Good morning, everyone. We're about to get started as we continue the insurance track here for the conference. In our upcoming session, we have Lincoln Financial presenting. Lincoln Financial provides annuities, Life Insurance, Disability Insurance, as well as defined contribution retirement and savings plans, and financial planning and advisory services. It's differentiated from that perspective. Here to tell us more about it is Lincoln's Chief Financial Officer, Randy Freitag. Let me turn it over to Randy.
Thank you, Jay, and thanks to the whole Barclays team for having us here today. We truly appreciate the opportunity to participate in the conference. Before I get started, I'll ask you to take a few seconds to read our safe harbor language. Two key areas I'm going to focus on today. The first is I want to focus on our operating model. Despite the ups and downs that we've experienced over the past few years, Lincoln has continued to demonstrate strong performance from its operating businesses. We continue to operate from a position of strength with strong products, broad distribution, and we have favorable demographics driving demand for our products. Second key theme I want to focus on today is really around financial aspects of our businesses.
As we sit here today from a financial standpoint, we have a very strong capital position in our life companies, and we have ample cash at our holding company, leaving us in an extremely strong position from a financial standpoint. It's this capital strength, when coupled with the strong operating fundamentals that we exhibit, that's really allowed us to start to be more active on the capital management front. It really gives us a favorable view of operating results in future earnings power as we look forward. It's this strong balance sheet that I do see as key to our strategy. It's this strength which really gives confidence to our franchise, to our customers, to our distribution partners, to third parties such as rating agencies, as well as to our investors.
Looking forward, I do expect to see a period of low growth in the company and low interest rates, believe that the combination of the actions that we have taken, the actions that we will continue to take, along with that strong balance sheet, will allow us to manage through any economic headwinds that we face. Let's just take a quick look at some of those operating fundamentals. What you see is that Lincoln has exhibited very strong top-line growth, which has driven strong bottom-line growth, with both of these items being fed by very strong deposits and net flows. Deposits and net flows that have been strong, positive, and consistent over an extended period of time. I think it's also important and interesting to note that these positive flows have remained that way regardless of the circumstances.
During the 2007 and 2009, the last crisis, those flows remained positive, as they have for the last five years. Maintaining a consistent market presence is a very important component of our operating model. By consistent, I do not mean that we are in the marketplace in an unchanging way. Rather, consistency is a philosophy of being in the market on a regular basis, not making sharp turns, continuing to be there as a trusted provider. This is a very powerful story for our customers, for our distribution partners, and key, for me, is that it supports and helps build a favorable book of business over the long term. I'm particularly pleased to see this year that our ROEs have grown, primarily driven by earnings growth. Let's focus on some of our businesses quickly. The annuity business for us has been a great business. It's driven growth.
It's driven strong returns. Demand for this product should continue to be favorable as consumers look for some certainty as they look to plan for their retirements. We have well-priced product, scale, and broad and comprehensive distribution driving flow and deposit results, as you see on the page. We approach this business with two fundamentals. First is that we sell product on our terms without focusing on market share. Despite that, as you can see, our market share has been consistently level over the years. In fact, we've been number 5 for the entire period we show on this page. The second is that we provide well-priced products that allow us to be in the market consistently. Back to that point I made on the previous page, we don't have to make those sharp turns.
We're never out there with the most aggressive product, and we're likely not going to be out there with the worst product. We're in there with a good product that we're selling on our terms. It allows us to be in there consistently. It's a very strong story for our partners. This requires a willingness to adjust when the environment dictates, and you've seen us do that. We've raised prices over the last few years, we've reduced benefits to customers, and we've improved the capital efficiency of the variable annuities that we sell. A key component of Lincoln, arguably the key component around the annuity business, is that we have maintained a fully hedged position since we entered this business. That means that our hedge program, regardless of the market, good markets, bad markets, has done what we've asked it.
