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ING U.S., Inc. (NYSE:VOYA)

Q4 2013 Conference Call

February 12, 2014 10:00 am ET

Executives

Darin Arita - SVP, IR

Rod Martin - Chairman & CEO

Alain Karaoglan - COO

Ewout Steenbergen - CFO

Analysts

Nigel Dally - Morgan Stanley

Erik Bass - Citigroup

Mark Finkelstein - Evercore

Ryan Krueger - Dowling & Partners

Steven Schwartz - Raymond James & Associates

Yaron Kinar - Deutsche Bank

Eric Berg - RBC Capital Markets

Chris Giovanni - Goldman Sachs

Operator

Good morning and welcome to the ING U.S. Fourth Quarter 2013 Earnings Conference Call. All participants will be in a listen-only mode. (Operator Instructions) After today's presentation, there'll be an opportunity to ask questions. (Operator Instructions) Participants are limited to one question and one follow-up. Please note this event is being recorded.

I would now like to turn the conference over to Darin Arita, Senior Vice President, Investor Relations. Please go ahead.

Darin Arita

Thank you, Emily, and good morning, everyone. Welcome to ING U.S.'s fourth quarter 2013 conference call. A slide presentation for this call is available on our website at investors.ing.us or via the webcast.

Turning to Slide 2, on today's call, we will be making forward-looking statements. Except with respect to historical information, statements made in this conference call constitute forward-looking statements within the meaning of federal securities laws including statements relating to trends in the company's operations and financial results and the business and the products of the company and its subsidiaries.

ING U.S.'s actual results may differ materially from the results anticipated in the forward-looking statements as a result of risks and uncertainties including those from time-to-time in ING U.S.'s filings with the U.S. Securities and Exchange Commission. ING U.S. specifically disclaims any obligation to update or revise any forward-looking statements, whether as a result of new information, future developments or otherwise.

Slide 2 also notes that the call today includes non-GAAP financial measures in particular all references on this call to ROE, return on equity, ROC return on capital or other measures containing those terms or to ongoing business adjusted operating return on equity or ongoing business adjusted operating return on capital as applicable, which are each non-GAAP financial measures.

An explanation of how we calculate these and other non-GAAP financial measures and the reasons we believe they are useful can be found in the quarterly investor supplement available on our website at investors.ing.us. Reconciliations to the most directly comparable GAAP measures are included in the press release and the quarterly investor supplement.

Joining me this morning on the call are Rod Martin, Chairman and Chief Executive Officer of ING U.S.; Alain Karaoglan, Chief Operating Officer; and Ewout Steenbergen, Chief Financial Officer. After their prepared remarks, we will take your questions.

With that, let's turn to Slide 3, and I will turn the call over to Rod.

Rod Martin

Thank you, Darin, and good morning everyone. As Chairman and CEO I'm always challenging our people to be forward-looking. However there are distinctive moments that deserve a look back and 2013 held a number of those moments. Before we discuss our solid fourth quarter and full year results, I want to take a few minutes to reflect on some of our major accomplishments in 2013.

As you can see on Slide 4, 2013 was a year of extraordinary transformation and value creation. First and foremost we conducted an initial public offering of VOYA stock in May, and a secondary offering in October, which reduced ING Group's ownership stake to approximately 57%. For U.S. IPOs larger than $1 billion, ING U.S. had the second best performance in 2013. Only Twitter's IPO outperformed ING U.S. And while we are pleased with the first seven months performance, we remain deeply committed to executing our plan and adhering to our financial discipline.

Second, we completed our recapitalization plan by accessing the capital markets with our compelling transformation story on five separate occasions and we did this while maintaining an RBC ratio well above our target of 425% for 14 straight quarters, including a 504% RBC ratio as of year-end 2013.

Third, we introduced VOYA Financial, our new brand, which is a derivative of the word voyage and symbolizes a journey that all Americans are on to become retirement ready. And as you recently learned, ING U.S. will officially change its name to VOYA Financial on April 7, making this our final earnings presentation utilizing the ING brand. We are excited to transition to VOYA Financial. However, we will continue to move in a deliberate manner to ensure a seamless transition for our customers, clients, and distribution partners.

And fourth, behind the strength of our Retirement Solutions, Investment Management and Insurance Solutions business, we cast our vision to be America's retirement company. ING U.S. is dedicated to helping Americans become financially and emotionally ready for retirement and this vision guides our efforts to provide our customers and clients with quality asset accumulation, protection, and distribution products and services, plus guidance and advice. We are proud of these accomplishments, yet we also recognize there is considerable work ahead of us. We will continue to aggressively pursue long-term transformation and value creation for all stakeholders as we make focused investments in the growth of our business.

On Slide 5, let me highlight our year-end financial results. We achieve total after-tax earnings of $198 million or $0.75 per diluted share for the fourth quarter, and $825 million or $3.27 per diluted share for the full year. We generated net income available to common shareholders of $548 million for the fourth quarter and $601 million for the full year.

