Lincoln National Corporation (LNC) Q2 2013 Earnings Report, Transcript and Summary

Good morning, and thank you for joining the Lincoln Financial Group's Second Quarter 2013 Earnings Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to the Senior Vice President of Investor Relations, Jim Sjoreen. Please go ahead, sir.

Thank you, operator, and good morning and welcome to Lincoln Financial's second quarter earnings call. Before we begin, I have an important reminder. Any comments made during the call regarding future expectations, trends and market conditions, including comments about sales and deposits, expenses, income from operations and liquidity and capital resources, are forward-looking statements under the Private Securities Litigation Reform Act of 1995. 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 our earnings release issued yesterday and our reports on Form 8-K, 10-Q and 10-K filed with the SEC. We appreciate your participation today and invite you to visit Lincoln's website, www.lincolnfinancial.com, where you can find our press release and statistical supplement, which include a full reconciliation of the non-GAAP measures used in the call, including income from operations and return on equity, to their most comparable GAAP measures. Presenting on today's call are Dennis Glass, President and Chief Executive Officer; and Randy Freitag, Chief Financial Officer. After their prepared remarks, we will move to the question-and-answer portion of the call. I would now like to turn the call over to Dennis.

Thank you, Jim, and good morning, everyone. Overall, it was great a quarter, with all of our businesses performing very well. At our recent investor conference, we reiterated our strategy to capitalize on Lincoln's key strengths in the current economic environment and earnings mix driven by growing equity markets, rising interest rates and mortality and morbidity coupled with an unusually strong distribution franchise that allows us to pivot nimbly between products that maximize returns from among this earnings mix as market forces change and consumer demographics that increase the demand for what we sell. This quarter underscores those strengths and demonstrates our execution on that strategy, and the numbers speak for themselves. From the conference, you may recall that a little more than a 1/3 of our earnings are driven by equity charges. The combination of strong net flows and rising equity markets consequently drove equity-based revenues up 20%, which contributed to company-wide revenue growth of 6%. You'll also recall that another roughly 1/3 of our earnings are driven by investment spreads and that those spreads have been declining as interest rates fell. Rates have firmed up a bit, allowing us to invest new money at about 190 basis points over the 10-year treasury today, for a gross investment yield of around $450 million. This gross yield was about 85 basis points less than our portfolio yield. The good news is that the rate of investment spread compression will abate at today's market yields, and the possibility of a turning point to improving investment spread may be coming sooner than we expected. Remaining earnings are derived mostly from mortality and morbidity, and we saw much better mortality and morbidity results in our group Life businesses as compared to the first quarter. We highlighted at the conference the strength of our…

Thank you, Dennis. Last night, we reported income from operations of $351 million or $1.27 per share for the second quarter, up 17% from the second quarter of 2012. Overall, it was a very strong quarter across all key metrics. Of note, excellent top line performance with operating revenue growth of nearly 6%, up from the 4% to 5% level of recent quarters. Tight management of controllable expenses, with growth in G&A primarily attributable to strong production and share price performance. Adjusting for those 2 items, G&A was up roughly 3%. Account balances increased to a record level of $189 billion; strong general account performance with realized losses related to investments coming in at a very manageable $22 million and balance sheet strength, with GAAP book equity per share, excluding AOCI, up 13% to $43.21; $693 million of cash at the holding company; an RBC ratio of 485%; $150 million of share buybacks; and return on equity of 12.4% for the quarter. As noted in the press release, we had no normalizing in earnings adjustment in the quarter, but we did quantify $19 million of positive earnings impact from higher-than-expected investment income on prepayment fees. All in all, a very good, clean quarter. Turning to segment results and starting with Annuities. Reported earnings for the quarter, which included $9 million of higher-than-expected prepayment fees, came in at a record $195 million, while ROE came in at 26%. Operating revenues increased 11% from the second quarter of 2012, primarily on higher fees, driven by a 15% increase in average account values, to $104 billion. This was a very good quarter for the annuity business that really exemplifies everything that we covered at our June investor conference: a history of responsible product pricing on VAs, that has put us in a very…

[Operator Instructions] Our first question is from Yaron Kinar of Deutsche Bank.