That is that it's delivered the assets required to fund the liabilities. You can see on that chart, those liabilities were as high as $4 billion, and the assets we own, the derivative assets that we own, their value was at $4 billion also. At the end of the second quarter, those liabilities had come down to about $350 million. Our asset position at that point, once again, was still well above that. In fact, we had about $1 billion of assets at the end of the second quarter. We had about a $650 million cushion. Undoubtedly, it's been a volatile third quarter with interest rates and equity markets all coming down. What you've seen, undoubtedly, is that the value of that liability has moved up. Key for me is this hedge program.
What we've seen is those assets, the value of those assets move up accordingly, and the program has been very effective during the quarter. I'd put it at about 95% for the quarter. It's doing what we ask of it. Quality products, distribution strength, and effective risk management give you what you see on this page. Strong returns, strong earnings growth. The DC business is an excellent business for Lincoln. We make a lot of money in this business. We make good returns, mid-teen ROEs. We have strong pre-tax margins, and we have a history of increasing assets under management. This is a business that we want to build faster, we are investing strategically to make that happen. Our market focus continues to be on the small to mid-size market with a big focus in the education and the health sector.
These are the markets that we believe provide the best opportunities for growth over time. We've had a few setbacks in the business. We had small negative flows in the second quarter. As we sit here today, the investments that we've made, the condition of this marketplace makes us very positive when we look to the future. Two key strategies for future growth. One, we're investing in a new admin system. This will take us from five platforms to one. That's a key item in the service delivery proposition, which is a really big component of a sale in the DC marketplace. Secondly is significant expansion of our distribution, focused on expanding the number of wholesalers we put into the wire channel selling our small case 401 product, and the number of wholesalers we've put out wholesaling to TPAs and consultants. Turning to the life business.
The Life Insurance business for Lincoln is about having scale and tremendous breadth of distribution that really drives market leadership. As you can see on the top right corner, we're the number one distributor in our top 10 distribution partners. That's tremendous breadth and depth, it's really our holistic approach to the business that allows us to do that. Strong distribution through different channels, a comprehensive product portfolio, once again, a consistency in the marketplace. In the life market, particularly the secondary guarantee UL marketplace, you do have to be dynamic and adjust as conditions dictate. You've seen us do that. We took actions last year on our single life secondary guarantee. We took actions earlier this year on our joint secondary guarantee UL product and will likely continue to take actions as we move forward.
Really attempting to focus consumer demand into products that produce more of a level premium type pattern and take the focus off of products that are more focused on single premium or limited premium type payments. Obviously, if you receive a premium today, a large single premium, you need to invest it into this low rate environment, and that hurts returns. Through the way we price, where we get competitive, we can drive the type of business that we receive. The other point that I want to make on this business is really spreads, because over the last few years, we've actually seen our spreads increase despite the low rate environment. This is due to credit rate actions, quite honestly, that we've taken. Fundamentally, the key point, the reason why we've seen this happen, is really our focus on ALM around this business.
We buy assets that are extremely long in duration. In fact, if you look at our secondary guarantee UL business, the average maturity of that portfolio is 24 years. People tend to focus on the immediate condition of interest rates without focusing on this fact. That's a portfolio, 24 years, that has a significant amount of time, obviously, before it matures. It's very supportive of this business and spreads. That's why, and we'll talk later about some interest rate sensitivities. You really don't see those large dramatic impacts that people sometimes envision. It's a good business. We're consistently a top provider in this business. It's not the fastest growth business. It's a mid-single digit type of grower, but is a stable, steady source of earnings to the organization. Our last, our fourth business Group Protection.
Over the years, it has been a steady provider of earnings and earnings diversification to the organization. Our focus historically has been on employer-paid Disability Life dental, but you are starting to see that shift to the voluntary marketplace. Our target market has always been the small to midsize, 500 employees and below, which is a segment that we have historically seen as the smallest or the least amount of competition. Now you are starting to see competitors come into that space, but really believe that we're well positioned to face whatever competition comes our way. In 2010, you did see loss ratios spike up, I think in response to economic conditions at the time. In response to that, we did take some actions. We raised prices. We increased the resources we put into claims management.