In the fourth quarter, ongoing business pre-tax adjusted operating earnings grew to $324 million, and for the full year 2013 ongoing business pre-tax adjusted operating earnings grew to $1.2 billion.

Our ongoing business adjusted operating return on equity improved to 10.3% in 2013, a 200 basis point improvement from our 2012 result of 8.3%. We're pleased with the improvement of our ROE in 2013 and that each business made a contribution to that progress.

Our ROE improvement exceeded our planned average of 110 basis points of improvement per year. It's important to acknowledge that 2013 benefited from some items that may not repeat in 2014 and in a moment Alain will provide more detail on the drivers of the ROE improvement and these notable items. We remain committed to improving our ongoing business adjusted operating ROE to 12% to 13% by 2016.

Turing to the closed block variable annuity segment, as you know our hedging program is designed to protect regulatory and rating agency capital from market volatility. And our 2013 closed block variable annuity result while varying from quarter-to-quarter performed in line with our expectations. In addition several of our key risk metrics showed steady improvement throughout the year due in part to favorable market conditions.

As we move to Slide 6, you will see how the ING U.S. franchise continues to leverage its leadership positions in attractive market segments to deliver diverse earnings. As I just mentioned, in 2013 we delivered $1.2 billion in ongoing business pre-tax adjusted operating earnings, approximately 74% of those earnings came from Retirement Solutions and Investment Management.

Retirement and Investment Management achieved positive net flows for the fourth quarter. In addition, annuities generated its second consecutive quarter of positive net flows for fixed indexed annuities. The remaining 26% of our earnings came from our Insurance Solutions business. We made steady progress in our transformation of our Individual Life business. Term sales were at comfortable levels and we saw encouraging sales results with our indexed life product portfolio, which are focused on both asset accumulation and asset protection.

Employee benefit sales results were also strong for the quarter. Across all of our businesses of our assets under management and administration grew to a record $511 billion, up from $461 billion at the end of 2012. Overall we remain confident that our premier franchise is well positioned in the right markets to generate steady growth.

As we move to Slide 7, you will see the ROE improvements I referenced earlier. Our ongoing business adjusted operating ROE for the full year 2013 was 10.3%, up 200 basis points from 2012. And we're encouraged by the ROE improvement and our progress toward our objective of 12% to 13% by 2016. Our ROE plan is designed to generate steady improvement and we remain committed to that plan.

I will now turn it over to Alain for more details about our ROE and ROC improvement program.

Alain Karaoglan

Thank you, Rod, and good morning everyone. As Rod noted in 2013 we made very strong progress towards achieving our long-term targets. And this morning I will provide further detail on some of the drivers of our performance in 2013.

Turning to Slide 9, as you know when we discussed each of our business segments we focus on return on capital instead of return on equity, since we do not allocate debt to each of our businesses. And our ongoing business return on capital improved 140 basis points to 8.6%, up from 7.2% in 2012. We are making very solid progress towards our 2016 target of 10% to 11%. And by continuing to execute on our more than 30 margin, growth, and capital initiatives, we were able to significantly improve both our return on equity and our return on capital.

More specifically the year-over-year return on capital improvement was due to several key drivers, many of which were outlined in the plan that we shared with you prior to our initial public offering. For example each of our ongoing businesses contributed to the year-over-year return on capital growth. We earned higher fee based margins. We managed our administrative expenses. We continued to focus on profitable growth, including shifting to less capital intensive products, and we earned higher investment spreads.

On Slide 10, you can see how our margin growth and capital initiatives each contributed to the return on capital improvement. First, our margin initiatives, as we expected were the primary driver contributing 112 basis points of improvement. Initiatives here include repricing actions, the run-off of less profitable assets, and aligning costs with lower levels of sales in certain capital intensive products. Also in 2013, we achieved approximately $30 million in cost savings as part of our plan to realize $100 million in costs savings by 2016. In addition, as Rod mentioned, there also were several notable items that contributed 42 basis points to margin improvement in excess of what we have considered our normalized run rate. And these included limited partnership income, prepayment fee income, and record keeping change orders.

Second, our growth initiatives contributed 39 basis points to the improvement. This partially reflects higher fee based margins on assets under management and under administration, which was due in part to positive net flows from Retirement and Investment Management, and our mutual fund custodial business.

Third, our capital initiatives contributed 40 basis points. This includes reinsurance actions and progress with shifting the composition of our product portfolio to be less capital intensive.

And finally, the headwinds of low interest rates negatively impacted the return on capital growth by 44 basis points, while the impact of low interest rates was factored into our plan, the increase in rates during the last half of 2013 should mitigate some of the expected impact going forward through 2016.

Now let's look at how the execution of our initiatives is benefitting each of our ongoing businesses. And let's begin on Slide 11 with Retirement, which improved its return on capital to 8.9%, up 170 basis points from 7.2% in 2012. Adjusted for the notable items, I mentioned earlier, Retirement's return on capital was 8.5%, 130 basis points improvement over 2012.

