Lincoln National Corporation (LNC) Q3 2013 Earnings Report, Transcript and Summary

Good morning, and thank you for joining Lincoln Financial Group's Third 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, Shannon, and good morning, and welcome to Lincoln Financial's third 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. 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. At this time, I would like to turn the call over to Dennis.

Thank you, Jim. Good morning, everyone. Overall, it was another very good quarter for us, with our results driven by an earnings mix benefiting from strong net flows, growing equity markets and somewhat higher interest rates. We ended the quarter with the operating return on equity just under 13%. And compared to the prior year quarter, normalized income from operations was up 13%, 18% on a per-share basis, and operating revenue growth was up approximately 6%. These results are being supported by key actions. First, prompted by low interest rates, we began actively repricing our products 24 months ago to raise expected new business returns. With few exceptions, our current product offerings are achieving at or above our target returns. Second, equity base margins are benefiting from strong cash flows and rising equity markets. And we are being rewarded now for our consistent market presence since the crisis. Third, increasing shelf space and distribution partnerships, along with the robust solution set, have elevated our availability to sell products on our terms. And finally, aggressive share repurchases, totaling $1.4 billion since 2009, continue to boost operating earnings and book value per share. We'll take similar key actions in the near term. I will touch on many of these as I move through business lines results, starting now with Individual Life. Third quarter sales in Individual Life were up 46% from the prior year. Sales are at pre-Pivot levels and are driven by a broad solution set offered to the marketplace through powerful distribution. Pivot products, which are more profitable and have a more balanced risk profile, were up significantly from last year. These products now comprise 63% of total life sales. Also, 80% of third quarter production is from products other than guaranteed universal life. Over the past 24 months, we…

Thank you, Dennis. Last night, we reported income from operations of $367 million or $1.34 per share for the third quarter, up 6% from the third quarter of 2012. There are a lot of things to like about this quarter, and before I dive into some of the details, I'll point out a few qualitative highlights. Our key earnings drivers, including account balances across all businesses, life insurance in-force and group premiums, all ended the quarter at record levels. Our yields on asset purchases are reducing the drag from interest spread compression. We are earning strong returns on new business sales, and the balance sheet, with the statutory capital at an all-time high, strong RBC and net financial debt nearly at a post-merger low, is in great shape. With those high-level points as a backdrop, let's dig a little deeper into the quarter. Key items of note include excellent top line performance, with operating revenue growth of nearly 6%, a continued focus on managing expenses, with G&A up about 2% on a normalized basis, account balances reaching the record level of $197 billion, net realized losses related to investments coming in at a very manageable $7 million, an 11% increase in book value per share, excluding AOCI, to $44.37, an estimated RBC ratio of 490%, $100 million of share buybacks and return on equity of 12.7% for the quarter. As noted in the press release, we had normalizing adjustments of $28 million or $0.10 per share in the quarter, primarily attributable to our annual review of DAC assumptions and expense and tax true-ups. I'm very pleased that once again, when viewed in total, the DAC unlocking process had only a modest and positive impact on our results. It’s also of note that the impact by segment was relatively small. Both…

[Operator Instructions] Our first question is from Randy Binner of FBR Capital Markets. Randy Binner - FBR Capital Markets & Co., Research Division: I'm just going to kind of pick up right at the end there where Randy left off. On kind of the capital plan and buybacks, and I appreciate the comments on this New York Department of Finance issue not impacting your capital plan, but I guess what I'd say, in my opinion and maybe other people's opinion, is that you can might be able to do more than $400 million a year. So I guess the first question is -- I mean, there was $100 million in the quarter. That was a little lower than the first quarter. Are you holding back a little on what you might be able to do otherwise because of this? And is there any way to quantify what the RBC impact might be from this decision -- this potential decision by the New York regulator?