You've really seen a response to that, as loss ratios in our most recent quarter came down inside of our targeted range. Loss ratios went up. We responded appropriately, and you're starting to see those loss ratios come back down. As you look forward, we really see the growth potential in the group space in the voluntary marketplace. Whether it's cost pressures, whether it's additional burdens from healthcare and employers, you're really seeing them start to shift more of the responsibility for these sorts of products to their employees. If you look at Lincoln, in fact, over the years, what you've seen is that we've had a growth in our voluntary premiums that's more than twice the growth of our overall premiums. We've seen this over the years. Right now, voluntary makes up about a third or so of our overall premiums.
This is where we're investing. This is where we continue to invest as we look to grow this business. Lincoln undoubtedly has one of the strongest distribution platforms in the industry. It's spread across all forms of distribution, wholesale, retail, work site, both in the group benefit space and the retirement consultant space. A key point in the middle of this page, the number of advisors who sell a Lincoln product, 61,000 advisors sold a Lincoln product in 2010. That's up 14% from 2008. 61,000 advisors made the choice to sell a Lincoln product. It's a great statistic, represents the strength of our distribution force. Let's shift the focus somewhat from the operating model and talk about some of the financial aspects of the business, starting with a focus on the asset portfolio. For the last few years, we have taken a defensive position, quite honestly.
Our investments have been focused on higher rated investments, we've consistently moved to take risk out of the portfolio. We've lowered our below investment grade percentage of the portfolio by over 3 points. By one internal measure, we've taken nearly $2 billion of risk assets out of the portfolio. We've been positioning the portfolio for the environment that exists today. It was really credit was really the only area, if you look back to 2007, 2008 and 2009, where we experienced any sort of capital erosion. As we sit here today, if you think about the areas that are under stress. Let's go back to 2007, what was under stress? Housing, those areas. We had a significant exposure to those sorts of assets. We had the losses to go along with that.
As we sit here today, it looks like sovereign European exposure is the primary set of risk assets. In that space, we just don't have the exposure that you saw when housing was the issue. I feel very well positioned as we sit here today in the asset portfolio. Our exposure to the, for lack of a better word, the PIGS countries is very limited in nature. We have no sovereign or financial exposure in Greece. We have very limited financial exposure in those countries, a little over $80 million, with the majority of that in actually a foreign sub of one of the large multinational Spanish banks. Once you come outside of financials, we just have a little under $800 million of well-diversified exposure in those countries, and that's diversified across country, across investment sector. It's a very well-diversified portfolio that's trading funnily right near par.
All in, it's a very good and well-positioned portfolio in that stress area. Let's look at capital, let's compare 2 periods, 2008 to today. The key component to me, the key change today versus then, is really on that first line, and it's what we do at our holding company. Historically, Lincoln did not keep cash at the holding company. In fact, we levered our holding company through the issuance of commercial paper, et cetera. We had other ways of moving cash along between the various entities, but we didn't hold cash at the holding company explicitly. One of our key learnings during the crisis, quite honestly, and we changed that, and we sit here today with $700 million. A levered holding company to today, where we have $700 million of cash, a $1.4 billion turnaround.
It allows me to comfortably say today that we could bank ourself regardless of what happens in the capital markets. We've also grown capital in the life companies, over $2 billion. In addition, we've taken dividends out of our life companies in every year. It's a very strong story of capital generation in our life insurance companies. We've reduced leverage. I would anticipate in the fourth quarter, we have another $250 million maturity. Current anticipation is that we would take that out with cash at the holding company. We'll obviously look at the conditions that exist when we get there, but that's my current thoughts on that. We've seen our risk-based capital ratio move up. That's a combination of the capital growth along with the improvement in the asset portfolio that I talked about.