We are benefiting from the actions that we've taken to improve margins. For example crediting rate actions reduced rates by 7 basis points in 2013 compared with 2012, bringing 90% of policies to the guaranteed minimum interest rates. We also had a 12% improvement in full service deposits, with an associated improvement in internal rates of return above our 12% IRR target.

In addition to growth, we are also focused on capital initiatives in Retirement. And in the fourth quarter we implement a capital efficient solution for a block of deferred annuities. Finally, I would also note that we remain focused on risk adjusted returns. For example, in January of this year we completed a transaction that will help meet stable value reserve requirements in an adverse economic condition.

Moving to Slide 12, annuities improved its return on capital to 7.3% that's up 140 basis points from 5.9% in 2012. Adjusted for the notable items, annuities return on capital was 6.8%, a 90 basis points improvement over 2012. In annuities, we are improving margins through the run-off of the annual reset and multi-year guarantee product. We also grew our fee based mutual fund IRA custodial product, which had a 30% increase in net flows over 2012 to $599 million.

Also supporting our growth efforts going forward will be the new strategic distribution partnership we formed with Allstate. This agreement combines our fixed annuity product expertise with Allstate's broad reach, and it enables us to help more Americans meet their need for guaranteed income retirement. It also ensures proper alignment of focus on customers, distributors, and investors.

Moving to Slide 13, the operating margin for Investment Management increased to 27.7%, up from 24.6% in 2012. Unlike our other ongoing businesses there were no notable items in 2013. And excluding results from investment capital, the operating margin improved to 24.7% from 18.4% in 2012. As you know, we focus on operating margin for investment management instead of return of capital since this is not a capital intensive business.

And one of our key initiatives for margin improvement is to leverage our strong investment performance and we have positive results to show here as well. As of year-end 2013, 93% of fixed income assets outperformed their benchmark on a 5-year basis. This is a very strong testament to the great work of our investment team. In addition, 84% of equity assets outperformed their benchmark on a 5-year basis. Likewise, we are pleased with the strong sales performance this year, which helped us grow our third-party assets under management by $19 billion in 2013.

And what 2013 has clearly highlighted is the scalability of our Investment Management business and our ability to generate revenue that will meaningfully drop to the bottom-line.

Turning to Slide 14, Individual Life improved its return on capital to 4.9%, up 60 basis points from 4.3% in 2012. Adjusted for the notable items, Individual Life's return on capital was 4.5%.

During 2013 we continued to align costs with our new level of sales. In addition, we furthered our capital initiatives in part by shifting our business mix to indexed products, which accounted for 40% of sales in the fourth quarter of 2013 compared with 26% in the fourth quarter of 2012. And moving forward, we will continue to shift our business mix with a view towards improving margin.

Turning to Slide 15, the return on capital of Employee Benefits grew to 18.8%, that's up 190 basis points from 16.9% in 2012. Adjusted for the notable items, Employee Benefits return on capital was 18.1%. Employee Benefits continued to perform well in 2013 as we focus on improving margins in the business and in both the fourth quarter and full 2013 loss ratios for Group Life and Stop Loss were within or better than our expected ranges.

We continue to invest in Stop Loss sales force training related to prospect identification and information collection. This investment in trading has enabled and will continue to enable us to improve our momentum for Stop Loss while maintaining solid risk selection and underwriting.

Finally, in voluntary benefits, sales grew 11% in 2013 compared with 2012 driven by our critical illness, accident, and hospital indemnity products.

In conclusion, we made significant products with improving returns in 2013. Moving forward, we will continue to execute on our margin, growth, and capital initiatives with a focus on achieving our longer-term return on equity and return on capital targets. The result of our first year as a publicly traded company combined with the improved interest rate and equity markets has increased our confidence in our ability to reach our targets.

Now let me turn it over to Ewout who will cover our financial results in more detail.

Ewout Steenbergen

Thank you, Alain. Good morning everyone. I will highlight some of our key financial metrics for the fourth quarter and the full year 2013.

Slide 17. I will walk you through this quarter's reconciliation from ongoing business adjusted operating earnings to net income. All information presented here is on an after-tax basis.

Starting on the left side, the ongoing business adjusted operating earnings were $210 million. After positive DAC/VOBA unlocking and the additional gain from the Lehman recovery, the ongoing business operating earnings were $229 million. Including corporate segment losses of $29 million, which is mostly interest expense, and an operating loss of $2 million from the closed block institutional spread products and other closed blocks, we had operating earnings of $198 million in the quarter. The $2 million operating loss in the closed block institutional spread products reflects the recognition of prepayment fees on the early termination of certain funding agreements. As we look to 2014, we expect operating earnings in the range of $5 million to $10 million for the full year from this closed block and this number can fluctuate quarterly.

Then moving to below the line items, our Closed Block Variable Annuity segment had a loss of $147 million. This was driven by $177 million in non-performance risk reflecting a further improvement in our own credit spreads. In addition to $69 million in net realized gains this quarter, we also had a gain of $263 million in our actuarial pension and post retirement plans, $44 million in losses in other items and $209 million attributable to the difference between the assumed 35% tax rate and our actual tax rate of close to zero. And this brings our total net income available to common shareholders to $548 million.