I wanted to maybe dig in a little deeper on the rate sensitivity and sort of thinking about kind of reverse sensitivity, namely with the free cash flow coming in higher than your expectations. I know that on the 10-K, you had given some disclosures of roughly $35 million of headwinds that you just talked about in the opening comments as well. What happens if free cash had come in 50 basis points above your estimates or 100 basis points above your estimates? Have you done any sensitivity work on that?

Yaron, this is Dennis. This is sort of what I was driving at, we're about 85 basis points lower than our portfolio rate. So if -- just rough justice, if rates -- our new investment yields get up to our portfolio rate, that would stop spread compression.

Yaron, this is Randy. I'll just add -- I want to make sure we're comparing apples and apples. The $35 million you referenced was what we put in the 10-K and it was the impact on 2013 results, with rates at 1.5%. $35 million is my updated estimate for 2014, which is down from $100 million previously. So we've seen a significant reduction and improvement in potential spread compression, because the treasury rates have increased 75 basis points or so.

Understood. But maybe -- so, let's say -- I don't know what your forward estimates are, but let's say that you're actually 50 basis points below or 100 -- whatever number you want to choose, what impact does that have on 2014 numbers?

Yes, we don't give the impact of x basis points. But as Dennis mentioned, we're roughly 80, 85 basis points below our portfolio today, which is -- we've come about halfway, and it's cut the impact substantially. So I would say if you got another 75 basis points or 80 basis points in an increase in treasury rates, you'd see the negative impact across Lincoln eliminated.

Okay. And the second -- the follow-up question is on the Retirement business. Clearly, mid-to-large market accounts are growing. Can you give us an update as to what comparative trends you're seeing there and what demand's looking like there?

Yes. Overall, I would say that it's a competitive marketplace in the mid-to-large market, rebid activities remain high. We're seeing a little more competition move -- small-market providers move up into the middle market. Pricing pressures sort of continue to be there. In the small market, again becoming more crowded, but we're still getting our fair share. What I'd say, in general, is in the small market, we're achieving our returns, we're getting good growth, we're expanding distribution, we have new systems. We have, again, expanding distribution. So that's a good long-term market, but we need to continue to invest in the expansion of distribution. Again, the shelf space is pretty remarkable, the achievements we've made there. In the mid-to-large market, we have this emphasis in the government space, as I mentioned, that has a good growth characteristics -- a little bit less price sensitive, a little harder to get done. So overall, from Lincoln's perspective, I continue to see pretty good growth in this business and pretty good ROE development. A little tougher in the mid-to-large market to get the returns that we want. But again, I think we have a very good position getting better known in the marketplace for all the achievements that we've made over the last 24 months, and we're pretty positive on the continued growth of that business.

Our next question is from John Nadel of Sterne Agee. John M. Nadel - Sterne Agee & Leach Inc., Research Division: A couple of questions for you really centered around Annuities. So if I look at the Annuities segment results this quarter and I strip out those higher prepayments that you mentioned, earnings really jumped about -- I don't know, about 15%, 16% from the average of the past few quarters. I'd expect, I think we would all expect, that higher account values, stronger markets, that the EGPs are higher and that all of sequel, even deck amortization should come down a bit. Maybe you could update us on where you are, how much you expect that deck amortization to be lower than it has been previously. And then within the corridor, given the strong market performance, I know you're already reasonably close to the upper end, where are you know now?

