Okay. It's a pleasure to have Chuck Cornelio here from Lincoln Financial Group . He is the President of Retirement Plan Services. He is also responsible for shared services and IT functions. Prior to Lincoln, he was an Executive Vice President at Jefferson-Pilot, responsible for shared services there as well, and Chief Legal Officer. Before that at Chubb Life, he was involved with shared services and legal responsibilities. As I think about it, Chuck, that's all been one company, right?
Pretty much. Pretty much.
It's been Lincoln the whole time. Very interesting responsibilities, and I'm sure you've got some great insights. Thank you for being here.
Thanks.
We look forward to hearing you.
Thank you. Yeah, I went to work for three companies and only interviewed one time, so it's not bad. I can tell you that they're all different. Now we're all Lincoln. Good afternoon. Andrew asked us to come by today and talk a little bit about our retirement plan business with you. I'll be focusing on that. Just to give you a little context, it's about retirement plan business, formerly defined contribution. It's about 13% of our income from operations. It's about 9% of the revenue, and it's about 25% of AUM or deposits end of year, last year. It, along with our group protection business, is one of the two areas of focus for Lincoln.
We thought it might be interesting to tell you a little story about the business and where we've been, and then if there's time, we can take some questions if you have any. We're not up to four pages yet on ours. We still managed to keep it to one, which is very nice of Mr. Shereen, who I think you all know. Here are some marketplace dynamics. I'm not going to talk about the economy. We all know what those issues are. The middle section of this slide, a couple of minutes on industry trends here. We are in both the small market 401 business and the mid to large market, and I'll come back to that in another slide. Here's some trends for you in the industry right now.
There's a big shift happening into an open architecture environment for asset gathering in this business. That's true really across the board, but particularly true in the large market and the mid to large market. What that does for us is we're actually already there. Our mid to large current offering is open architecture. We do offer a stable value part of that, which is obviously proprietary, and we like stable value because it has good ROA characteristics to it. This trend is actually happening even to the largest of money managers, who are now willing to, in fact, quote on retirement plans and not demand chunks of their assets. Not all of them, but some of them. I think part of that is related to the rollover strategies that are becoming a big part of this business.
Fee disclosure happens this year, both at the plan sponsor level and the plan participant level. The regs have been put off, fee disclosure happens early in the summer at the plan sponsor level and then a little bit later in the plan participant level. We actually think fee disclosure is good. We think transparency is good. Now, in the small market, it will cause churn. That market is sold through advisors with third-party administrators. They're going to have to justify their fees to their clients. Excuse me. That will create some churn in the market. Because the regs are so late, you probably won't see the dynamics in that small 401 market starting to really happen till 2013, when advisors can start talking about that. There's no question, in that market, that's where this is the biggest hit.
In the jumbo market, of course, in the mid to large market, fees are already part of pricing and they're pretty transparent to plan sponsors. We are a large player in the healthcare market, the 403(b) healthcare market. I'll come back to that, too. There's a lot of consolidation going on there. There's a lot of uncertainty because of healthcare reform. That's both an opportunity and a challenge. As healthcare providers consolidate, of course, there are less number of hospitals to sell plans to. If you're as strong in the industry as we are, we see that as an opportunity to get new business as those providers think about their newly combined world. There's also, particularly in the 403(b) space, hospitals are getting more efficient. They're worried about their costs, so they're finally getting around to consolidating their plans.
That's a big opportunity if you're a big incumbent in hospitals like we are, to gather more assets going forward. In fact, there were a couple of cases last year where we retained hospital clients, and in the course of those mid to large plan retention activities, we actually gathered more assets because they were finally consolidating plans away from other providers. You're all aware of in-plan guarantees. We plan on offering an in-plan guarantee later in the year. There's a couple of important things about this. In-plan guarantees must be simple because it's a workplace sale. That means that the risk management of those products is simpler and easier than hedging on a retail annuity. As I say, we're going to be offering our own product near the end of the year.
The dynamic here, though, is that plan sponsors want you to offer them this. Their employees aren't taking it. There's very little uptake, very little asset moving into in-plan guarantees because it's still somewhat complicated. The average person has to get their mind around, "Well, what happens if I leave? What happens with that guarantee?" That portability problem is a big issue in this kind of a product line. The industry is trying to solve it by being able to record-keep other people's in-plan guarantee annuities, and that's coming along. Target strategies are changing a little bit. The old sort of set it and forget it stuff is starting to move a little bit. We, for example, offer a LifeSpan offering in our small market where that kind of QDIA option is actually adjusted as time goes by differently than just a target date fund.
We're starting to see some tick up in that section of the industry. Consumer mindset. There are basically two ways to get people to take action in preparation for retirement. One is to scare them into it. Basically, you see the commercial where the person says on the tweet, "Well, maybe we could never retire." Fear just causes people to freeze up. We did consumer research about this, Lincoln's first broad-based consumer research, found something not startling, which is optimism actually causes people to take action. If you're not afraid, you're more motivated to do something. Our new brand campaign, which is across Lincoln, the Chief Life Officer campaign, is actually about optimism, motivating people to take better actions for their retirements.