Then Slide 18. We conducted our annual actuarial review of our pension and post retirement plans during the fourth quarter. As a result, we recorded $405 million in pre-tax actuarial gains driven by the combination of an approximate 90 basis points increase in the discount rate and strong investment returns in the pension plan assets.

Our funding needs have also declined. We now expect our 2014 cash contribution to be approximately $30 million and that is roughly 40% lower than our cash contribution in 2013. It's worth noting that we use a fair value methodology to account for our pension plan. This approach recognizes non-operating gains and losses in the current period rather than amortizing them over a multi-year timeframe. This does leads to more volatile results to the bottom-line and we consider this an appropriate trade-off.

Then Slide 19. We are managing our business, as you know, on the basis of three main drivers of operating revenues. Beginning with underwriting gains, we saw decline driven by favorable mortality in individual life in the third quarter of 2013, and this was partially offset by sequentially better mortality results in group life. Investment spreads and other investment income increased during the fourth quarter benefiting from higher prepayment and limited partnership income. And this was partially offset by a lower core investment income, which was moderated by crediting right actions we have taken.

Finally, we continue to see a nice increase in fee base margins mostly in retirement and investment management and these were driven by positive net flows and a strong equity market appreciation in the quarter.

Slide 20, you can see the strong ongoing business adjusted operating earnings we achieved in part by managing our expenses. The 17% year-over-year improvement in ongoing business adjusted operating earnings was achieved despite a lower investment income stemming from approximately $600 million lower capital in the ongoing business.

On the expense side, we have managed to hold our expense grow flat year-over-year. Active cost reductions that we have implemented will offset the higher variable expenses related to higher sales and other higher volume effects from some of our businesses during the quarter.

Slide 21, I will quickly give you some color on the underlying performance in each of our ongoing businesses. Retirement achieved another quarter of positive net flows. We saw $363 million in the quarter based on sales that are priced at or above our 12% target return level. We generated positive net flows in our full service corporate markets and in our stable value products.

In Slide 22, our Annuities business has continued to generate positive net flows into our Select Advantage mutual fund custodial product where we earn attractive margins. We also saw a second consecutive quarter of positive net flows for our fixed indexed annuities. Strong distribution momentum helped by the rising rate environment contributed to this positive result. At the same time, we saw a continuation of the outflow of low and negative margin products such as the annual reset and the multi-year guaranteed annuities. These outflows also help in reducing the capital health for this business thereby improving the return on capital.

Slide 23, we saw solid commercial performance in investment management where net flows were $1.3 billion excluding variable annuity outflows. The strong flows were led by senior loans, CLOs and alternatives, and those are all higher fee assets categories. We did not have any non-ING U.S. sub-advisor replacements during the quarter. As we have previously indicated, these flows tend to vary quarter to quarter.

At the bottom of the chart, you will see that the closed block variable annuity out flows for the funds that are managed by investment management were $651 million. Including the variable annuity outflows, investment management net flows were $646 million.

In Slide 24, this slide shows that we continue to execute on our strategy to shift our Individual Life business to less capital intensive products. In conjunction with the sales shift, we have right-sized our expenses relative to the new scale of the individual life business. Looking ahead, we are focused on growing our indexed universal life business.

In Slide 25, Employee Benefits total sales were up year-over-year. As this chart illustrates, sales in this business are lumpy with a majority of sales occurring in the January and July renewal periods. To-date, we have been encouraged by our efforts to drive Stop Loss sales while maintaining our underwriting discipline. For the quarter, our Group Life loss ratio was 72%, well our Stop Loss ratio was 78.4%. For the full year, the loss ratios for both group life and Stop Loss were within or better than our targeted range of 77% to 80%.

Then turning to Slide 26, in the closed block variable annuity, our hedge program largely offset the change in statutory reserve liability as a consequence of equity market movements during the quarter. Our hedge program for the close block variable annuity continues to perform well in protecting regulatory and rating agency capital from market movements. The estimated available resources for the close block variable annuity segment are $4.1 billion and the net amount at risk for the living benefits declined by roughly $900 million during the quarter to $2.2 billion. And that is now lower than the estimated $2.4 billion in statutory reserves for the living benefits.

The net outflows were $1.1 billion for the quarter, which translates to 10.2% annualized net outflow as a percentage of the beginning of period assets. Then, at the bottom of this page, you see the new sensitivity tables for the end of the fourth quarter for both regulatory capital as well as GAAP earnings, for equity market movements and interest rate movements. We will provide an update to our 50 year cash flow scenarios that we originally provided during the IPO Road Show no later than our first quarter 2014 earnings call.

And then finally Slide 27, you can see that our combined estimated risk based capital ratio at the end of the fourth quarter was fairly strong at 504%. The RBC ratio improved relative to the third quarter primarily reflecting statutory pre-tax income earned during the quarter, and a reduction in risk based capital due to the update of the NAAC factors. The redomestication of our reinsurance subsidiary Security Life of Denver International in December had no effect on the overall capital position of ING U.S. the CBVA book, the reported combined RBC ratio, or our holding company cash level. Given our strong capital position, we had many enquiries about when we might provide an update on our capital return plans.