Well, let's separate those questions. We're going to meet with New York in the coming weeks, so we'll have more clarity when we -- after we have that meeting. SO based upon what I know today, then what do I know today, we're in a real strong overall capital position in total and in New York. We stopped selling SGUL in New York early this year, I think in the first quarter, and New York has indicated that any impact would likely be graded in. So based upon those facts, I don't expect any impact to our capital deployment plan. Now over to the capital deployment that we talk about and which we have been able to exceed over the last few years, the numbers are right in line with what was said, we've upstreamed to the holding company so far this year roughly $600 million, so we're right on track for our overall $800 million that we talk about sending to the holding company. Our holding company needs remain the same. Dividends are roughly $125 million, interest expense is roughly $275 million, which leaves us that $400 million. We came into the year with a little bit of extra cash. We're unable to use -- we're using some of that extra cash to take us over the $400 million that we guided to coming into the year. And when you move up going forward, we continue to look -- to leverage our balance sheet to hopefully exceed our guidance. But coming into any given year, we're going to continue to stick with that $400 million of guidance because that is what the numbers indicate coming into any given year. Randy Binner - FBR Capital Markets & Co., Research Division: Okay. So the free cash flow, basically, it guides the buyback regardless of potential other buffer and a pretty high RBC ratio? I mean...

Yes. Randy Binner - FBR Capital Markets & Co., Research Division: But I guess, I'd reiterate the question. I mean, is this -- is the event -- I mean, is the outcome of the New York situation, could it affect RBC by 10% or 20%? I mean, does it have the potential to -- it is hard to see the impact from the outside.

Randy, we're -- this is Dennis. We're in the midst of discussions with New York, but I don’t think we should front-run those discussions with any more specific discussion about the New York situation. Randy Binner - FBR Capital Markets & Co., Research Division: All right. I just got one final follow-up, which is important to this, and that's on excess reserve financing, and I know that's kind of implicit in the guide for the capital plan. So is that kind of -- we're getting late in the year here, so that's been kind of above or below or in line with the expectations for now and the rest of the year?

I think, Randy, in any given year, on average, we expect to do a couple hundred million dollars of reserve financings. And I think when all is said and done for this year, we'll meet or exceed that number.

Our next question is from Erik Bass of Citigroup.

Just hoping you could talk a little bit more about the structure of the reinsurance transaction. And is the right way to think about this that it means that on the coinsured piece, you're essentially selling a VA without a living benefit guarantee?

Erik, I think the last comment is right, if I heard it correctly, we're essentially selling a VA without a living benefit guarantee. I think that's an accurate characterization. Let me step back a little bit on this. I have said, company-wide, we are gradually changing the mix of the sales of long-dated guaranteed products versus non-guaranteed products. Several years ago, this mix was 50-50. This year, we expect it to be 65% non-guaranteed, 35% guaranteed. So we're moving in the direction strategically want -- we want to do -- we want to go. With respect to this specific transaction, we're very pleased with the economics, and it's a good deal for both parties. To your point about profitability, the $8 billion reinsured block will remain well above our target returns and profitability after the cost of the reinsurance. So I think, this is a good transaction. It's part of a broader strategic plan, company-wide, as well as inside the Annuity business. And again, inside the Annuity business, you heard me talk about increasing the sales of non-guaranteed products, in part, by directing our sales force that way; also, leveraged by our ability to create VA products, to have as their benefit to the client more asset-based opportunity and not guaranteed living benefits. So it's just part, if you will, of a broader company strategy that we've been articulating. It's one tool. I think it's a very, very good transaction, again, for both parties, very happy with it, and it's part of this longer-term strategy that we have for Lincoln.

That's helpful. And just one specific question on the structure. Do you retain the ability to adjust the living benefits feature? Or are you locked in to the current terms through year-end 2014, so meaning to change either the roll-up rates or the pricing on the feature?

Yes, I think -- I don’t have the specifics, but I think we retained, as we do with all products, the ability to adjust the underlying characteristics, subject to the guarantees.

And then just on -- Dennis, to your comments about shifting the mix, are there any other actions that you're considering to potentially accelerate the mix shift goals that you talked about?

Well, again, if you step back and look at the company in total, one very good example of this is in the Life Insurance business, where we've gone from long-dated guarantees representing 75% of our sales to now only representing 19% of our sales, 19% to 20%, so that's a big change. If you look at the emphasis that we have on growing the Retirement business, and you hear about billions of dollars of sales, those are all sales without guarantees, so that's important. If you go over to, of course, the Group business, we're accelerating the growth of that business, those are all sales without long-dated guarantees. So company-wide, there's quite a few things, specifically inside the Annuity business, reinsurance, products with value proposition for the customer that is not living benefits but is more high asset return inside a tax-deferred wrapper the way we used to sell Variable Annuity products, sales incentives, it's part of the broader scheme -- or, excuse me, the broader targets for Lincoln strategic targets, and we're going to pull as many levers as we can. But let me finish by saying that the business that we're selling, the VA business with living benefits, in this particular marketplace have very, very strong returns, and we like that business. As we go forward, we want to continue to grow our overall Variable business at a good pace. But within the overall Variable Annuity business, we'd like the VA business with living benefit guarantees to be at a slower pace of growth. Okay?