What I would say about the industry trends that in many ways, we're already there because of some of the actions we've been taking in the last couple of years. We'll see where fee disclosure goes, but you'll see a lot more of that change in industry sales next year than you would this year. What's in the business? Here's some industry growth characteristics. We're actually excited about this because we're in these markets. The small market has an asset growth potential of roughly 7.5%. Some of that results from increases in the market. Some of it is because plans move, which is the takeover column on this slide. The mid to large market is primarily corporate, but there's also 403 in there. Healthcare is here because we think this is one of the more exciting opportunities.
Total retirement assets, we think, from the information we have from Cerulli, grow through 2015 to about $20 trillion. The interesting change here, as I know we've discussed in your last day or so of this conference, is that more of that growth begins to happen in the rollover market than the plan space. I'll talk to you a little bit about what Lincoln is doing in that part of our business. The healthcare, about 40% of record keepers actually think that healthcare will grow more than this number and actually will become the largest grower of assets simply because healthcare continues to expand in the U.S. Here's the profile of the retirement plan business at Lincoln. Let me first talk about the gold little piece of the pie up in the left-hand corner. That's something called Multi-Fund. That's actually closed block of business.
It's a very large block of individual and group variable annuities that are no longer sold. The business is essentially in runoff. It has a negative cash flow characteristic to it. It is a high ROA business, which is currently under stress in that business because a big slug of it has 3% GMIRs in it. Those contracts, once they're in existence, last forever. The margins in that line are under some pressure, but the ROA is still very healthy here, and the ROE is good. The business has to overcome a headwind, which is if this 40% of our assets are in outflow, the other pieces of business have to grow a lot faster. The small market, which is roughly $6 billion of our assets, is primarily a group variable annuity chassis wrapped by some tools that we think give us an advantage in this market.
We have introduced some other products there, which I'll talk about. The mid to large market is an NAV solution, open architecture with a stable value offering attached to it. We're ranked number 3 in the healthcare business, which is a surprising number to some people because outside of that area, we're not sometimes as well known as we should be. We're number 6 or so in total in the 403 industry. Numbers on the right you can read for yourself. Down at the bottom, it gives you some sense about how this business is distributed and how it's offered. The critical thing in the small market, I would tell you, is the third-party administrators generally work with advisors, both to generate a sale and then to keep the client. We made a strategic shift last year.
We were offering our small market product both to TPA-assisted sales and what they call full-service sales. We decided in the middle of the year to stop selling that product where there's not a TPA involved in the sale. I will tell you that sounds like we're reducing our distribution opportunity, and in fact, it broadens it because there were TPAs and agents and advisors who would not work with us because they thought we were actually competing with them for business. This was perceived very positively in the market. We got some help here because a very large competitor, one month later, decided to abandon a longstanding practice of only selling through TPAs, and now they are in the full-service business. Some of those TPAs think that company is competing with them now, which we think will help our sales grow.
The mid to large corporate and healthcare market is dominated by the consultant firms but also dominated by, there are specialty practices inside of wirehouses and banks that also sell that business. We are seeing more of them now than we used to. A couple of descriptions here. My definition for purposes of this, small market for us is about $10 billion and less of assets. The mid to large market is there up to about $750 million or so. At about $1 billion, you get into the jumbo market. We do not compete there. The margins are too narrow. They're not in the sweet spot of our value proposition, which has to do with the plan sponsor and participant experience, and I'll talk about that too.
We're excited about this because we've gotten much stronger in all those areas of distribution and how we service the business, as well as how they're offered in the market. This is our profile. Lincoln's actually been in this business 50 years, and primarily in the 403(b) space. It's been a slow grower, which we're aiming to change. How are we doing that? We'll talk about the numbers in the next slide, and I know some of you have heard this. In five different areas, we've been investing to capture market share, and I can tell you, as I'll talk about, that it's actually working. Record keeping, not a differentiator, it's a commodity. It was a differentiator for us. A bad one, to be honest. We had too many record-keeping platforms. They were fairly archaic.
What we've done is embarked on a complete transition of those record-keeping platforms. We've partnered with a company, DST, that offers a record-keeping platform in this service. It's an ASP, application service provider model. We go out through the cloud, if you will, and grab the information from them. It rapidly sped up our ability to do this and reduced the expense. The first part of this record keeping change, along with its much more important internet offerings, went live in October, which is about a year. Amazingly, for an IT project, it was actually ahead of schedule and on budget. We actually put our first sets of plans up in October, including a couple of $100 million-plus clients who would not even have been talking to us if it weren't for the technology. The critical thing about this is not the record keeping.