I would like to remind everyone that our plan is to finalize our statutory reporting at the end of the month, conduct an assessment of our capital position and our long-term operating plan, review it with our board, and report back to investors at the latest during our first quarter 2014 earnings call. As you can see on the right hand side of the slide the debt to capital ratio at the end of the fourth quarter further declined and is now 23.5%, slightly better than our target of 25%.

In the Appendix section we have added the slide highlighting the seasonality we experience in our business. This should give some improved insight into our business trends.

For example we have lower performance fees and higher FICA payroll taxes in the first quarter. As a reminder, we benefited from prepayment and limited partnership income in the full year 2013 and it also helped in the fourth quarter.

In summary, we delivered strong financial results both this quarter and for the full year as we continue to focus on increasing margins, running off less profitable businesses, strengthening our balance sheet, generating free cash flows, and protecting regulatory and rating agency capital for the closed block variable annuity.

And with that let me turn it back to the operator Emily so we can take you questions.

Question-and-Answer Session

Operator

I'll begin the question-and-answer session. (Operator Instructions) The first question is from Nigel Dally of Morgan Stanley. Please go ahead.

Nigel Dally - Morgan Stanley

First question just on capital. I'm trying to assess the amount of excess capital. We know that 425% is your target. But in looking at the amount of capital potentially available for buyback, would you be looking at maintaining some sort of buffer above that or are there any things that you got to being able to get dividends out of the -- that this rate that we should be aware of?. I'm just trying to get from some sort of appreciation as to how much of the excess capital is really readily deployable buybacks or dividend?

Ewout Steenbergen

Nigel, good morning, this is Ewout. If we look at the RBC level of 405% that translates into approximately $1.1 billion of excess capital above the 425% level. A part of that is available in terms of ordinary dividends. So we expect approximately $800 million to be available in ordinary dividend and we will have some other consideration to be made. We have some holding company expenses during the year. We have to think about some buffers, some recapitalization, and rebalancing of capital between entities and then we have to determine what is available in terms of excess capital.

It is simply too early to give you a number at this point in time because we still have to go through that exercise and we first have to close our statutory financial statements, which we will do at the end of this month. So as we stated before we will come back to you at the latest when we announce our first earnings -- first quarter earnings early May with a precise detail on our excess capital and our return plans.

Alain Karaoglan

Right. Just to clarify one number that Ewout spoke about, it's 504% and then everything else follows.

Nigel Dally - Morgan Stanley

Then just a couple of quick numbers questions. Closed book ISP understand results were negatively impacted by a prepayment penalty. Can you quantify the impact there? Then may be alternatives clearly fell a quarter but looking forward, can you discuss what you would consider to be a normalized return on those investments?

Ewout Steenbergen

Nigel, the answer on your first question is the amount for the prepayment penalty that was in relation to an early termination of some FHLB funding was $13.9 million. And then in relation to our normalized alternative investment income, the assumption, long-term assumption we use is 9%.

Operator

The next question is from Erik Bass of Citigroup. Please go ahead.

Erik Bass - Citigroup

Just one question on the captive consolidation. I appreciate there's no meaningful impact to RBC or capital. But are there any tax implications, particularly around the usage of deferred tax assets?

Ewout Steenbergen

Eric, good morning. The short answer is as a side effect of the redomestication there might be some tax benefits. Let me elaborate a bit on that. The deferred tax assets in relation to Security Life of Denver International so far were held offshore and we could not use onshore income to offset and to use those DTAs. Now SLDI is a part of the onshore entities. There might a possibility to use those DTAs in the future.

As you know, the tax position of the company is very complicated, and we have to take into account many assumptions and judgments. So we don't know exactly how much we could use in the future. But there might be a benefit of the redomestication as a side effect.

Erik Bass - Citigroup

And then I guess on Investment Management flows, and clearly still positive but the pace has slowed from earlier in the year. Can you just talk a little bit about the flow dynamics you're seeing and also I mean do you still see additional opportunities for sub-advisor replacements going forward?

Alain Karaoglan

Yes, so, Eric thank you, it's Alian. The flows are in line with our expectations. If you think about the areas that will generate this flows are our senior bank loan team alternatives with Private Equity, and an alternative fund, and equity were the areas that generated flow. So depending on market conditions these areas are either of interest to investors or not and will generate additional flows.

In terms of the sub-advisor replacement we do have additional opportunities going forward. As I mentioned earlier, our performance both in fixed income and in equity is very strong. And it compares very well to the market and to other players. And as long as that's the case that will provide us with additional opportunities for sub-advisor replacement going forward that will be beneficial to our clients.

Operator

Our next question is from Mark Finkelstein of Evercore. Please go ahead.

Mark Finkelstein - Evercore

My first question relates back to capital. If you just look at the fourth quarter, rough calculation is somewhere in the $450 million to $475 million of stacked capital generation. And I know you identified some specific items that influenced that? Can you just walkthrough what those were. I assume some was from the MIB, can you just walkthrough what those kind of abnormal capital generation items were?

