We're going to get started with the next session. We're pleased to have with us Dennis Glass. Dennis is President and CEO of Lincoln. Dennis has served as the CEO at Lincoln since 2007, previously serving as the COO. During the past couple of years, Lincoln has been focused on an active acceleration with its capital management plan. Year-to-date, Lincoln shares are up nearly 30%, one of the best performers within the large cap insurance space. With that, I'm going to turn things over to Dennis.
Chris, thank you very much, and I'm delighted to be here. Good afternoon to everyone. We'll go through a few slides here. I guess I've got to say, pay attention to the safe harbor. We'll go through three slides, a few slides. What I want to cover today is what you see up here on the board, which is financial performance and trends. I would say five-year histories of earnings and capital development is not something that a lot of people have been sharing over the last four or five years because it's not been that good. I think when you see it, you'll see that there's been a tremendous recovery. As I've listened to people over the last 12 months, not everybody asks me about franchise value and long-term growth.
They seem to be, and probably appropriately so, caught up with valuations and risk management and VAs and interest rate impacts. I want to touch on that a little bit in some depth. I do, at the end of those remarks, come back to franchise strength. As we all know, franchise strength is what builds earnings, which build shareholder value over time. Even though at the moment it's a little bit less important to a lot of people, in the long term and in a couple of years when things return to whatever the new normal is, we'll be back to talking about that. Take a look at this slide. Okay? What I've tried to demonstrate is earnings and the balance sheet that developed since the crisis. You see back in 2007, we were earning about $1.2 billion, earning about $4.42 and 11%.
Of course, in the crisis, that dropped off pretty dramatically. At 2011, we're sort of back to, if you will, the earnings levels that we saw pre-crisis, back to the ROE levels that we saw pre-crisis, closer back to the earning per share levels. If you look at the bottom of the slide, we say momentum continuing. We don't give forecasts, but if you were to look at or sort of just annualize the earnings that you've seen us get in the first three quarters, you'd see the trend and the momentum continues to build off of 2011. Hopefully, those numbers will be higher. A complete recovery in income from operations and earnings per share.
In the financial services business, it's extremely important to have a solid balance sheet. This is the next piece of the puzzle in terms of recovery and momentum. Importantly, we had at the beginning of the crisis, $6 billion in statutory capital. Today, we have $7.6 billion, a lot of that coming from the generation of earnings. Risk-based capital is at the highest level it's been, even pre-crisis. Finally, holding company cash. We used to run a negative cash position. The 40 years before 2008, you could always borrow in the capital markets, and running a negative cash position was not highly risky. In 2008 and 2009, we discovered that the capital markets can once again close down.
We changed our policy from running a negative cash position to having $500 or $600 million of capital on the balance sheet in cash. That number is driven by essentially being sure that we have two years of forward debt service in cash on the balance sheets, that we'll never again be in a position of the share price being significantly affected if there is a maturing debt and we can't access the capital markets. Incomes back, balance sheet as strong as it's ever, policy has changed. The only thing that hasn't changed is the share price. Used to be $50. It's down to $25 today. Despite the recovery in all the typical measures that would drive stock value, it's quite a bit lower than it was, 50% lower than it was at the end of 2007. Make the point one more time.
Despite the fact the balance sheet is as strong as it's ever been, earnings are back to the levels that they were at. ROEs are back to the levels that they were at. Why is that the case? Let me come back to valuation for a second. If you just look at us on this metric, which is the regression of ROE to price to book, recognizing the whole industry, I think, is undervalued, given the value proposition we have as an industry and the needs that we meet. Even on an undervalued industry basis, we're $8-$12 below, based on this ROE price to book regression, which I think is not justified. What are we hearing from investors? We're hearing that low interest rates is a risk to the balance sheet. That translates into you're going to have to raise some capital.
They say, "We don't like your variable annuity program as much as we used to. We used to get 12 or 13 multiple on that business. Today, it's single digit." What do we believe? We believe that low rates are a headwind, but manageable. We believe that the variable annuity business, the way we run it is a high growth, high ROE business, and worth a much higher multiple than we've had. At the top of the slide, you see what is fundamental, which is consistent, proven execution will drive value creation. Over the last eight quarters, we've not missed an earnings estimate. In the last quarter, when all the other life insurance companies were reporting results and adjusting their intangibles, we had none. Many of our competitors had billions of dollars of swings.