John, it's Randy. Let me answer your question this way. First, I'm going to compare second quarter to the second quarter of last year, and then I'll talk about the sequential quarter. If you look year-over-year, earnings are up 23% or so, and that's pretty much primarily driven just by AUM growth and the growth in the amount of fees we're collecting per dollar of assets. If you look at average separate accounts year-over-year, they're up 19%, and when you look at what we're getting from an expense assessment standpoint, they're up 6 basis points. Bring those 2 items together and what you see as expense assessments are up 21% year-over-year, and that's pretty much the driver of earnings growth year-over-year. It all makes sense. When you look at the sequential quarter, it's that along with a couple other items that I'll mention. So if you look sequentially, earnings are up 23%, 17% if you strip out the $9 million of strong prepayment fee income. But first and foremost, the driver is strong expense assessment growth. You see average separate accounts at 5%, and you see our average expense rate up another 4 basis points. You bring those 2 things together, you get expense assessment growth of 7% or $27 million, and that's the primary driver of the earnings growth. In addition, what you see is that we had very strong results in our broker dealer during the quarter. I'd attribute that to expense savings from a consolidation we did in our distribution system and the benefit in the retail channel of strong AUM growth, so strong results in our broker dealer, which I believe are repeatable. And third, as I mentioned, is the cum benefit -- the cumulative benefit on deck amortization would have been a period of very strong performance in the equity markets. I believe when you bring all those things together, I'm very comfortable with the annuity earnings in that mid $185 million -- $180 million range. John M. Nadel - Sterne Agee & Leach Inc., Research Division: Got it. Okay. That's extraordinary helpful. Then the other question I just had is just to -- Dennis, I think you mentioned in your opening remarks that let's not all get scared that VA sales are -- jumped as much, there was some acceleration in front of your product refresh and benefit change; and that the production levels have come down about 25% from the levels in May, but we don't really know what the levels were in May. I'm assuming they were significantly stronger in the front half of the quarter given the May new product launch. But can you give us a little bit more help there?

Yes, I can. First, let me remind all of us that Lincoln has been -- has had about 1/5 market share for 5 -- we've been #5 for 5 years. So we've done an exceptionally good job of getting the business on our terms without reaching for market share, and we do that through price changes. If we see the market -- see our demand getting too strong, we'll change prices, as we did in May and of course, we've done consecutively over the last 24 months. Sometimes in a quarter, it's hard to have that same consistent result, in part because competitors are making sharp turns, and we, for a moment in time, might get a little bit more market share from them because they've exited the market or changed their pricing. So my point is that we've done a great job at this over 5 years. This is one quarter when things popped up a little bit. Specifically, it popped up because our -- although we made changes to the benefits on our single Living benefits product, we didn't -- we waited until June to make it -- the product changes on our joint Life products. And just perspective, typically, the joint Life runs about 1/3 of overall sales. In the second quarter, again, in part because of competitor actions, this jumped up to 54%, so drove a lot of that increase. Again, with the sales -- excuse me, with the pricing changes, we're now back to that product being at its normal 1/3 level. And just -- you may then ask the question, "What did we do?" -- we reduced the payout rates by 50 to 100 basis points for the age 65-74 bands in our joint Life product, and we restricted some other benefits. So that's sort of the big picture. As we look for the second half of the year, we don't expect to see the same volume of sales that we saw in the second quarter. And if because of competitor reactions or just generally strong demand for this product, we see sales inching up above our guidelines, we'll take additional actions. I would like to come back and say that these pricing actions that we're taking are not being taken because the products that we're selling had too low of returns. All of the business that we sold over the last 6 to 7 months are -- we continue to talk about mid-teens to upper-teens returns. Even before we made the product changes, we were getting that on this business. So the stuff that we've sold is good profitable business. It's just that, as I said in my opening remarks, in total, we like to be a business -- we like our long-guaranteed businesses, but we'd like to see it sort of become a smaller part of us over time. So that may be more than you wanted, but that's my answer to your question, okay?

Our next question is from Suneet Kamath of UBS.

Just have a couple of things. So first, Randy, on your comment on the -- I think it was $1.8 billion of treasury locks that you purchased, does that have any impact on that -- in the past you've talked about this $500 million potential statutory charge on the UL block at some point, kind of 5 years out, maybe a little bit longer. Have we started to chip away at that with some of the actions that you've taken so far, including these treasury locks?

Suneet, I think anytime you see either the interest rates move up or us take actions to lock in higher rates in the future, it has a benefit on the margin. We continue to feel very comfortable with where our reserves are today and the trend and interest rates. So I feel very comfortable about any pressure on statutory reserves.

Okay. And then I guess on past calls, you've kind of given us a walk-through of sort of capital generated, what your expectations are inclusive of reserve financing. And I take it by your comment that you continue to try to beat the $400 million -- roughly $400 million of buybacks, that nothing there has really changed? I just wanted to kind of confirm that.

