we do get a mic. We've got two mics. We'll work both sides of the room, but those folks need to know where to go next. We'll start with Suneet over here, and bring it up to Eric over here.
Suneet Kamath with UBS. I guess for Randy, on that chart that you've shown us now for a couple of years, where you have the hedge target and the statutory reserve on the VA business. You show the level of the S&P 500, but you don't show the level of interest rates. My understanding is that there's a benefit that you're getting in terms of the hedged program that you have from low interest rates. What would that scenario start to look like if rates start to climb, those different bars that you show?
Describe the scenario again. I missed the first part a little bit.
Yeah. You know the slide I'm talking about with the three bars that you've shown us now for a while. I don't know if there's actually a page number on it. It's got the hedge target, it's got the statutory reserve.
Okay. Yep.
Yeah. You show us the S&P 500 level-
Yep
against that, but not the interest rate environment. Obviously over that period, interest rates have fallen, which I think has helped.
Right.
You've gotten the hedge benefit. What does that look like in a period of rising interest rates?
It changes. It changes because the economic hedge assets that we've got, which have some interest rate protection in them, as rates rise, go down in value. Whereas your statutory reserve has a natural limiting factor of zero. Can't go below zero. It can change a little bit. That's why it's key that we start from a very strong position, right? We start with this $800 million cushion, which gives us a lot of support against rate rises. The other key point that I make is statutory reserve can actually go above the economic assets, especially if rates go up significantly. That's one of the advantages of running the program the way we do, right? Because it allows us in sort of that uneconomic scenario, that uneconomic scenario where statutory reserves actually increase the economic view of the liability.
It allows you to use that credit facility or a letter of credit as support for that uneconomic situation. We don't have to do that in these normal times, right? We've never had to do that. We always have these real assets in excess of these real liabilities. If you get into that uneconomic situation like you just described, one of the advantages we have is that we can use a letter of credit facility to support that event.
All right. I guess my follow-up is on those cash flows that you provided for the VA business again, where you did the different scenarios. In some of those scenarios, I guess the claims are pretty high.
I guess, you're showing present value calculation over multiple years, but what would the accounting sort of look like on a GAAP and stat basis in any given year? When could it get really bad, which would perhaps cause you to do something different in terms of your capital redeployment?
I don't really understand the nature of the question, but let me take a crack here. It shouldn't get bad because our hedge program is focused at the economic nature of that liability, right? As those claims get closer and closer, the liability that we have on our balance sheet is going to be there. The assets that we have on our balance sheet are going to be there to be sold to fund those claims. That's what the hedge program does. If we're doing a good job, we have minimal breakage. Take you back to that slide Mark looked at, where we just have a very small difference between the above the line and the below the line results in the annuity business. If the hedge program continues to perform in that way, we shouldn't have negative accounting implications as you get closer to those payments.
Just like we don't have negative accounting implications as we get close to mortality payments on the life business or any other payment that we have in the future. Remember the comment I made. That pattern is no different than the pattern that you see for any product that we sell. Yep.
Let me add. I think this is an important question, if I could just amplify the first one.
Under certain economic scenarios, it's true that our economic hedge target will drift differently than the statutory hedge target. The statutory hedge target is a temporary target. So long as you know what the consequences of that drift is and you have backup plans, it's not a permanent reduction in capital. If you're not hedging on an economic basis, then you have the possibility of a permanent reduction of capital because you haven't properly hedged the present value of your liabilities against the present value of your assets. Temporary drift on the statutory side because of a momentary set of interest rate and equity positions is just that. It's temporary. Again, it's not like credit losses. That's a permanent reduction in your capital. I'll just make that point.
Eric.
Thanks. Eric Bass from Citi. Wanted to ask you, maybe you could expand on how you think about target returns, both for new business kind of by segment, but also for your overall ROE. Dennis, I think you alluded to earlier, kind of based on your business mix, you do have a higher beta. That should play into your cost of capital. How do you think about targeting ROEs and making sure that you exceed that cost of equity across markets.