For the last two years, we've been very consistent, I'll talk about what accounts for that in a bit. Let's talk about interest rates just a little bit more. We've had this slide up there before. I'm going to cast it in a little different perspective. Okay. Interest rates, if the 10-year is at 1.5% through 2014, we're going to have an earnings drag of 5%-6% on our corporate earnings. If we do no more than continue to buy our shares at the pace that we've been buying them, on an earnings per share basis, we'll recover most of that 5%-6%. That's where we start. How do we get that growth rate positive and to a higher level, which I expect we can. Just simply new business growth, I'll get into franchise value in a little while.
We're doing a little bit more. We've been very careful about investments since 2008. We're taking a little bit more investment risk, and we're sourcing some things to give us incremental yield. Of course, expense management. Interest rates are a headwind, but we think a manageable headwind from an earnings perspective. GAAP and DAC reserves, that's a non-cash item. We don't see any big problems here. This talks about what is the reduction in GAAP and DAC reserves. Again, that book value per share type thing. It's $125 million if we drop our assumptions 50 basis points. We can't drop them much more than 75 basis points, or they go negative in the early years, and they're below the forward yield curve in the out years.
Even if we did 75 basis points, I think it may be $180 million of hit to DAC, which again, is only 1% of equity, that's not a big impact. The big deal from a shareholder's perspective and the big deal from my perspective is there a chance that because interest rates are low, that you'd actually have to raise your statutory reserves? That's a real deal because that's cash. If you had a significant increase in your statutory reserves, you'd have to go out and borrow some money, you'd have to go out and raise some equity. That's a big deal.
If the 10-year interest rates stay at 1.5% for the next 10 years, we don't expect to have to increase our reserves by more than $500 million, and that's not even out until after the fifth year, and that's a maybe that we'd have to raise that much more, or we'd have to increase our reserves that much more. What is $500 million? It's 35 basis points of RBC. We're running at the highest RBC in the industry right now. Even if we had to take $500 million right now, our RBC would still be among the highest in the industry. Today, we make $700 million of statutory earnings. $500 million is not even one year's worth of earnings.
Interest rates, with respect to having to raise capital to increase reserves, the best analysis we can do is just simply not a cliff event, not an issue. Let me try to give a little more perspective on that. This next slide, this is the cash slide. I think a lot of investors get frustrated by the lack of transparency in some of the GAAP accounting, some of the statutory accounting. What I tried to do here is say, "Forget it. Let's just look at the present value of our assets under different interest rates, the present value of our liabilities under different interest rates, and there's a spread." That means there's value. There's not a cliff event.
You can see at every interest rate, starting at 1% all the way up to 8%, that the two lines, although they move around a little bit, in all instances, the present value of the assets is bigger than the present value of the liabilities. This is just more confirmation about the simple fact that with respect to the balance sheet, the value of the business, interest rates are not a cliff event. We're not going to fall off the cliff at the top of the mountain. This is inside baseball. There's a lot of actuarial work. Is there anything I can point to that kind of gives you some comfort that the inside baseball is accurate? There is, because on our balance sheet today, we have a $9.4 billion unrealized gain.
That's why that present value of assets over all these interest rates stays as high as it is. A $9.4 billion unrealized gain on the balance sheet, that goes to our core capability of matching assets with liability. We have long liabilities, and therefore when interest rates drop, cost of those liabilities go up, but so does the value of the asset. It goes up to one, as it is here, $9.4 billion. As compared to the peers, they only have about 9% value unrealized gain relative to their book value. Probably the reason that we're at 13% and they're at 9% has something to do with the fact that the peer group might have a little shorter liability duration than we do Given the nature of the business that we're in.
We're ahead, and that should add some more comfort to this whole concept of interest rates are a headwind, but not a problem. Let me move to the second investor concern, that is the long-term value of the variable annuity business, and that's another long-term guarantee business. As you know, we provide income guarantees. Let me be clear about that, income guarantees. We guarantee if you want income over time, that we'll increase your account values and so on and so forth. If you try to take your money out of a variable annuity contract, you take it out just like you take it out of a mutual fund at the current asset value. Why have we outperformed the industry on that?
I think it is covered by a few things here, and this slide's a little busy, but let me try to go through it carefully. The most important issue is at the top. What is our value proposition in the marketplace? It's fund performance first. Lincoln's in the business of collecting assets from retail investors and building their assets over time. In our variable annuity subaccount mix, we have more four and five Morningstar rated funds than any of the competition. Again, that's because we start with the VA proposition that account value growth matters. The second piece of the puzzle or value proposition is, at some point, you're going to want income guarantees. So we do have that in the product. Finally, consistent market presence.