Yes, Suneet, nothing there has changed. I'll broaden your question, and I'll talk a little bit about statutory in general, talk about both what has happened over the last 10 quarters. So I think it's very important to look at the reality and then talk about some of the trends I see as we look forward. If you look over in the last 10 quarters, you go back to the end of 2010, we were a company with an RBC ratio of 491%. We were a company with roughly $700 million of capital at the holding company. In the next 10 quarters, we've bought back 1.3 billion of stock at an average price a little below $25. We've delivered by a couple of hundred million dollars, and we've raised our dividend by about 140%. So we've put roughly $600 million of capital to work. And where are we at today? We're a company with an RBC ratio of 485%. We're a company with roughly $700 million of cash in the holding company, right where we started. So the reality is that over the last 10 quarters, we have had a very strong capital deployment story. We continue to have a very strong balance sheet. Now when you come up to today, you look at what we did in the second quarter, we had roughly $200 million of statutory earnings, which is right in line with my expectations. When you think about the things -- when you look forward, we've got the strong equity markets, which are going to continue to help the Annuity earnings. We've got an easing enough spread compression as rates go up, as Dennis talked about, we've repriced all of our products. GUL has fallen from what was 50% to 60% of our sales to 15% of our sales today, and that's our most capital-intensive product. In addition, we just repriced that product in the second quarter to make it much more in line with today's reserve regime. So, the trends when I look forward are very positive. So this year, just as said in my script, we're very comfortable that we can meet or exceed the $400 million, and the trends, I think, as you go up beyond that are very favorable on statutory.

Got it, helpful. Maybe just one last follow-up question either for Randy or for Dennis. Just thinking about your share repurchase program, a year ago plus, your stock was at, I don't know, 60%, 70% of book value, something like that, and the accretion from buybacks was significant. Now with your stock now getting closer to book value x AOCI, how do you and how does the board think about that trade-off between -- in the past, you've talked about the implied return on buybacks versus things like acquisitions. Obviously, that implied return will potentially narrow as the stock price goes up. So how do you think about that trade-off?

Well, on the lighter side, it's certainly more fun to buy our stock back at $20 when it moves to $42 or $43 quickly. But as the stock approaches the book value, the return that we would expect is different from share repurchases. So I don't think necessarily that means we will do less as we move forward, but the return on that needs to be compared to returns on every other use of capital. But right now, I think Randy's guidance is pretty good. We're going to continue to buy our shares back, but the return has to be put into the broader perspective of other uses. And at the moment, we're generating excess capital. We think continuing to buy our shares even at this price is a good idea. I still contend that, using the metric of price book progression, we're still $8 to $11 less than what we should be before we just get normal market appreciation. So long answer is sure, as the price increases and the return on potential purchases goes down, we have to look at that, but there's nothing I can see right now that would change the plans that Randy's just outlined.

Our next question is from Ryan Krueger of Dowling & Partners. Ryan Krueger - Dowling & Partners Securities, LLC: My first question was on life mortality. Could you just talk about how it was in the quarter relative to your expectations and maybe the actual to expected metric that you've given in the past?

Ryan, yes. Life mortality, as we noted, improved to right in line with our expectations. Remember the first quarter, we talked about an a-to-e of 86%. If you look at the second quarter of last year, that number was 80%. And when we came into this quarter, we're right in line with that 80%. I think, mathematically, we came in at 81%, but that's right in line with the expected range of mortality. Ryan Krueger - Dowling & Partners Securities, LLC: Okay, great. And then on the change in the sensitivity to low interest rates, about $100 million in '14 going down to $35 million, was that purely due to the increase in higher interest rates? Or does that also incorporate some of the proactive steps that you've taken so far along the way that impacted some of this guidance that you've given in the past?

I think it reflects both of those items. I'd also note that, just factually, if you go back to the $100 million guidance at the beginning of the year, 2 of those quarters have passed, right? So there's 2 quarters of impact that are in our results right now, and the $35 million is an estimate relative to what we just reported in the second quarter. So you've got some that's already in our results, so that's some of the impact. I'd call that $20 million to $25 million. But the rest of the impact is primarily attributable to the increase in interest rates and then a little bit the proactive things we've done. Ryan Krueger - Dowling & Partners Securities, LLC: That's it. And then just one last one, just on -- back to the discussion of share repurchase and M&A. Just wondering if as interest rates have come up, if you've seen any change in the M&A type of activity going on behind the scenes?