As we come into the fourth quarter, we will look at our dividend level. I think everybody's well aware that during the crisis, we reduced our dividend significantly, then we raised it up to $0.20 annually at the end of last year, and we'll look at that again this year. Feel very good about where we are from a capital and cash flow standpoint. We'll discuss that with our board in the fourth quarter. This position has really allowed us to become more active from a capital management standpoint. This year, I estimate that we'll return roughly $500 million to shareholders through share repurchases, through dividends. We've been able to shift completely from a story of raising capital to being neutral on capital to today, where the story is about distributing capital.
That being said, I want to hang on in an environment that exists today to that excess capital that we have sitting on our balance sheet. I don't see any reason in an environment like today to dig in to that strong financial position that we have. I don't feel the need to grow it larger, so we'll be using the cash flow that we generate, roughly $400 million a year. As we sit here today, I don't see us digging in to that 500% RBC until we get some clarity in the marketplace. Once again, capital strength is key to the franchise at Lincoln. Let's talk about interest rates. It's obviously a very topical item these days.
Over the years, over the quarters, we've provided, I think, leading analysis around the impact of low interest rates, we've tried to do that again, understanding that is a very important item for investors. We looked at the impact of a 10-year Treasury at 2% across a number of aspects at Lincoln. We broke it up into earnings, balance sheet items, goodwill, and new business returns. Let's talk about those piece by piece. First, earnings. What we see, as one might expect, is that we have some spread compression, and what we see is a first year impact of about $50 million, the impact growing by about $50 million every year after that, or for the three years we show on the page.
The majority of that impact, as I mentioned, is spread compression, with some impact coming from the DAC side and some impact coming from lower returns on surplus. The majority is just good old-fashioned spread compression. Looking at the balance sheet components and focusing first on DAC. Last year, we unlocked what we call our J-curve, our long-term earned rate assumption that sits inside of all of our models. That had roughly a little over $100 million impact when we lowered that assumption 50 basis points. That's an assumption that we change infrequently. Honestly, we had done it two times in 10 years. I don't necessarily see us doing that again this year. Outside of that sort of fundamental change to a long-term assumption like that, really don't see an impact on the DAC asset over the next five years.
There's a small component, as I mentioned, of DAC up in that $50 million of earnings impact. You basically get that from an underperformance on your interest rate assumption. It's about $10 million a year of the $50. You do get some element, but outside of changing that long-term assumption, you're really not going to see a large impact on DAC. That's why I noted last year's impact. This gives you the ability to scale the issue. Looking at reserves, once again, we see a similar story. We just don't see an impact from low interest rates when we look out over the next five years. If you look at a couple of our big businesses, I think it really illustrates why this is the case. There's no doubt that variable annuities are the business that we have that's most sensitive to interest rates.
It's a market-driven liability. As I mentioned earlier, we have this hedge program that holds a significant book of derivative assets that are designed to move with the value of that liability. What you don't see is any impact from variable annuities as you move forward. The other piece being the secondary guarantee UL business, which is our longest duration life liability. What you really see there, and I'll reference the life slide that I talked about earlier, we have a very long duration and well-matched asset portfolio. It's that ALM, that long duration asset strategy, which supports the reserves over time. Once again, you see your spread come down, and you see that impact in the earnings. What you don't see is a large impact on reserves, either GAAP or statutory. On the statutory side, additionally, we layer on cash flow testing.
We've looked at our cash flow testing results, and we see no impact from that sort of analysis either. If you look at the two spaces, GAAP and stat, it's really not surprising. I'll focus on stat. In statutory, is among the most conservative accounting platforms that exist, quite honestly. The assumptions are prescribed. They're designed at issue to be very conservative. While we tend to focus on the issue du jour, that being interest rates right now, one tends to forget that there are multiple assumptions inside a reserve calculation. There's mortality, there's premiums, there's lapses, there's expenses. It's more than just interest rates inside a reserve calculation, and none of those other items are under stress. In fact, if you look at statutory reserving, the mortality assumption is wildly conservative.