Perfect. Yes, I appreciate your comments. And just the last thing, you didn't mention any in-force actions. Is that something you would contemplate as well? Or do you really see the mix shift being driven by kind of the actions you're taking on the new business front?

We've seen what some other companies have done on that. We've looked at our own products and our profitability, and candidly, we can't. It just doesn't make sense. We've got very good business on the books, and we like the business that's on the books. It's been well priced all along. And so I don't think we'll be tampering with contracts that are in place.

Our next question is from Jimmy Bhullar of JPMorgan. Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division: Dennis, you mentioned like looking at it as selling of VA without guarantees, but it's a 50% coinsurance contract, so I'm just -- I think the right way would be like selling a benefit with lower -- or selling a contract with less guarantees but not without guarantees, right?

I answered the question, I thought it was with the half that did not... Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division: So if you sell a $1 million, in a way, you've only sold $500,000 with guarantees and $500,000 without that sort of benefit [ph]?

Yes, right. But if I'll come back to -- my other point is that if you do look at it in total, it does have -- it being the 6 -- the $8 billion block, it does have better -- a better risk profile, and the ROE on that business is still above our expectations. Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division: And as you looked at like -- as you looked at various alternatives and just the reinsurance option that you ended up choosing, what's your view on the availability of reinsurance or other solutions for like legacy lost [ph], whether recently written or written around the financial crisis?

Yes, you've heard me say this before, but I think smart money is -- has been moving into this segment because of good risk/reward opportunities and generally, as in this case, partnering with an experienced manufacturer. So we've seen different transactions in the past six months, it's my expectation that the dynamics stay -- risk/reward dynamics stay the way they are now, I would guess some people would be more interested in looking at it. Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division: And then on your Retirement business, you had pretty strong deposits, and that's been a trend recently, but your lapses picked up this quarter, so wondering if you think that that's more of an aberration or did you see anything that was driving the uptick in lapses, whether they were concentrated in the certain market segment or industry.

Yes, it goes to my comment about this business is lumpy. It's lumpy on the new sales side because when you make a sale, it's usually pretty big relative to our overall sales. And then the pattern of how often people reprice business that they have with us now fluctuates from quarter to quarter. We win some, we lose some. But just in general, it's the lumpiness. I don't see any different pricing characteristics at Lincoln over the past 12 months that would drive sales one way or the other.

Our next question is from Yaron Kinar of Deutsche Bank.

Going back to that reinsurance treaty, can you talk a little bit about kind of choosing this alternative over other alternatives that were at your disposal, including maybe just shrinking sales altogether? And maybe touch -- if you could also touch upon just the pricing, which I have been under the impression that, for a very long time, reinsurance pricing on non-VA books were just exorbitant, so has that pricing come down a bit and make this alternative more palatable?

Well, let me once again repeat what I said. The economics, both to the reinsurer and to Lincoln, are excellent upon this or we wouldn't have done it. Said another way, our understanding of the overall liability and the price at which the transaction traded, again, is very positive for both parties. We will continue to look at every opportunity to diversify our risk across the company, as well as within the individual Annuity space, as I just mentioned, and we've made good progress. We have several tools, and we'll use those tools as they come about. But let me come back to why not stop selling the product. First of all, why stop selling a product that is getting exceptional returns in current market, and we just had that validated by some of our outside pricing consultants at this particular period of time as the pricing on the VA is as good as it's been. So the VA with living benefits is as good as it's been. So we're going to stay in this marketplace because we're getting good returns. The volume, as I said as well, we continue to sell and see the VA business volume grow, but the total growth is going to be faster than the VA living benefits. And finally, let me come back to the point about, I guess, just cutting off sales or, in some artificial way, reducing sales, that is so contrary to the way we run this business. We just -- we're not going to artificially yank a product or cut off 10 35 [ph] exchanges. We have to be in the business consistently. And we think if you're in the business consistently, the long-term value with your partners, the long-term profitability are going to be better if you're not in the business consistently.