Let me just pause on that for a minute, because being in the market consistently is important, and it's important from two principal perspectives. One is your distribution partners. The shelf space that you have is important to be able to distribute the products and distribute them profitably. You can't tell your shelf space partners, your distribution partners, that you're temporarily getting out of the business because you can't sell more product this year. I mean, that's just very disruptive, right? You're not a good partner if you do something like that. That's happened quite a bit over the last four or five years with people who have not had a stronger value proposition but were selling on the basis of guarantees only. Which essentially is they're selling not on a holistic value proposition, but selling on the basis of the cheapest product, translated highest features.
It's important that you're in the market consistently from your partner's perspective, but also it's like dollar cost averaging when you're buying stock. If you're in the market all the time, you're going to get a better return if you stay in the market than if you go out when the market's at its worst and you come back in when the market's at its best. For variable annuities, the market was at its worst in 2006 and 2007, highest. In 2008, it was at its best from the manufacturer's standpoint because it was way low, right? We sold some of our product when the market was real high. We sold a lot of our product when it was very low. Over time, we expect to get our ROEs because we're in the market consistently.
As you can see from the slide-- well, let me come back to one more point. Lots of lines on the slide, but we consistently have had the lowest guarantees in the industry. At least for the last three years, we're a little bit higher than the low, as you can see here in 2008 and 2009. Substantively, what this says is the guarantee, which is the red line that we provide in the market compared to our peers beginning in 2009, 2010, 2011, and through today, we have the lowest guarantees in the industry. That is a proof point that the larger value proposition, which is fund performance first, is in fact working. Because as you can see, in every year, our market share has been about the same. In every year, our sales ranking has been about the same.
Even though there's people that have significantly higher guarantees than we do, we still take the amount of market share that we want because of our overwhelmingly strong value proposition. Back to my point that the VA business is a high growth, high ROE business. You can see that our ROEs, and these are real numbers, have ranged from 22% to a low of eight at the worst part of the market, and now they're back up to 19% 2012 year to date. We have a good value proposition. We're consistently in the marketplace. We're consistently getting ROEs. Let me talk a little bit about the income guarantee risk and our risk management capabilities, which is on this sheet. Let's not overcomplicate an income guarantee in a variable annuity. An income guarantee is simply selling a put.
That's what an income guarantee is, selling a put into the marketplace. All we have to do is buy a put to neutralize that risk, and about 80% of the derivatives that we use in our portfolio to hedge the put that we sold to the customer is just vanilla puts. We buy vanilla puts. Okay? It's not that complicated. What is complicated is that you've got to do it. You've got to do it on every product, every feature. You got to do it all the time. You have to have a policy of doing that. You can see here, as we say in the footnotes, our hedging strategy is in place at product launch. It's part of the product development process. We hedge all of our living benefits and death benefits. Our program is recognized by both S&P and Moody's as being excellent.
In fact, we're oftentimes referenced as having the top variable annuity hedge program in the industry. What's the big important point on this slide is that in every quarter since the fourth quarter of 2008, and even before that, the value of the liability that we might have to pay out has been less than the assets that we have to make that payment. In an insurance context, we predict out over multiple scenarios what calls we might have on that income guarantee. We bring it back to present, then we ask ourselves, do we have enough assets in order to cover that call? The present value of the liability, again, is equal to the present value of the asset, sort of on a cash basis. Our hedge program has always generated enough assets to do that.
I want to make another point. I spent a lot of time on this issue. I spent a lot of time with my board on this issue. I spent a lot of time with my risk management team on this issue, with my product development people, so that I'm sure that I understand this business, and I can at least, as a CEO, ask the right questions. Well, the right question mostly has to do with have you done a good job estimating the target liability? Do you know that the present value of future claims under this guarantee is actually the amount of money that is on the balance sheet representing that claim? The answer to that is yes. We think that the present value of the claims is exactly equal to what they're going to be, of course, that changes over time.
Every year, we take every assumption that's in our product pricing. We compare it to actual experience and make sure those two things aren't diverting because if they do divert, overnight, that liability could be much higher than the hedge asset, and of course, that would be problematic, and that's what's happened to people in particular who haven't had hedges in place. I'm confident in the hedge target being accurate. Again, we review the assumptions each year. This year, when we reviewed the assumptions, we had some actual pricing assumptions that were a little bit worse than experienced. We had to adjust for that. As you would expect in any insurance product, you have some pricing assumptions where you're doing a little better than you're actually expected to do. That was the case this year.