Ewout Steenbergen

Mark may be if I may ask to clarify the question. Do you refer to the RBC ratio movement and the capital development there or do you mean the capital on a GAAP basis?

Mark Finkelstein - Evercore

No, no, no statutory.

Ewout Steenbergen

Okay. So if you look at the improvement of the RBC ratio during the quarter we saw a change in total adjusted capital of $164 million and that was mostly driven by the pre-tax statutory income. At the same time we saw a reduction of the RBC requirements of $370 million and it is at a 425% level, and that is reflecting changes in the NAAC factors with respect to commercial mortgages RMBS and CMBS, but mostly commercial mortgages NAAC factor update. So you could say approximately 25 RBC points is coming from those from the factor updates.

Mark Finkelstein - Evercore

And then my follow-up question relates to the statutory variable -- closed life variable annuity $4.1 billion of kind of capital resources, $2.2 billion of living benefit reserves. Can you just walk through what represents the difference between those? I know last quarter you had $100 million of death benefit reserves and some asset adequacy reserves. Is there a way of framing out how those numbers have changed and perhaps how much is the -- how much is true capital?

Ewout Steenbergen

Mark, the $4.1 is build up by the following components. $2.4 is the statutory reserves for living benefits as we already stated, and we have $500 million, which are the death benefit reserves, there are approximately $400 million cash flow testing reserves, and then the other $800 million is unassigned, so those are additional assets we have available above the statutory reserves and the cash flow testing reserves. So that is the composition of the $4.1 billion. We have currently no letters of credit outstanding on this block anymore.

Mark Finkelstein - Evercore

So the cash flow testing reserves went down roughly $400 million sequentially?

Ewout Steenbergen

Yes, I think I probably haven't specifically spiked out the cash flow testing reserve last time so it's hard to comment on that right now, Mark.

Operator

Our next question is from Ryan Krueger of Dowling & Partners. Please go ahead.

Ryan Krueger - Dowling & Partners

I had a question on Individual Life. You took out a fair amount of expenses in 2013. Thinking about the trajectory of our -- the improvement going forward is the main thought that the improvement will just come from writing new business with better returns or do you also think you can do more things to improve the in force returns there as well?

Rod Martin

Ryan, good morning it's Rod. Two components to the answer. So first we think we are at a run rate basis for new business that is roughly in the $100 million to $125 million basis as we project forward. And that's $50 million in term and the balance in our indexed universal life portfolio a little bit of variable life.

The other piece I'd remind you is we are not presently a tax payer, and that has an impact. The second piece is we're going to continue to be very diligent on the focus on expenses going forward. So we took some very aggressive actions that we thought were appropriate by reducing the expenses over 13% in 2013. We think we're at the right level and we're going to continue to move forward. The protection element and the asset accumulation element of our life products is very important to our overall retirement reduce strategy. So we're going to continue to move forward and keep you updated with the progress we're making.

Ryan Krueger - Dowling & Partners

And then just a quick one. Can you say what the holding company liquidity was at the end of the year and how it compares to your target?

Alain Karaoglan

Holding company liquidity was approximately $600 million at the end of year, and our target is 24 months. Holding company needs liquidity which translates to approximately $450 million. So we're holding a little bit higher balances at the holding than our target.

Operator

Our next question is from Steven Schwartz of Raymond James & Associates. Please go ahead.

Steven Schwartz - Raymond James & Associates

Just to follow-up on life. What did you guys think about mortality in the quarter? I know it was -- you had very favorable mortality in 4Q '12. I'm wondering what you think about it in for this quarter.

Rod Martin

Hey, Steve, it's Rod. On average it was approximately 90%. So as we look over the last eight quarters, by way of example, it is roughly average that outcome. So it was within our average expectation for the quarter, which we're pleased with. And that's approximately what we would expect going forward.

Steven Schwartz - Raymond James & Associates

On the investment performance if I may ask to please. On the investment performance, Alain, you referenced the five-year numbers. How does that look on one and three? Is there very much difference?

Alain Karaoglan

So on the fixed income side this has constantly improved. And so I think the number if we had on the five it would have been significantly lower. So 94% is significantly up from that level. So you can see that one-year, three-year and five years.

On the equity side, the one-year performance would be weaker than the five-year performance. Part of it is our investment philosophy. Our investment philosophy is research driven, quality driven, sustainable institutionalized process, and in markets that are extremely positive, we will tend to outperform in these markets as markets become more normal or subdued the quality by it shows and the performance -- and we outperform.

Steven Schwartz - Raymond James & Associates

And then if I may just one more. On the tax rate, the assumption is 35% tax rate and I think the assumption always was that the DRD would go away. We have a 2-year budget agreement. It seems unlikely to me that the DRD will go away. Is there any thought about possibly changing that guidance and the course that would affect the value of the DTA as well?

Alain Karaoglan

If you look at the effective tax rate for the company that is mostly driven by the tax valuation allowance and hence we have on our book. So what is happening is when we generate income we are able to release some tax valuation allowances and driving the effective tax rate close to zero and the other way around in case the company has an overall net loss.