It doesn't surprise me when I think about the totality of what goes into a reserve calculation. I understand the conservative position that we start with, that we don't see an impact over a period like we've shown on the page, five years. Looking at goodwill, and we put goodwill on this page despite the fact that I would say that interest rates are not the issue for goodwill. Really for goodwill, the primary issues are, can we continue to sell profitable amounts of business in the amounts we contemplated when we established the goodwill? As we talked about on the life side, the life franchise continues to perform very nicely. All that being said, we will do a very rigorous analysis in the fourth quarter around the goodwill asset.
I feel good as I come into that analysis, but I have to be very cognizant of a number of things, including the fact that our share price, as we sit here today, trades at a fraction of book value. That's a component I have to think about as I enter this sort of analysis. It's a goodwill analysis where the underlying fundamentals are very good, but we do have this thing we have to think about, and the fact that our share price is trading at a fraction of book value. When you look at new business returns, in three out of our four businesses, what you see is that our returns are within our targets or at the low end of our targets. Annuities, DC, Group Protection, despite the interest rate environment, we continue to deliver returns consistent with our targets.
It's really on the life space where we're underperforming a little. I mentioned that we've taken actions on the life space. I would anticipate that we'll continue to take pricing actions in response to the low interest rates to move these returns more in line with our long-term targets. To wrap up today, I started out, I wanted to talk about two main themes, the operating model, the franchise that supports our profitable growth. I talked about the actions we've taken, the actions we'll continue to take, our distribution strength, where we're investing. It's a strong model.
It's a model that is linked to the second item I wanted to talk about today, the financial strength, the fundamental strength of this organization, the strong capital in our life companies, the strong cash at the holding company, our ability to start being more active on capital management through the use of the free cash flow we're generating. It's all of these items that make me feel very confident in the future for Lincoln. Thank you. With that, I think we've got a little time left, Jay, for some Q&A.
Great. I'll kick it off here, Randy. The hedging program, is that more sensitive, or is it focused more on statutory results, GAAP, or is there no difference?
We historically, Jay, well, and still today, run a program that is focused on the economics of issuing variable annuities. What we've seen over the years, because as I mentioned, we've had this hedge program in place since we entered the business. This isn't a hedge program we've tried to build over the last two years, over the last three years. This is a program that's been in place since we started selling Guaranteed Living Benefits. What you saw is that during the last crisis, the program delivered a significant amount of assets. We had no stress on the statutory results. The variable annuity program used not dollar one of statutory capital during the last crisis.
It's this focus on economics that makes me feel very confident that this approach to the economics of issuing variable annuities should yield a similar result in the environment that exists today. There are certain environments that can create timing stress on the stat side. For instance, if interest rates spike up, that can create a difference between the economic value of the liability and the statutory value of the liability. We do maintain some items in place to cover that sort of temporary usage. Quite honestly, as we sit here today, I don't think there's any worry about stress on stat capital from the VAs.
Okay. For the third quarter for reduced equity markets, what's the potential impact on deferred acquisition costs, year to date?
Yeah. We'll go through every third quarter. We do a very rigorous analysis. We do our third quarter unlocking, we call it. I guess if you look across the space in the VA business, we have run a corridor, as we come into the third quarter, that corridor approach had a significant cushion on the positive side. It covered up to, I forget exactly, but it was something like a 30% drop in the equity markets before we even hit the middle of that corridor approach. I feel very comfortable that you should not see a big negative item on the VA side from the DAC front. On the life side, we've been working on our models for a number of years. We've been moving to a single platform. You've seen some of our line items move around on the life side.
I don't anticipate large-scale adjustments, but I'm not going to get in front of the process. The folks who run those businesses, the actuaries and accountants who work with them are in the middle of that third quarter unlocking. We'll see what comes out of it.
Questions from the audience?