Okay. And then one follow-up. You talked a little bit about the -- in your financial services the developments with the superintendent [ph] there. Could you also maybe comment about the June proposal, FASB proposal, and your thoughts on that?

June FASB proposal, Randy, would you take that, please?

Yes. Yaron, we commented we -- I assume you're talking about the new approach to accounting for insurance contracts, so I premise my response to that. We provided a response. In general, while we're supportive of FASB's efforts to come to a more converged system across the globe, we're not in support of the particular process described in the exposure draft, and we had expressed our opinion in our comment letter. So I believe that the approach they've taken would not be good for investors, it would not lead to a better understanding of insurer financial statements. I think it would be a negative in terms of sort of the metrics that historically have been used to measure performance in the insurance business. So for all of those reasons, we're not in support of the exposure draft as described.

Our next question is from Suneet Kamath of UBS.

A couple of follow-ups on topics you already talked about. Just on the reinsurance deal, just to make sure I understand the philosophy here, so we should not expect a change -- or should we expect the change in your appetite for Variable Annuity sales kind of going forward? I know there's been some concern on recent calls that maybe you're gaining a little bit too much share as some companies have sort of pulled back. Now you have this reinsurance deal. And should we assume that whatever the sales plan was for 2014, before the deal is going to be roughly the same as what it is now that you have the deal?

I think that's a good way to think about it, yes. So, yes, so we're not going to try to pump sales next year just because we have this plan. We're going to stick with our sustainable and consistent marketplace approach.

Got it, okay. And then, Dennis, you had said in your opening comment that -- when you're talking about product profitability, that most of your products are achieving your target returns. I guess, I'm wondering which products do you feel like you have some more work to do.

That was specifically -- the big product change is MoneyGuard in the Life business unit, that generates a lot of our premium, our sales, and so that's one example. And as I've said, the -- it's ready to go -- it will be ready to go in the first quarter. There may be much smaller products here and there that continue to need updating, but what I'm trying to get at is, on those products that drive most of our new sales, pretty much done with what we have to do. And I'd also add to that, pretty much done with what we have to do based on the yield curve that was in place a couple months ago. So as I look forward over the next several years if, in fact, interest rates rise, we're going to be beating our pricing expectations. Quite a different story during the last 2 decades where you had secularly declining interest rates, and you're always chasing declining interest rates and having to reprice.

Got it. And then one other one on the new money investment rate, the 4.65%. I guess, my question is how much more capacity do you have to pursue these yield-enhancing investments? In other words, how sustainable do you think that 4.65% is as we think about the next several quarters?

Yes, I think 4.65%, in part, had a little bit spike of up to 2.80%, 2.90%, 3% in the 10 year in it. So I think in the fourth quarter, we might be down 10 or 15 basis points off of that level. So that's the dynamic of what's the sort of underlying interest rate that you start with. There was no significant mix difference in the third quarter than what we'd expect in the fourth quarter coming from those higher earning investments.

Okay. And then just the last one on this New York issue. I thought in your press release, you had cited the RBC ratio of Lincoln Life & Annuity Company of New York as opposed to LNL. I guess, I'm just trying to think about -- as we think about this issue, should we be considering whatever ends up happening impacting just the New York sub or impacting potentially LNL as well, as well as the other subsidiaries?

Yes, all indications are that this is just the New York sub. And we pointed that out because, I think at the end of the day, the New York sub will be able to handle any impact.

Right. I understood you. I guess, there's an earlier question about RBC impact, and it sounds like what you're saying is you're fine in terms of the New York sub, and we don’t need to worry about LNL?

Yes, I do not anticipate a major impact on the overall corporation's RBC. Remember, we ended the quarter at 490%, so we're in a very strong position. New York represents roughly 10% of the overall capital of the organization. So the vast majority of our capital sits in LNL, and so I wouldn't anticipate a major impact on the total capital position of the company. But clearly, the New York needs a little more capital that takes -- New York is included in the 490%, just to be clear.

Right. But I think you stated the RBC of New York was pretty high, right?

Yes, was in the 5s, high 5s.

Our next question is from the Mark Finkelstein of Evercore.