Well, let me talk about the overall, I'll turn it over to others for the businesses. As I've said in the past, in total, we reported the lower 11%, right around 11% ROA last year. In the world where interest rates stay at the very low level, I expect that we can essentially hold that level. In a world where rates start going up again, you can start to see more improvement in that ROE. That ROE, which has come up roughly 300 basis points over the last four or five years. We're at 11. I think we can hold that in this low rate environment. We can improve it by continued capital deployment, by continuing to put on products at higher returns than that if rates give you a little bit of outperformance.
In general, what we do, matter of fact, I've got a meeting on it when I get back this afternoon. We take the risk-free rate by product line, we adjust the risk-free rate up for the risk embedded in each of the products. Each product will have a different hurdle rate. Now, having said that, let's just take sort of a multiple on the VA earnings. Back when our stock was at its high point of $70 or so, you all were awarding us a 12 and a half multiple on that business. With the crisis and so forth, the multiple has drifted down to middle single or low middle single digits. The current multiple is too low. I think sort of excessive exuberance. Is that the word that the Secretary of the Treasury used when it was at 12 and a half?
It's somewhere in between there. In the same sense, a spot equity cost on a VA, I don't think you can run your business on any of the spot equity costs. You have to make a good determination of what that should be over time. I think we're covering the cost of equity, generally speaking, but for the places where Mark was saying that we have to do a little bit more on our IRRs.
Let's go with Bob right here.
I have two questions about credit, one to Ellen and one to Randy. Ellen, how do you think about the 2008, 2009 crisis, or how should we think about it? You said you have a lever that you can pull to re-risk, and you correctly point out that Lincoln's done a really good job of managing credit on a micro basis. The flip side of it is from a macro basis, Lincoln de-risked at an unfortunate time.
In 2009, as far as cutting, you didn't want to cut high yields back. You would've liked to have owned a 9% high yield in 2011, 2012. Now you're at a sort of crazy point where you can re-risk but you correctly said you're going to be cautious and tactical in how you do it. Should we, from the outside, be excited about the fact that you can re-risk here? My question to Randy is how do you think about credit risk in basis points of headwind that you had in the last few years, and the fact we've had the most benign credit environment you could imagine? That's helped your ROE over the last couple of years.
In terms of addressing the credit risk associated with 2009. Unfortunately, if you look across not even just the insurance sector, but you look across all financial sectors, there were significant losses. Where were most of them? Well, most of them were in structured credit, where we had our share. I think going back to that. I think the very important lesson learned and a point that I really tried to reinforce is that when you look back, and of course, hindsight is always 20/20, did the world understand the risks associated with what was going into each of those individual structured credit securities? The answer is absolutely not.
There was way too much reliance on looking at overall rating agency criteria and not a fundamental understanding of what was in the underlying and the fundamental understanding of the various different stresses that were there. Nor, by the way, could any of us quite fathom, even if we did stress test, how stressful what was going to happen would actually emerge. We have that behind us. At Lincoln, we learned our lesson. When we think about things like re-entering back into structured credit, which some of our peers have done, it's fundamental to our process to absolutely understand that underlying. If we're not comfortable with it, we won't play. To the point of we've de-risked, we see that there are some potential enticements to go out there and think about stretching for yield. We won't do it.
Well, I look at it as we have the advantage of sitting on the sideline. We talked about integrating conservative thinking into our forecast, but we're on the sideline. We've got dry powder to deploy. When the opportunities are there. We're there and we're waiting. We have the advantage of being able to take advantage of that opportunity from a risk capacity perspective now, understanding and making sure that we're getting paid for the risk that we're taking. Hopefully that addresses the question.
Bob, I'm going to comment on one piece of the question. You said that we possibly de-risked at the wrong time. Something I'd point out to you is that de-risking, which was elemental to bringing C1 component of required capital down significantly, is really one of the elements that allowed us to get very aggressive when it came to share buybacks. Spending $1.2 billion on share buybacks at $24.08 a share, what's that, 50 million shares, which is a key component of where we are from an EPS standpoint today, is a big benefit of that de-risking process. I wouldn't just say a blanket statement that de-risking was done at the wrong time. From that standpoint, it was done at a great time.