We continue to be -- well, you all know we've built Lincoln, old Lincoln, old JP, with thoughtful well-priced, well-executed executions. The people sitting around the table here are the same people who've done those successfully. We have a strength, which if the right circumstances occur, we wouldn't be -- we would do a deal. I would have to say right now, though, that it's -- the activity is not anywhere in what we would find of interest. And so at the moment, what's in front of us, what's out in the marketplace, what might be coming down the road, there doesn't seem to be too much that would be of interest to us. And again, some of the deals that have been done recently have been done at very low discount rates, my view, and we're just not going to do that.

Our next question is from Jimmy Bhullar of JP Morgan. Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division: And so some of my questions were answered, but just maybe one on variable annuities. Dennis, like even if the business shrinks a little bit in the third quarter, it's still actually growing faster than other parts of your business. And is there a point at which variable annuities get too large as a percentage of your business mix that you decide to take a little bit more of a drastic action and maybe reduce the growth there? And then what would that point be if there is one? And then secondly, on your disability business, the margins had steadily improved the last few quarters. This quarter, the loss ratio went up about 1%, still decent overall but was wondering whether that's -- you're seeing any deterioration in losses or is that just normal loss in claims trends?

Yes. I think I'll take the first one and give the second one to Randy. The -- we are modulating our -- moderating our VA sales to a level that I think is maintainable over a fairly long horizon, and that's in part because we're growing other parts of the business as well. I'd also like to make the comment -- we talk about annuities as a business. Number 1, you've got to pull out fixed and variable dynamics and the earnings impacts over time. Those 2 things are different. I think of our total variable annuity -- excuse me, of our total annuity earnings, about 25% is on the fixed side. But then even stepping back farther, the lines of business, you're calling it annuities, are a good indicator to me of how we source liabilities in the business. It reflects sort of the nature of our liabilities, but I don't look at the businesses per se as the final criteria on earnings mix. What I've been focusing you all on is the balance of capital market businesses and mortality and morbidity businesses. So again, back to what I said earlier, it's our goal to -- well, I didn't say this, but I will. We get about 1/3 from equity charges across all of our business lines. Of our earnings, we get about 1/3 from interest spreads and maybe, at this moment, about 25% from mortality and morbidity. The goal is to change that mix more towards mortality and morbidity and then to lower the percentage of sales in the long duration of products. And I would say that these are midterm goals over the next couple of years, and I'm pretty confident of both the market and again, the quality of our distribution. I mean, to me it's pretty -- it's a pretty decent business, some good examples of the strength of our model. We talked today about taking Universal Life sales, which were running 60% to 70% of total Life sales, down to 15% in the space of 24 months and by the way, now back at the same levels of sales we were when we started that Pivot. If you look at what we've done in the VA business, we were selling no protective strategy funds. It went from 0% to 80%, because our distribution was able to drive those results. So as we set our sights on more crisp business mix and product mix objectives, I'm pretty confident, based on our history, that we'll get there. So this a long story to say that the business mix is going to be moved more towards mortality and morbidity. I think that mix will improve our share price performance over both economic and capital market cycles, and I think we have the wherewithal to do it. Okay? Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division: And then on disability?

Yes. On the DI loss ratios, we didn't see any trend of deterioration in the quarter. It was a very strong quarter in the DI business. I think broader picture in the group business, there is some seasonality in the different businesses that moves in opposite ways, actually. You'll see DI incidents trend up a little bit over the course of the year. On the other hand, you'll see dental incidents trend down, and you'll see mortality typically improve in the last half of the year. So you've got these things that work against each other. But all in, very happy with the group results in the quarter and feel good about us moving forward.