Again, many of our competitors had wild swings in the third quarter as they did this same analysis. Profitability. This is not a static product. We're in the business of managing risk. Part of that risk comes from changes in the capital markets. As capital markets change, interest rates get lower, growth rates in the equity markets adjust. You have to change your products. What we've done is we've raised fees, we've reduced the guaranteed payouts, and we've added some accounts where actually the hedging is done inside the customer's account, not at the corporate level. Again, coming back to high growth, high ROE business, we're getting 16% on this business. I'm very comfortable that the VA is a great business.
The income guarantee business and the rest of the business inside the variable annuities is a good business because of the value proposition that we start out with and the hedge capability that we have, and the two of them have to work together. Let me also say that I get asked a lot about the fact that people are leaving the industry, walking away from that business. I'm really not interested in the people who walked away from the business because those were the folks that didn't manage it correctly. I'm happy they're out of the marketplace. Those were the people who, back on that slide a couple of pages back, were having these 9% guarantees. The people in the market today, the Mets, the Prus, are disciplined managers of this product.
I'd rather compete day in and day out against smart people, not against people that only compete on price. With that, let me come back to franchise value. A couple of points I'll make opening here. Whoops. What drives the Lincoln franchise? First of all, we only do retail deposits. We don't do any wholesale deposits because I don't want to be developing risk products where we're sitting across the table from a smart chief financial officer, and he's taking advantage of every missed pricing of whatever embedded option there is in the product. We want to create a comprehensive program of product manufacturing, good products that become good consumer values that are distributed, and it's a retail program. There's no wholesale programs at Lincoln. We have favorable demographics for our target markets. We have specific segments of the markets which I'll talk to.
We just simply have the best and most comprehensive distribution in the insurance business in the U.S. for the products that we sell. We cover every distribution channel. We have shelf space at all the big names, and I'll show you that in a second. We have a strong consumer solution set. We can pivot to different products when capital markets make one or the other one less attractive, and we have a balanced approach to capital. Real quickly, you can spend some time looking at this slide, the demographics favor the insurance industry, and they favor the products that we're in. Our individual life and annuity business is sold to the two blocks on the right, 45 to 64-year-old cohort, 65 and older cohorts, term insurance, and our retirement businesses and our group of businesses are sort of across the spectrum.
What you can see here is that, particularly in the age cohorts where 80% of our earnings come from, the demographics are very favorable in terms of growth and wealth creation. I'd also say that as compared to pre-crisis, where people thought all they had to do was invest in a mutual fund and their life would be perfect, they now understand there's risk in the marketplace and insurance companies provide risk protection. Just from a consumer perspective, our products are more important. Many of you who follow us have seen this slide before, and it gets to the power of our distribution platforms. 558 wholesalers. We go to firms, not so much Goldman Sachs, they don't have much retail. Merrill Lynch, Bank of America, UBS, all the big names in wire house distribution.
All the big names in independent distribution, all the big names in regional brokerage distribution. We have our own retail group, predominantly financial planners, so we can control some of our product, and then we're in the worksite. Across channels, we have the best shelf space and extremely good coverage by our wholesalers and retail advisors. As you can see, we have a pretty even product mix that is sold by these distribution groups. Powerful distribution. It's important, right? If you're going to sell a value proposition of VAs that isn't the richest feature, that you're having to explain to people the reason why it's a good value proposition, which is account value growth, you got to have smart, educated people, and you have to have a lot of them in order to make that work, just as one example.
Now let me turn to the businesses, let me start with annuities and individual life. Here in the annuity business, I've talked about the profitability and so forth, the demand, the top-line revenue demand comes from, it's a source of tax-advantaged lifetime income. I've talked about that. We have investment choices. We manage the volatility. Income certainty with potential to outpace inflation. It's a very good value proposition for that 45 and up age cohorts, those age cohorts. In the individual life business, I'll pause just a second here and talk about tax. Generally speaking, higher marginal tax rates and higher state tax rates, which may be forthcoming, are good for the insurance business, particularly good for a company like Lincoln, who sells more mortality-based products than we do products that include liquidity and investment earnings, excuse me, the inside buildup of earnings savings accounts.
Depending on which way tax policy goes from the consumer level, we expect it to be helpful to our demand. What we've done with our distribution and our complex, not in the terms of complex, but our set of consumer solutions, we've moved, as you can see here, if you look at that little brown box, we used to sell 60% of guaranteed universal life. That product is not as attractive from a shareholder perspective today, and therefore, we've had to shift to other products. We're able to do that for two reasons. One, we have the products developed, and two, we have this massive distribution force that can take these new products to market. When I turn to the Retirement Plan Services and Group Protection, the demand driver is a little bit different, okay?