Let me come back with an overriding comment. Lincoln is in the business of retail liabilities, right? In being in the business of retail liabilities, and there's not as sharp a pencil on retail liabilities because they're bought by individuals as there is on wholesale liabilities. You're not driven by wholesale because we don't have wholesale liabilities, and we're not going to do wholesale liabilities. You're not driven as much by a basis point here or a basis point there. We've talked about it several times this morning, which is it's an entire value chain, and where we take risk along the value chain that we have to keep in mind. Again, we are not in the wholesale liability business where every basis point on your investment yield makes a big difference. Because you have no way to differentiate your wholesale cost.
A couple of kids on the phone calling up, I don't know whom to get $100 million overnight, and then the investment guy's taking credit risk and duration risk to try to make that trade work. We're not in that business. What we are in the business, though, of is trying to avoid credit losses, which is, in the history of the industry, been the biggest problem all the time when you go through a financial cycle. In the 2008/2011 cycle, our investment losses were about 2.4% of our general account, which was about a tenth of a percent above the industry average. I think the structure that we now have in place and that Ellen outlined will flip that, the next time there's a credit cycle, I think we'll be below the industry average. That makes a difference of $500 or $700 million in capital.
I think we're doing it a lot smarter this time. I'll leave it at that.
Okay. Why don't we go to Eric Berg and then y right here with Nigel.
Thanks, Jim. Eric Berg from RBC Capital Markets. Just one question for Randy. It's obvious that you'd want your hedge assets to be at least equal to your hedge liabilities, your economic liabilities, certainly. Why is it a good thing when the assets exceed the liabilities by a lot? That would seem to be the equivalent of buying too much insurance on a house, for example, and wasting money.
No, it's not about wasting money. It's about replicating the potential for that liability to move, right? The significant book of long-dated equity put options and long-dated interest rate swaps and all the other hedges that we've entered into as a company that have that $1.2 billion of value, that's the book you need to replicate the potential movement of that liability. The ability for that liability to move because of changes in equity markets or interest rates or volatility, that asset book is what replicates that potential movement.
Thank you. Are you saying essentially the assets reflect kind of a worst-case scenario or a picture of what could happen to the liabilities? Is that essentially what you're saying?
No, think about it this way. We charge X% for that particular guarantee. As Mark said, I think it's 105 basis points for single life and 115 or 120 basis points for the joint life. Some % of that is needed for hedging. Some % of that is needed for the cost of that rider. We send that to the hedge program, and that hedge program buys those assets, which will replicate the potential movement of that liability. Those assets just build up as they do, and that number's reflected in the equity that Mark talked about also. They build up as this $1.2 billion pool of assets, which will replicate the potential movement of liability. That's how I think about it. They're not extra assets that impact it.
They're essentially the value of that liability on the day we issue it, accumulated over time as we get those fees. Okay. Nigel, you're going to go next. Ryan, would you work yourself around the room, and we'll grab some more folks over here next. Thank you.
Randy, question on free cash flow. Obviously, one of the most important determinants of that is going to be your ability to get reserve financings done. I was hoping you can provide some assessment as to where you are with regard to getting some transactions done and overall market conditions there.
Sure. If Mark has anything to add. I expect that we will be able to do reserve financings going forward. I can tell you the pool of counterparties is very deep right now. I'm sure there's a stream of counterparties waiting outside my office when I get back to tell me about Their solutions. There's a lot of counterparties. The costs are reasonable. The duration of the solutions is right in line with what we want. From that, it's a very good situation in the reserve financing marketplace. As I mentioned, the five-year period I showed on that slide benefited a little bit from a big book that we had coming into that period. I don't think we have that big book left anymore. I don't think you'll see as much reserve financing, but you will definitely see some reserve financing going forward.
We still sell Term Insurance. We still sell some amount of Guaranteed Universal Life, even though those sales have come down significantly. You'll see some level of reserve financing, not as much as in the past. Of course, as we sell a little bit less of those capital-intensive products, you would expect to see that the statutory operating earnings would be a little higher.
Second question is on the captives. You mentioned there's no real capital benefit from the captives, but there are significant advantages, I think is what you said. Perhaps you can just articulate what those significant advantages currently are, and just how detrimental to the firm would it be if you were forced to clap the captives back onshore?