Our next question is from Steven Schwartz of Raymond James. Steven D. Schwartz - Raymond James & Associates, Inc., Research Division: Two. First, with regards to the interest rate guidance, Randy, just so I'm understanding this, I had historically thought of the guidance as, okay, 2013 interest rates, that's going to hurt you by $35 million. And if you think in 2014 that Lincoln's earnings were going to grow 9%, to pick a number -- grow them out 9% and then kick off another $65 million, so $65 million, $35 million, equal to $100 million. Now I'm thinking about it, okay, so we have the $35 million, and I'm not even sure if it's still $35 million for this year. You didn't say anything about that Randy, so if you could touch on that. And then it's going to be -- if I'm going to grow out earnings for Lincoln 9% -- $35 million less $35 million is zero. I'm going to keep it at 9%. Is that the right way to think about this?

Well, let me try to walk through that. First off, as I mentioned, $35 million was a number coming into the year, full year impact. Two quarters are behind us, so there's some level of impact from spread compression in our second quarter results. But as we've been saying all along, we've -- there are lots of levers we pull to manage interest spread compression. So we've been managing expenses. We've got favorable impacts from the equity market. So we have this very strong second quarter, which includes some level of spread compression impact, primarily in the Life business and the Retirement business. Now as you move forward, you'll see a small quarterly impact that will total up to $35 million, as I mentioned next year. Last half of the year, it's a relativity small number, it's a single-digit number in the second half of the year, relative to what we reported in the second quarter. And it says nothing of the fact that we will continue to do everything we can to manage the bottom line impact of that spread compression. Steven D. Schwartz - Raymond James & Associates, Inc., Research Division: And then one -- I had to go on to something else, so I apologize. If I missed this, just let me know, and I'll check the transcript. But I am interested in the Retirement Plan Services, particularly the success in the mid-to-large market. And it wasn't clear to me from Dennis' statement whether that was being driven by government or whether that was being driven by 401(k) or by teachers. And it's our understanding, I think, that mid and certainly, large is the -- probably the most competitive of the areas in the defined benefit business. So maybe you can touch on what you're seeing there competition wise?

Yes. In the mid-to-large market, progress to date has been made by virtue of 2 things. One, we -- well, many things, but if I can spike out 2 things. One, we have a new platform. Before we had the new platform, we weren't on any of the consultant lists, or we weren't on as many as we needed to be. So once we got the new platform in place, the number of consultants who drive this mid-to-large business started taking notice of Lincoln. So that's number one. Number two, accessing the consultants requires feet on the street, and over the last 18 months, we've increased that, okay? Our product is as good as anybody's product, so -- but now we have access to consultants because of the overall mix of our business. If I remember correctly, some of our business that we've been putting on the books comes from our expertise in the healthcare area, which has been a good growth area. So that sort of brings us up to today. The government market is a new initiative that we started in the last 90 to -- maybe 6 months. And the pipeline for new sales, whether or not we can close it, we'll see, has a lot of that business in it. So going forward, we expect an additional push from the government market. But so far, it's come from improving our platform, getting in front of more consultants, expanding the sales force that calls on the consultants. Steven D. Schwartz - Raymond James & Associates, Inc., Research Division: Okay. Is the government market particularly price sensitive, Dennis?

The -- I guess the toughest place that we're finding to get well north of 10% on new business returns is in this mid-to-large market. I think the government may be a little bit less price sensitive, but it's less so than the 401(k) market.

Our next question is from Seth Weiss of Bank of America, Merrill Lynch.

I just wanted to follow up on the Annuities business and the sustainability of sort of that mid-180s run rate that you mentioned, Randy. And just thinking about it from an ROE standpoint, if I normalize out the $10 million or so of higher investment income, we're still getting to an ROE of about 25% for the quarter, which is a pretty big jump quarter-on-quarter, year-on-year, than what we've seen in the last 4 or 5 quarters. So I just want to make sure that I'm understanding that, that you're comfortable with the sort of the $185 million as a normalized run rate to start from here. And maybe help us understand where the leverage is that makes for this pretty drastic increase in the ROE looking at that segment.