I want to go back to the VA question or the VA reinsurance transaction, maybe just a very specific transaction and how it will function. I mean, typically, with the coinsurance agreement, you kind of split the economics at the set percentage. So my question is this, are you essentially going to be giving to Wells Fargo the fee rider that you charge for the living benefit guarantee? Is it going to be more than that? Is it going to be less than that? How should we think about that?

Well, again, I appreciate all the questions around this, but, as a practical matter, we're not going to discuss the specifics of the pricing for a couple of different reasons: one, competitive, why would we want to share that with our competitors; two, in negotiations with a single entity, we're just not going to get into details about the give and take or who gets what and how. I think we're just going to stay with -- or I don't think, we're going to stay with the point that I've made a couple of times, the economics were good for both parties, and we certainly analyze this from the perspective of getting the right economics for the risk that we were being relieved of. And that, in total, after we pay the cost of the reinsurance transaction, our ROEs are going to be above our target ROEs for VA business.

Okay. All right, well, thought I would try.

No harm in trying.

Exactly. I guess, Randy, can you just talk about the assumption study a little bit? You didn't do anything -- and I'm thinking more on the VA side here. You didn't do anything on the equity, you didn't -- it doesn't sound like you did much on the lapse. Can you just talk about maybe those 2 areas and what led you to the decision to kind of keep things as they were?

Sure, Mark. I'll remind you that in 2012 we made major changes to lapse assumptions in the Annuity business. And as I noted, a year's worth of experience validated everything we did, both to lapses and utilization. So there was no major need inside of those products, the Annuity products, for any major impacts to the lapse assumption. If you think about the Life business and across the company, we made the big change to the J curve, the long-term earned rate assumption in the other years. So that major impact was behind us, and rates are up some since then. So we made a lot of the major changes in previous years. So came into this year in a -- with an expectation that we're in good shape, we won't have major impacts. Specifically to the long-term earned rate assumption, we made some small tweaks to specifically the bond return component of the long-term earned rate assumption. I think I noted in previous quarters that our average long-term assumption was 8.6%. The changes we made brought that down to 8.4%, so we did make some small changes. I would also note that we did not unlock our corridor, so when you think about what is right now an immediate 14% drop in returns embedded in our DAC models, you have an overall lifetime effective return inside our DAC models right now in the mid-7s. That is a rate that is easily supportable, along with the 8.4% return assumption, by the way, by any set of long-term data that you can look at.

Okay. Maybe if I can just sneak one more in, thinking about free cash flow a little bit, and we continue to talk about $400 million is how we start a year. And I mean, you're kind of pivoting to lower capital intensity products, so you are growing a bit, I agree on that. But you also have said that the free cash flow should grow with earnings. And earnings, I think you've grown better than most people are expecting. Why do we tend to go back to the $400 million as a starting point? Why shouldn't that number be higher?

Well, I think, if you think about the last -- let's talk about the last few years, which is when we've been talking about $400 million of free cash flow. You've got a lot of another -- a lot of other anomalous items that have come into the equation. You've got an AG 38 solution that's come in. So you had a number of these items that have come along which have impacted the free cash flow numbers, and I think that's why we really have been steady over the last few years. Looking forward, just as you said and I'll reiterate, I expect that free cash flow will grow with the earnings of the organization, and it will grow as we shift our mix of business to lower capital-intensive products. So that's in the future, and we'll talk about those items when we get closer to that future. You know we don't give guidance. So we don't give guidance. These things happen over time. They don't happen immediately. But I fully expect that free cash flow will grow as we look forward.

Our next question comes from Chris Giovanni of Goldman Sachs.

I'm going to follow up again on the reinsurance deal, and I wanted to see if you can talk a little bit about some of the economics. And certainly, there are a lot of strategic decisions for doing this. But if you try to compare maybe the differential, the comparison of the ROEs between pre-reinsurance deal versus the post-reinsurance deal, what would the differential on the ROEs be?

Chris, if we price the block, if we look at the block before reinsurance and then after insurance, the change in the ROE is 1% or 2%.

Okay, that's helpful. And then we haven't really seen these really since the financial crisis. And certainly, I think a lot of your competitors are having to address kind of this deal today. But wondering, was it just this one reinsurer? Were there other reinsurers that were willing to share the risk with you? Do you think this is something unique to Lincoln, where the metrics that you guys clearly have shown is that your business is more profitable than some of your peers? What do you think just reinsurers, in general, are looking to get more involved in new business risk?