Well, I think there's two primary advantages that I can think of. First, it's a single point for the. We sell guarantees in a couple different entities. It's a single point to run the hedge program. Instead of having to enter into ISDA with multiple different entities in our company, we can do it in one place. The second is really the answer I gave to Suneet's question. In these odd economic situations, you can use assets like letters of credit to support that reserve financing. While it doesn't eliminate the need to have potential volatility in your statutory capital calculation, it does minimize, it does reduce it because you can use these alternative assets over in that captive. Those are the two primary items I think about.
I guess I would turn that around a little bit. Our ability to generate $400 million of free cash flow primarily develops out of the large statutory earnings from our operations, and that's 80%. The reserve financings are, I forget what the slide said, 15% or 16%. The ability to be more effective with the use of our capital, statutory capital with the mix in products and everything is something that takes up a little bit more of my time than the reserve financings themselves in terms of driving cash flow up to the holding company.
Okay. Chris, hold your hand up there. We'll get you next, Tom. Then Mark, hold your hand up, Mark.
Chris Giovanni from Goldman Sachs. I guess around the variable annuity business, I'm still a little, I guess, confused about what the path looks like from here. You've talked a lot about the good, steady, high returns. The growth here looks like it's highest amongst all of your different segments. Everyone's pulling back. You guys have opportunistically raised fees, kind of pointed to your competitive advantage here. I think if we think more broadly across financial services, if there's 20%+ returns out there with double-digit growth, seeming like greater barriers to entry when you think about your hedging, your risk management practice. Why aren't you going to look to get more aggressive in terms of increasing your market share?
Do you want to take this?
Let me give a line of business perspective, then these guys can give the corporate perspective. If you think about it from the standpoint of consistency, pull it back to that simple formula. It's all about being consistent. Why does that matter? Why wouldn't you double up right now? Because I can't tell you what the stock market's going to do over the next 30 years any more than you can. By having consistent growth over time, that allows that dollar cost averaging aspect to work for you to nail the returns we're talking about. It might be the best time in the world to double up. It might not be. It's not a bet we want to take given the consistent approach we take to the business. With my line of business hat on, that's how I think about that question.
Let me take you back to the objectives of the Old Jefferson Pilot, Old Lincoln merger. Broadly speaking, Old Lincoln was predominantly a variable annuity company. They were running out of the capability to continue selling. Old Jefferson Pilot was predominantly a fixed annuity and universal life company. That merger had to happen for both companies, for OJP to get better growth opportunities and for Old Lincoln to have the ability to continue to sell variable annuities. This management team is in the business of building long-term shareholder value without having to do a transaction. We're going to manage our business mix so that without doing anything, we can be around for 15 or 20 years more and not be forced into, because we're taking more risk in a particular product line, having to do something that's dramatic.
Just one follow-up. On the regulatory side, any thoughts on private equity participation? Obviously, New York's taking a closer look at that. I know in the past you've talked about how that's encouraging for the industry. Any updated thoughts there?
Yeah. I think smart money has come into the market, changed the dynamics a little bit more so on fixed income than on variable annuity, but both.
I think that's fine. What the regulators are looking for is there more investment risk being taken? Is the new insurance entity feeding profitability to the asset management company? I think we have to take a look at that. I think so long as the companies that are coming into the business start where we do, which is designing a good, strong liability that is good for the customer and is good for the company. If they start there and then go to what kind of assets can they maximize the return on from that liability flow, I think they'll be fine.
Okay, Mark.
Okay. My first question is really a clarification on the VA rider cash flow analysis. I guess I'm interested, how does the hedging costs in the future against the rider fee factor into this analysis?
If you think about the fee is, there was the bars, right? The present value of the fees, the actual cost. The claims in the future are the expected cost, right? That expected hedge cost comes through as claims in the future. Right? If you have fewer claims, you're going to end up getting to keep more of that, even though you used it on hedges, more than likely. If claims go up, you're going to end up using more of that. That's a clear cost.
The hedge costs are essentially part of the rider claims, essentially.
Yeah, essentially.