It has to do with the fact of the segment that we go after. In both the Retirement Plan Services and Group Protection, we target the small end of the market. If you go down to the Group Protection business, 1,000 employees and fewer. If you're in the Retirement Plan Services, it's the 401 market for small employers. We do a little bit mid to large, but the same math holds here. If you're selling to small companies, they're more interested in service, they're more interested in education of their employees around 401 plans and saving for retirement. You saw in a previous slide that we have retirement consultants that do that.
You don't have as much price pressure in the small end of the market as you do when you're competing, either in the group business or in the retirement business for, let's say, Goldman Sachs. How many smart guys you'd have to work with, Chris, in order to sell that product? There's very thin margins there. These also, the small groups, historically, the small employer markets have created about 80% of job formation in the U.S. There's two things going on here. One, more job creation, and two, these are the most under-penetrated companies on both of these businesses. Making a lot of investment in both businesses, a couple of hundred million dollars. We want to grow these two businesses faster than the other businesses, and again, we're in the right segments to do that.
Finally, in the Group Protection business, as employers have less money to pay for employee benefits, people, workers are buying their own group life protection. They're buying their own long- and short-term disability. The voluntary business, which really is a very much different business than when the employer is paying for those products, and we're expanding substantially into that. We're in the right products. We're in the right segments. We've got a great focus on profitability and growth. Let me just finish up with our balanced approach to capital management, and this slide helps us get at that. What have we done in the last eight quarters? We've bought $1 billion worth of shares back. We've increased the dividend 140%. We've reduced debt by $225 million.
46% of our income over those eight quarters and 17% of our market cap has been returned to shareholders. Why have we done so much? It gets back to that page where we're selling at 60% of book value. We fully expect to get a very high marginal return on those shares that we're repurchasing. It makes all the sense in the world to do that right now. Even to the point that we're willing to sacrifice market share, where on new sales, we can't get the returns that we expect and that our shareholders expect. In our life insurance business, where for some reason, where we used to be all the time sort of 5%-7% off the most aggressive pricer in the marketplace, today on some of the products we're off 20%.
We're not going to raise our prices, or excuse me, reduce our prices to those levels because we can't get double-digit returns. Every dollar of life sales that we don't sell frees up a dollar per share buybacks. It's pretty simple. Why would you sell a dollar of life sales that's earning 10% or 7% or 8% if you went to the lower pricing when you can take that same dollar of capital and buy your shares back and get 17%-18%? As you all know, there's a limit to that. The only reason our share price is going to grow over time is if we have a franchise, if we have the shelf space, if we have the people to run the business. At the margin, we can cut sales and use the capital for share repurchases.
At the same time, there's a limit to that. I think we've struck a good balance. We're making strategic investments. We've made $300 million, $400 million in the group and retirement business, and we think that'll pay off well as we move forward. Let me finish by just saying we're serving growing markets. We've got this powerful distribution program, comprehensive solutions portfolio, strongest balance sheet that we've had in a long time, and we think we're smartly deploying our capital to its highest and best use and highest return. To go back to where I started, I don't understand why our value is as low as it is, and a lot of you in the audience continue to ask me that same question, and I hope this sort of gets at some of the issues. Thank you very much for your attention.
We appreciate you being here. Chris?
We have time for maybe one or two questions. I guess your frustration around interest rates, VAs is probably not much different than even some of your competitors, right? I guess you guys maybe benefit from better regulatory clarity than some of the larger guys. I guess what more can you do? What more can the industry do to get investors comfortable with the concerns around interest rates, the concerns around variable annuities?
Yeah. We'll continue. Every once in a while, someone comes out with a better way of demonstrating some of the sensitivities in the businesses, as we see that information, we'll do it. You cannot argue with five years of average 16% ROEs in your variable annuity business. Those are facts. You can't argue with the fact that our hedge assets has exceeded our target liability ever since we've been in the business. Those are facts. You can't argue with the fact that we continue to sell product even though we don't have the richest guarantees. At the highest level, we've consistently proven that business to be a good earnings business. I think that over time, we've got five years, another, as you pointed out, Chris, our share price is up 60%, or 30% this year compared to the average of 15.
I think as that performance consistently continues and improves, that valuation gap will begin to close.
Questions? I think that'll do it since we are out of time.
Good.
Thank you very much, Dennis. Thanks.