It's difficult to say, and this isn't going to be specifically responsive. We'd continue to see -- and I said it earlier, but we'd continue to see smart money coming in to the Annuity space. My view is in terms of just the balance of trade, if you will, between the reinsurer and us was as good as anything that's been done in the marketplace for the last -- well, since before the crisis. And I think that's in part -- it's, in part, related to 2 things. The math for VA business today, in terms of generating returns, is so much better than it's been over the last 3 or 4 years. That's one dimension of it. And the second dimension is, to the point that you're making, we do have one of the best track records in the industry for developing profitable business. We have one of the best track records for hedging this business. And so it's a combination of -- again, at this moment in time, good economics for everybody, people are looking for a little bit of extra return on their businesses, and doing it with a really strong manufacturer.

Okay. I totally agree. And then just one maybe for Randy. Wanted to see if you could talk to a little bit about maybe what the spread is of the living benefit rider fees that you're charging today versus the cost to hedge. So where does that spread stand today versus maybe 12, 18 months ago, before the capital market movements that we've seen and kind of the tighter risk parameters that you've been putting on the products?

Chris, yes, it bounces around, right? It bounces around day to day with the capital markets. But on average, I'd say you're running in the 80% range right now. So we charge 100 to 110 basis points, and the cost of hedging is roughly 80% of that.

And then where would that have been 12 or 18 months ago? Would it have been similar? You've just been adjusting the fees to keep that 80% ratio constant?

Yes, so we've been adjusting the benefit and the fees over time. There were -- there have been periods of time where the fees had been lower than the cost of hedging. There had been times when the fees had been quite a bit above the cost of hedging. But I think with the adjustments we've been able to make, we've been able to keep that sort of 80% ratio pretty consistently over time, whether you're talking about today, a year ago or 5 years ago.

Our next question is from Tom Gallagher of Crédit Suisse. Thomas G. Gallagher - Crédit Suisse AG, Research Division: First question is just on the business mix. And how are you now? And, Randy, I know you mentioned you're going to surpass the $400 million of buybacks for this year. But as we think about going forward, how are you now thinking about the balance of M&A versus share repurchases, especially considering a desire to rebalance the business mix in some way?

Tom, maybe I'll take that question. And again, this may not be specific, but I'll start with saying that we build the business on the basis of organic plans. We don't look to acquisitions as a sort of ongoing opportunity to do things. So our organic business plans are directed in getting us to the targets that we're talking about. On the sales mix, we'll get there faster organically than we would be able to change the earnings mix to a higher mortality chain -- a higher mortality component. That's just the math. Just because it's -- math is math right now. So we're going to continue to grind away on an organic strategy to accomplish what we want. If a deal comes along that helps us accelerate our organic plans, we will, of course, look at it. And as you look at organic -- excuse me, as you look at M&A all the time, the litmus test is, given the risk of what you're doing and given the return that you're going to get on it, how does that compare to the return you're going to get by buying your shares back? Obviously, with the share price moving up a little bit, the debate there gets a little closer. But we'll continue with that general strategy and that general -- but generally, that's the way we look at things.

Let me just add, over the last 12 quarters, we've spent $1.4 billion on share buybacks at an average price of $25 and just a little over $25.50. The analysis when you -- based upon what we do, when you sat down and looked at it, whether or not industry share buybacks is a slam dunk, right, I mean, the expected return based upon our analysis was just world class. And that made the rate of return you needed to use in -- as part of any M&A analysis, pretty high, as the hurdle for other uses of capital is pretty high. That's obviously changed a little bit, but I still think that share buybacks, where we are today, trading right above book, represent a pretty good place to put capital. And we've done that, and we will continue to do that.