Okay. A question I get a lot is kind of sustainability of future statutory earnings or free cash flow. On the one hand, you're going to have a more meaningful impact from spread compression, maybe less of an ability to do or need, frankly, of kind of captive reserve financing. On the other hand, you have growth. You also have a pivot to maybe lower capital intensity products. I guess just thinking about that free cash flow on a go-forward basis, how should we think about that? I mean, is there any risk to sustainability of that which you're generating? I know you don't like giving guidance, maybe just a framework for how to think about it.
Yeah. Look, we grow as a company. We grow as a company by selling products that have a good, strong IRR. I mean, the basic way we price is you looking at discounted cash flows, right? That's how we price. Which comes through statutory results. As we continue to grow as a company, I expect my statutory earnings to continue to grow, and I expect my free cash flows to continue to grow. I'm not worried about the sustainability, which the implication of your question is, could it go down? I don't think so, right? I mean, we're going to continue to grow as a company, and that should continue to kick out the steady stream of earnings, which I expect to grow with the rest of the company.
The free cash flow ratio against the operating earnings.
Would you see any sort of change in that ratio over time?
What I talked about was the statutory total stat results versus the GAAP earnings. I said that was a 70%, which I said is a ratio I'm comfortable with. Craig?
Yeah. Let me make sure everybody understands. I suspect everybody does. We're talking about two things. One, we're talking about statutory earnings inside the life insurance companies as a percentage of GAAP earnings, and that's the 70%-80%. We're talking about that continuing on. The free cash flow we're talking about is after we moved dividends from the life insurance subsidiary to the holding company and charged and subtracted out the debt interest expense and the operating cost of the holding company. That's the $400 million of free cash flow. The two are different. Statutory earnings, a percentage of GAAP. We throw that up to the holding company, and we define free cash flow as the net of expenses, including interest expense and what's come up from dividends.
Okay. Mark, when we analyze, let me tell you, when we analyze that 30% that represents the difference, it's essentially all made up of the strain of selling new business. There are some other pluses and minuses. For instance, you've got a negative number with your holding company debt interest expense, there are positives that offset that. At the end of the day, it's essentially just strain on new business. I don't think that level of strain is going to change materially.
When you start comparing us to the other companies in the industry, you really have to step back and say capital intensive versus less capital intensive. As Randy pointed out, we're quite comfortable with our capital intensive businesses, and they have benefits versus your non-capital intensive businesses.
Okay. We got time for a few more. Tom? Jeff?
A couple for Randy. First on your slide three where you reference separate account return assumptions, 8.6% is your blended return assumption. I think about a third or at AUM within separate accounts are in fixed income and blended funds and money market. I get your point that there's cushion on the equity market assumption. What about non-equity funds in the separate accounts? 8.6% would seem statistically implausible when you think about a prospective-looking assumption. A number of your peers have already reset those assumptions materially lower than that. Should we think about that as a risk factor? If so, if you did have to recalibrate those assumptions, would it fully offset the $300 million equity market cushion?
Well, I think about any assumption, right? It is a potential risk factor that you have to change it. No, as I said during my discussion, I'm very comfortable where we are today. Let's go through the math where we are again today with our models. If we were to completely unlock it, you know that the corridor we have is about a $300 million benefit. When you look at the corridor we have today with this immediate 14% drop and then the growth rates that we have going forward, you have an effective rate of 7%. Right? An effective rate of 7%, I don't spend a lot of time looking at what's going on across the industry, the little bit that sticks in my memory is at the very south end of wherever the industry is.
Very comfortable that if we, as you asked, needed to unlock to a much lower rate, could it be covered by that $300 million? Yeah, definitely.
Okay. Is that something you've looked more closely at? Is that something we should be looking for you to adjust? Or is there a reason why the prospect of fixed income and non-equity return assumptions may not have to be adjusted?
I'm very comfortable where we are today. We're well within the corridor, if you will, which defines our approach to modeling. Very comfortable where we are today. I'm not going to guide you to any sort of change. We obviously review assumptions in the third quarter, all of our assumptions, but we're very comfortable with where we sit today with our DAC models and the return assumption embedded in them.