There are other moving parts as you are mentioning the DRD, some other tax credits and other items. If you look at the effective tax rate for the quarter, it was in fact minus 4%. So in fact, we had a small tax benefit on an overall income level pre-tax for the company and those differences in those few percentages, there you will find the effect of the DRD.

So in other words, there is clearly a benefit of the DRD and if that continues it will benefit our effective tax rate. But the main driver between the 35% and zero is coming from the tax valuation allowances.

Operator

And our next question is from Yaron Kinar of Deutsche Bank. Please go ahead.

Yaron Kinar - Deutsche Bank

If we go back to the life, the individual life business for a minute, it seems to be tracking may be a little below what the target was and I'm just curious with the new management in place there, are there any changes to the strategic initiatives and/or targets in the long-term?

Rod Martin

Yaron, it's Rod, good morning. One of the benefits of the transition that we've done with Butch Britton and with Mike Smith is I think it demonstrates two things. One, the bench strength we had to draw on and we're very pleased for that. And Mike has been with the organization so he knows the strategy, the people in the organization well. That said our fundamental strategy hasn't changed. Shifting from where we were was a significant change and it takes a period of time to work through as we have discussed in previous periods.

We have been very aggressive at aligning expenses with the current run rate of sales. As I mentioned in one of the earlier questions, we'll continue to be vigilant about that go forward. We've been very active, Butch, Mike, myself and others in communicating our strategy to our distribution platform and I think it’s been well received.

In terms of our focus being broadly on our middle market term portfolio and our index universal life portfolio for both asset accumulation and asset protection. So, I feel good about where we are. We've got a solid base to build on. We'll continue to be vigilant. We're very mindful about where the returns are and what our objectives have been outlined and we're going to work very, very vigilantly to continue to close that gap.

But I think the fundamental strategy, as we discussed in May, hasn’t changed as we go forward. We're simply in the implementation mode of that.

Yaron Kinar - Deutsche Bank

And then in the annuities business, do you have any sense or are you able to quantify the impact of the Allstate strategic partnership?

Alain Karaoglan

Aaron, as you might appreciate, we're not going to quantify the impact, but it's an important partnership. As we execute on that and develop our relationship and the relationship with the distribution of Allstate and the agents and we would report the results as they become more meaningful, we'll highlight them to you. But we're very excited about it. It hits our strategy on many fronts. It's a testament to our capabilities on the fixed annuity side and also the way we would like to operate going forward. So we're very excited about it. We're looking forward for the results. We're not willing at this stage to quantify but keep posted; we'll update you of that over time.

Yaron Kinar - Deutsche Bank

Let me try maybe one other approach at it. Do you think it would -- could you offer any assessment whether it would be accretive to this year?

Alain Karaoglan

Yaron, excellent try. Thank you.

Operator

Our next question is from Eric Berg with RBC Capital Markets. Please go ahead.

Eric Berg - RBC Capital Markets

I won't ask about the earnings from the Allstate Business but I would like to understand a little bit better than I do the philosophy behind the partnership. And by that I mean this, if you were withdrawing from or reducing your exposure to the MIGA business, the multi-year guarantee annuity, and the annual reset, what is structurally different about the Allstate management that makes it attractive but your existing MIGA and fixed annuity business, a business that you were drawing from?

Rod Martin

The second part of your question in terms of what's fundamentally different, we are pricing this business consistent with the targets that we have outlined to you and to others. So we are able to place this and I think it brings together the strength of our manufacturing capabilities and the strength of Allstate's distribution platform of 11,000 captive agents and price that at or above our targeted returns. And candidly, the MIGA business as we discussed when we did the road show in the subsequent periods simply didn't meet those returns and that's why we are running that business off at a faster rate as we can at this point and time.

So it really goes back to kind of the fundamental shift in culture in the company from when we started and we talked about a value creation focus tied to the three metrics that we discussed certainly with you and all others on the call, and that's risk adjusted return, sales at or above our targeted IRs and distributable earnings. And we are bullish about our distribution capability and our ability to partner with Allstate and we would certainly look for other like arrangements assuming they can meet or exceed our targeted returns. And it's no more or less complex than that.

Eric Berg - RBC Capital Markets

My second and final question is aimed at even sharpening further, Rod, your comments about administrative expenses in life. I don't think in the December quarter they changed all that much relative to the year ago quarter or if there was progress it appeared to me to be modest. When you say that as you look forward you will be vigilant about expenses. Does that mean that they will go lower? Or does that mean that they will be controlled?

Rod Martin

Good question, Eric, and I would say they will be controlled. So most of the stuff that we put in motion was reflected before the fourth quarter. So that's an excellent observation. And they certainly will be controlled and we were really talking about the administrative expenses associated with the run rate of the new business levels. We are going to continue as reflected in a slide that Ewout talked about in the earlier part of the deck, if you look at the aggregate expense flows and particularly take into consideration, we grew our business in total from our three business segments, the aggregate expense level in light of that was still flat for the year. I think it shows that we have been very disciplined about controlling expenses and will be on a go forward business.