I'd also add to that, that you're not going to do acquisitions out of free cash flow. And so the guidance around stock buybacks comes from this holding company free cash flow. In any one year, we might have to take a harder look at that, but the ongoing free cash flow is more about dividend levels and stock buybacks than it is about M&A. Thomas G. Gallagher - Crédit Suisse AG, Research Division: Now that's helpful from -- to hear both of your perspectives on that. I guess, the follow-up is to what extent is -- I get the comparison between buybacks and M&A. And Randy, I hear you certainly, 1 to 2 years ago, there was a pretty obvious disparity there. But to what extent are you also factoring in enterprise risk management from the sense that the volatility and -- if things go bad in the market and what better balance in your business would do? Because I think the analysis of IRR, looking at the ROE comparison, doesn't factor in volatility and enterprise risk. So I don't know if that's something that you've contemplated and how that would weigh in.

Yes, let me differentiate it a little bit. I think what you're talking about, I would describe more as economic capital. Capital needs, when you look at various stress tests. Obviously, a key component of what we do as an organization when we think about our overall capital needs, you see it embedded when we talk about a long-term RBC requirement of 40%. You'd hear it when we talk about drawing that RBC down over time 10 to 15 points a year. So stress testing, driving capital requirements, looking at details, key part of how we run the business today. The broader topic of enterprise risk management is embedded in everything that we do. It's embedded in what Dennis talked about, the strategy of shifting to a mix of business that has a lower percentage of long-term guarantees. It's embedded in the product design that Mark and Chuck and their teams do on a daily basis. Enterprise risk management is a very broad topic that is practiced everyday in almost everything that we do. Thomas G. Gallagher - Crédit Suisse AG, Research Division: Okay. And if I could just sneak in one last question, just a technical one. Randy, I think you had said the -- for the Variable Annuity separate accounts, the new long-term return assumption is 8.4%?

Yes, on average, 8.4%. Thomas G. Gallagher - Crédit Suisse AG, Research Division: On average. But if you consider the cushion embedded in -- on the equity side, I think that would drop all the way down to 7.5%?

Yes, right around 7.5%. Thomas G. Gallagher - Crédit Suisse AG, Research Division: So my question is, several peers have made that adjustment and then corrected -- taken the what -- in your case, it would be 8.4% down to 7.5%. And in your case, if you did that, it would -- there would be a neutral impact, right? It would -- I guess, the backward-looking gains would be offset by lower prospective looking assumptions. So why not just make that adjustment and have the 7.5% going forward? The only thing I can think, and maybe this isn't right, is that if you did make that adjustment, I think there would be a requirement to amortize more DAC going forward because of the way the accounting model works for future DAC amortization. But I just wanted to ask you that question.

Sure. Well, first off, I don't know the net impact on amortization. I tend to think that the net impact on amortization wouldn't be that large, one way or the other. Now as to the long-term earned rate assumption and the short-term corridor, I discriminate between those and differentiate between those 2 items. The long-term return expectation of 8.4% is linked to our view of what the market should support going forward over an extended period of time. And when determining what that number should be, we spend a lot of time looking at history, a lot of time looking at expectations. And I think in our analysis based upon, really, any long-term view of history, 8.4% is a very supportable long-term assumption. Now in terms of the corridor, that's sort of the near-term expectation of the marketplace, and that's why you have that down 14%. So I differentiate between the 2, I think the 8.4% long-term is very supportable based upon history. I think the corridor, we're well inside the corridor, so there, really, isn't a reason to unlock that. And I don't believe -- I haven't, once again, analyzed the numbers in any depth, but I don't see -- I don’t believe you see a big difference in amortization coming out of either approach.

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

Just a question on the broader competitive environment of variable annuities, and you've spoken several times about the very positive economics of the annuity space right now, and I think we'd clearly see that in terms of rider pricing trending up, while features have tended to move less generous. And I would say, within the last year or so, part of that would probably be from capacity being removed from the system. If we look at smart money now coming in, in terms of this reinsurance agreement, as one example, do you see any risk of this favorable competitive dynamic, perhaps, shifting in the future?

It's hard to predict what market participants will do, but the trend over the last several years has been to more risk sharing of the risks between the customer and the manufacturer. The trends have been to less rich benefits in total. The people who were aggressive have left the marketplace. So I think there is going to be a pretty decent balance as we go forward. So I'm pretty optimistic about there being a good balance -- competitive balance.

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

Well, thank you, everybody, for joining us this morning. I know we didn't get through all the questions, so we're going to be available to take those questions. And you can either give me a call or call our 800 line in Investor Relations at 237-2920 or e-mail your questions on our website. So again, thank you for your participation today, and have a good day.

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