Got it. The other question I had is, I know you mentioned you expect some spread compression on life and on retirement, but not on the fixed annuity side. To me, that seems a bit counterintuitive, just because the fixed annuity book should be the much shorter-term book. When I think about that portfolio rolling down-
The way that I would think about it playing out, I would think you would have more pressure there, not less, especially because most of those contracts are at contractual minimums. How should I think about that? Just I guess sizing the impact of those three different lines.
Mark may have something he wants to add here, the fact is they're not at the guaranteed minimums. The fact of the matter is that Mark and his team have been pricing fixed annuities with a 1% guarantee for a long time now. There is a lot of room to move interest rates down in an extended low-rate environment.
How much a percent of that book is not at the contracted minimums?
The majority. I don't have the number off the top of my head, most of it is not.
The only thing I'd add to what Randy said is we again go back to the ALM. We have a very tightly matched book of assets that are going to roll off just at the same time, there isn't this big gotcha coming from that standpoint.
Okay. Jeff, you want to just finish this up?
Thanks, Jim. First, a clarification from Randy. In your slide, you talked about consolidating the offshore captive would have this accretive benefit of 25 basis points to RBC, but I'm not sure if I have a complete understanding. Are there tools that you use on the offshore balance sheet that wouldn't translate offshore? There were things, do the arithmetic, it's plus 25 basis points. If you actually had to literally collapse, actually bring that onshore physically, would you have to do some restructuring that would actually change that outcome?
No.
Okay.
That's exactly what that scenario is, that if you bring it just as it is and plop it into L&L, what would happen? The RBC would go up. That's been the case, by the way, for as long as I can remember. I go back to Fred looking at this and talking with you. It increased the RBC at that point in time. It really relates to the fact the way we've hedged that liability and the significant amount of real assets we have behind the hedge program. Now, when can it change and when could it be actually a deduction from RBC? It's in the scenario that Nate asked about. It's when your statutory liabilities actually move above your economic assets because of the temporary movement of the markets, right? You get that temporary blip, and you can get a different answer.
For as long as I can remember, it has been accretive just as is to the RBC of the domestic companies.
Okay. One higher-level question, I guess, to help us bridge something conceptually. In your ALM slide, you talked about the fact that your durations match and that the values go up and down together, and you seem to be sort of immunized from interest rate movements looking through that lens.
We think about one of Mark's slides where he talked about do you have cash flows that are not invested in the future, that you're not really cash flow matched. We know that if those are invested at low rates, that you have yield compression and earnings compression. I guess through that lens, it does in fact seem like the outcome is sensitive to interest rates. Is it an oversimplification just to look, and obviously it's necessary to be duration matched, but is duration asset sufficient to immunize you economically?
Well, let me answer this this way. There are lots of measures you can use to think about the potential movement of an asset or a liability. Duration is one. There are others, right? Convexity. Coming into, if we go back two, three years ago, and I think right now, if I remember the numbers, our assets were 7.4 and our liabilities were 7.6. I think if you went back a couple of years, the assets might have been right on top of I don't remember the exact equation, but the liabilities and the assets were pretty much exactly the same. Your liabilities have a little more convexity. As rates have come down, you've had a little bit of extension liability. You can get different movements like that because of some of the other ways.
Broadly speaking, where we are today, you have a very tight matching of duration, which immunizes you against value movements from interest rate changes.
The other thing I'd add to that, Jeff, is that what I was comparing is how we priced it versus what really happened, including what already happened as well as what's happening in the future. We were catching a falling knife on interest rates. I'll be the first to admit that. We'd assume X, then 12 months later, Y would have happened. That X to Y is reflected in my minus 2%, if you will.
Jeff, maybe I could add another perspective on that from me. We picked duration for a presentation like this because it's kind of easy to convey. Underlying that duration, the simplicity of duration are hundreds of millions and thousands of stochastic analyses of all of our portfolios. I've mentioned several times that we run 100 million scenarios a night to reposition the DA portfolio. The fact that we choose that is because it supports duration because it supports the enormous amount of stochastic testing that covers cash flow and other issues like that.
Okay. Well, at this time, we want to thank you all for joining us today. We do have a lunch. We'll all be around to answer any follow-up questions. Again, thank you for joining us today.