Sure, Seth. Well, first off, yes, I am comfortable with the mid-180s for all of the reasons that I went through before relative to the second quarter, relative -- second quarter of last year, relative to the first quarter. This is driven by good solid AUM growth, good solid performance in our broker dealer and the powerful benefit on deck amortization of all of those items. So yes, very comfortable in the mid-180s. From a return standpoint, the 24%, 25% ROE that you referenced to which you normalize out the prepayment fees, that's just the end result of a business that was very well protected as we came through the last 4 to 5 years. I think what you see at a lot of companies is companies that weren't protected -- didn't have hedge programs in place coming into the crisis and had to build those hedge programs at costs that are probably twice what we had to spend to put that hedge program in place. That is the key component which differentiates our returns from other companies. And there are a couple other companies out there, I won't name names, who have similar returns. Those happen to also be the companies that have very powerful, robust and deep hedge programs coming into the crisis. That is the key differentiator. So yes, very comfortable with the 180s, very comfortable with the ROEs that we're reporting.

Okay, great. And I guess just one follow-up. I'm thinking about sort of new business returns in -- VA was a business that was, in terms of business mix, was obviously quite out of vogue just a year ago. Now with the S&P over 1,700, returns are looking better, as you mentioned. Is -- some of the legacy business run over the last 2, 3 years probably has pretty good returns. Is new business maybe at a slightly lower ROE when we think about kind of the run rate of this going forward? Still maybe above 20%, but this 25% is probably not the right level to think of as new business? Is that fair to say?

That's sort of difficult to predict. In my remarks, I said we were pricing new business today at unlevered returns of 19%. If you add leverage to that, you still get into the low 20s on the balance sheet.

We have time for one more question. Our last question is from Eric Berg of RBC Capital Markets.

Dennis, the -- what would appear to be a -- there appears to be a growing interest, not a stable interest but a growing interest, on the part of the public, both institutions -- both individuals and institutions, in tax efficiency and in flow fees. We see this is in the growing share of passive strategies in the asset management business. Annuities kind of go in the opposite direction from that trend. They tend to be tax inefficient, converting capital gains into ordinary income, I believe, when the money is distributed. And the fees on them were dramatically higher in most instances than on the next based alternatives. Why do you think that this extraordinary growth that we've seen over the last decade and more in guarantees can be sustained given this trend? And relatedly, this whole longevity business that you're in and that the whole industry is in right now and is benefiting from, why should we think that the life insurance industry will prevail? And I realize in the context of this call, you all have only 1 minute or 2 to answer. It's something that we should probably get into more detail off line. But even if you want to answer briefly, why should we think that the life insurance industry is going to prevail over competitors, such as banks and asset managers, who are as equally aware of the longevity trends as you life insurers are?

Well, there is a lot in your question that we probably should take -- we ought to have a 2-hour lunch, but let's just come back to what happened during the crisis. Precrisis, in terms of preferences for products, does have more certainty. Prior to the crisis, everybody thought that the stock markets would forever increase. Then we had the crisis. People lost a lot of money, unfortunately, as we all know and read. Individual investors don't have a very good track record of market timing. So I think the broad statistic on that is individual investors' performance is 2% to 3% less than the overall growth in the S&P 500. So they're not particularly good in -- at it, and again, I think it comes from the market's decline. People get nervous, and they sell when they should hold. But in any event, so the individual investor hasn't had a good track record. He or she has seen the markets collapse, and their earnings collapsed likewise. I remember during the crisis, people started returning the 401(k)s as 201(k)s. And so there's been a pretty dramatic move in the preference of individuals to have some part of their portfolio invested in something that has more certainty. And I think that's going to continue, and that's why we think, in the right amounts, at the right returns, the VA business will continue to grow. With respect to the life insurance markets, some of that -- life insurance products has -- have a variety of uses, but the state taxes aren't going away, so the state tax declining will remain an objective. Young families that want to provide protection in the case of the breadwinner dying prematurely are going to continue to buy life insurance. So I think the fundamental needs of Americans for life insurance are going to continue to be very popular over the next decade. And again, as we've said and as you've seen in our competitors' reports, and none of us can predict or see that this is going to continue the way it has, but a good growing stock market and slowly rising interest rates has got to be absolutely the best economic climate for the insurance industry on top of the demand that we're talking about. Okay?

Thank you. I would now like to turn the call over to Jim Sjoreen for closing remarks.

We would just like to thank everybody for participating on this morning's call. And if we didn't get to your questions, we'll be glad to talk to you with a call to my line or to the Investor Relations line. Again, I appreciate your time today, and have a good day. Thank you.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day.