Yes. I think there's a lot of these presentations about capital strength and balance sheet strength, 500% RBC. Looking at the potential returns in all your businesses or where you're kind of hitting returns now, as an owner of this business, why wouldn't I want to see you allocate more money to buyback, given that your stock is trading half or less of book value, and pull capital, not necessarily away from those businesses, but maybe slow the allocation of capital towards those businesses, especially when we are in an environment where annuity sales have been as strong as they are, even though returns are dropping. Crediting rates are still pretty high across the industry, falling, but kind of can you frame that question a little bit?
Right. Well, first off, let's just talk about capital usage. We had this discussion on the second quarter conference call. I think in an environment that exists today, sitting here with a very strong capital position is where I want to be. I can run all the stresses I want, and believe me, we do when we set our capital policy. Those are the stresses that I know. In an environment that exists today, it's the things that I don't know that I'm worried about. It's why as you sit here today, honestly, as I came out of the second quarter, I had no idea that the U.S. was going to be downgraded. I didn't know it would get as stressful as it is in Europe. There are all these things that continue to percolate in the environment that exists today.
I want to sit on very strong capital in that environment. That capital is, as I mentioned, is what feeds the franchise. In terms of slowing down the sale of new business, capital using new business, and pushing those proceeds into other sources, like buying back stock, I'd note that it isn't a simple process just to suddenly turn on a dime, new sales. We continue to respond with pricing increases to move those returns on new business up. I understand that the return on buying back stock is high. What we don't want to do over the long term is damage this franchise. It's this franchise that when you look out five, six, seven years, that will be delivering value for shareholders.
While buying back stock today creates a very good favorable economic outcome, it won't lead to that franchise five, six, seven years in the future that we need to think about. We need to be prudent with the mix that we come up with. We need to be responsible with our pricing actions on our products, and we are. We need to be responsible in buying back stock when it makes sense, and we've done that. As I mentioned on the call, on the second quarter call, we'll target in the range of $400 million this year. That's a significant increase over last year. We'll continue looking at these things as we go forward.
Could you talk about the assumptions around Well, first you said that the secondary, the SGUL investment portfolio duration is 24 years. How about the impact of the sensitivities of the policyholder behavior changes, such that if the liabilities really are 24 years?
Excuse me. The SGUL business, as we have designed that business, is a very low liquidity business. Our product drives cash values to zero very quickly. What you see in that business is that you don't have that customer flexibility. The customer doesn't have that cash value to make that decision to suddenly shorten up should they so desire. If they decide to lapse, we don't have a big cash outlay for them. Product design really leads to an optimal outcome here. It's that product design which gives you a very tight range around understanding what the duration of that liability is, and really allows us to be very comfortable investing for the long term like that. Because if they do decide to lapse, we don't have a cash outlay to them. We don't have to sell those assets.
Good morning. I'm not sure you can comment on this, but I read somewhere where people were questioning how Pru could have had roughly a $1 billion reserves strengthening at the end of the fourth quarter in 2010, relative to your fairly modest interest rate risk exposure that you've laid out when they looked at the two different books of business. If you can add any more color to that.
Yeah, a little bit. I don't know if it's going to be as specific as you like, but nonetheless, I saw that comment and actually did reach out and ask a question of our friends over at Pru. They did not put up $950 million of reserves at the end of the year, a new $950 million of reserves at the end of 2010. They've had reserves up for an extended period of time for a particular book of business, which I believe was focused in the Structured Settlement space, which is a business we don't participate in. I can't speak specifically about Pru, but it's a business that we're not in that I think led them to have those reserves on their balance sheet for an extended period of time. They weren't new reserves that they put up.
What I know when I look at our results, I talked about the conservative nature of statutory reserves. I've talked about the quality of the asset liability management program. All those things are very supportive of stat reserves as we sit here today.
Great. With that, I think we'll have to stop there. The conversation will continue in the breakout suite in Clinton. Please join me in thanking Randy for his presentation today on Lincoln.