Operator

Our last question is from Chris Giovanni of Goldman Sachs. Please go ahead.

Chris Giovanni - Goldman Sachs

I know a lot of focus around capital and timing of when you could deliver something, but could you just remind us kind of your key priorities in terms of rank order uses of capital?

Ewout Steenbergen

Chris, good morning. This is Ewout. We have not determined in which way, if we come to the conclusion that we have some excess capital during this quarter, we have not concluded in which way we would like to return that to shareholders. All the options are on the table, it can be an increase of our dividends, it can be share buybacks or other options. We will come to a conclusion on that over the next few weeks and try to get the approval from our board for that proposal, but clearly the driving factor behind our thinking and conclusion will be what is in the interest of our shareholders, the value maximizing outcome in terms of return of capital.

Chris Giovanni - Goldman Sachs

And then I guess around the ROE improvement that we saw in 2013, I guess certainly better than I think we many and maybe when you guys have in your original assumptions. So just kind of wondering what this means for the 2016 target. Is it truly your ability to achieve this as maybe put forward some or is that maybe the pace of improvement starts to moderate a little bit from what we saw this year?

Rod Martin

Chris, its Rod. So two-part answer. One is as you heard me say in the opening remarks and you certainly have heard from all three of us over a period. On average, we expect the ROE to improve 100 to 110 basis points a year. We talked about some notable items that were we benefited from and we're being very consistently transparent in the discussion of that and the revealing of that both on this call and in our communication.

If you make an assumption that macroeconomics continue in the way that they have what we said is we will -- we are staying vigilant to these targets. If those factors enable us to accomplish our 2016 objective sooner, of 12% to 15%, then we will consider raising the targets at that time and I think -- I point to Prudential when they went through a similar path of laying out three or four year targets, hitting them, raising the targets hitting them and so on and so forth, and that's certainly a model that we are wanting to follow.

We think just barely or not even a year into being a public company, we laid out a very aggressive plan, we feel very good about the pace of accomplishments. We are trying to be very clear about what has contributed to it in terms of what were notable and we will continue to communicate in that way go forward, but our eye is on accomplishing what we said, and I will reinforce that's a point in time number. That's not a ceiling and that will be based on market conditions at that point in time. But we look forward to continue to make progress in 2014 and on as we discussed earlier on the call.

Chris Giovanni - Goldman Sachs

And last question. Obviously the next kind of big -- one of the next big milestones is around the rebranding initiative. Can you talk again about just the expenses you guys are associating with that and then how we should be thinking about that from a timing perceptive?

Ewout Steenbergen

This is Ewout. What we have earlier disclosed is that we will expect to incur expenses with respect to the operational rebranding of $50 million over 2014 and 2015. So for both years combined $50 million and that relates to changes in our IT system that relates to changes with our legal entity names and other matters. It does not include an advertisement budget. In terms of announcing to the markets the name change, that advertisement has not been determined yet, so we don’t have a number for you for the additional marketing expenses we have to do in a short period of time. But in respect to the operational rebranding, it's that $50 million number and that's still our best estimate as we speak.

Chris Giovanni - Goldman Sachs

And then one follow-up. The 50 million, is that in your, you know your ROC and ROE targets or not? And then equally is the marketing rebranding, whatever that number will be, is that embedded within your targets?

Ewout Steenbergen

Those will show up as non-operating expenses. So they will not be part of the ROE or ROC numbers.

Operator

And this concludes our question-and-answer session. I'd like to turn the conference call back over to Rod Martin for any closing remarks.

Rod Martin

Emily, thank you. We're pleased with the results for the fourth quarter and the full year and we're making steady progress with our transformation story. ING West is a premier franchise with leading positions and attractive markets and we're investing in our growth. We're continuing to execute on our ROE improvement plan. We will continue to build on our solid foundation which is based on the recapitalize and de-risk balance sheet. We have a lot of confidence as we head into 2014 based on our track record and continued focus on execution.

We have three solid businesses. We have quality products and services meeting our customer, clients' needs for asset accumulation, for protection and distribution. We have an exciting new brand. We have an experienced management team across the entire enterprise.

A couple of weeks ago we announced the retirement of our insurance solution CEO, Butch Britton. Butch is a great leader, colleague and friend to all of us who will be missed. Fortunately, we had a strong and experienced life insurance and annuity veteran in Mike Smith in place to succeed Butch as the CEO of Insurance Solutions. We're saying farewell to a strong leader. However, we're transitioning to someone, as I mentioned as I mentioned a moment ago, who also very strongly understand ING U.S., our strategy and our people. It will be a seamless transition and our distribution partners and customers will benefit from that.

The same is true for Chet Ragavan who has succeeded Mike Smith as our Chief Risk Officer. Chet has been with ING U.S. for more than six years; he's also joined our executive committee. We're fortunate to have the bench strength to make these moves from within the organization.

With that we'll conclude our call. Thank you and have a good day.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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