It's that we are now able to effectively compete. We're seeing finalist opportunities. We're getting business. We're landing larger cases now because the internet offering is very good, and they're not worried as much about their service anymore. The participant and plan sponsor experience is critical in this business because of its long-term nature. I would remind those of you who heard me at the investor day in the fall that 65% of our total deposits are from renewals. If you don't keep these folks happy, you're going to lose the business. That experience for us includes something unique, which is about 350 or so planners and retirement consultants who are inside the business who call on individual folks in our plan sponsor offices.
That face-to-face experience, along with a much more upgraded set of education materials, differentiate us from a lot of competitors in the corporate 401 market. That experience is critical. I will tell you, in 2009, we had some scores done by a rating firm called Chatham, which, for those of you who are familiar with life and annuities, is kind of like Market Metrics. We were below the industry standard on every measure. In two years, we are now way above the industry standard on every measure, which is critical to keeping consultants, advisors, and sponsors happy. According to Boston Consulting Group, we have the highest plan sponsor satisfaction score now in the industry. We're sure that it will. We've made a huge investment in marketing and communications. Our chief marketing officer came actually from Vanguard.
We've done a lot more work in this area. A lot of thought leadership activity going on, a lot more visibility. You may see that we seem to issue a lot of press releases that relate to this business. They don't seem like they're so important. Some of them are, in fact, relatively mundane. What matters about them is it's part of a plan to get people to think about what's going on at Lincoln. Very deliberate. Our consumer research got picked up by over 150 media outlets. It led to a series of webcasts with hundreds of plan sponsor participants, even if they weren't doing business with us. It landed us in places like the marquee in Times Square a couple times. That sounds like a big deal to some and not to others. For Lincoln, that kind of visibility in this business matters.
Here's the other thing. You got to have thought leadership in this business that's independent of what you're offering for people to take you seriously. You're not going to gather any assets if you're not on the cutting edge of what's happening in the business. A lot of what we do in marketing is really about trends, industry trends, and how we see them. A lot of product expansion here. This is much more like the asset management business. It's not so much about the chassis as life and annuity is. This is about, are you offering the right things that interest consultants, advisors, and sponsors to put more assets with you? We came out with a new small market NAV product in the fall. It complements our group variable annuity.
It's been getting a much bigger uptake than we expected this quickly out of the box because we've just started marketing it. It's open architecture. What else is important about this for Lincoln? RIAs, registered investment advisors, are moving into the small market in larger numbers. They can wrap their fees around this product. They can't do that with a group variable annuity. That offers a whole new distribution channel for us moving forward in a product that comes down to about $7.5 million in the market. It's exciting to us because we're seeing a lot of quoting activity in this year and then at the end of last year, which is a big activity for us. Excuse me. I talked a little about distribution expansion already.
We've doubled the number of people selling this stuff into the markets for us, both in the small market and the mid to large market. We've also, by the way, changed over all the distribution leadership in 15 months, and we think we've got some very good people here now. We've been able to, fortunately, lure them to come to Lincoln from places that are both in the insurance business and the asset management business. It's because of all the stuff they're seeing going on at Lincoln. They're coming from very diverse companies. What's really critical to this is that you have to be able to cover the footprints of places where people sell this business. It's not like the annuity business. For example, in the small market, there are roughly 6,000 to 7,000 advisors who sell small case 401(k) business for a living.
What those wholesalers have to do is not go through the corridors at Morgan Stanley Smith Barney. They've got to find the 50 people in that regional office that sell this kind of business, establish and deepen relationships with them. Similarly, there are a lot of consultant firms that operate in the mid to large market on a regional basis. We weren't getting to enough of those. By doubling it in the field force, we're able to get to a lot more of those, and we're starting to see that happen. I will tell you, we don't quote pipeline numbers, but our pipeline in both of these businesses is much, much bigger than it was at this time last year. That's exciting for us because we know we're going to close some of those deals. Strategic spend.
Group protection and Retirement Plan Services are getting outsized investment from Lincoln. If you remember the numbers I said up front and of the strategic investment, we're getting about twice more than the share than the rest of the businesses are getting here. It's a huge investment by the company. A couple things about these numbers, though. These are not bottom-line impact numbers, okay? These are the total investments made in 2011, what we expect to do in 2012, and what we expect to do in 2013. These numbers will be capitalized. All right? The impact on the bottom line is different than the numbers I'm putting up in front of you. What you see, though, if you're thinking about the longer-term power of the business, it peaks in this year, 2012, and it declines radically.
That tells you that we're actually on schedule to finish much of this work over the course of the next 15 or so months. I think I mentioned a couple of years ago at an investor conference that I saw this as a two and a half year or so turnaround of this business, and this tells us that we're basically on schedule for that. Because we got that record-keeping platform up as fast as we did, we feel pretty good that this will happen. It's two times the share of earnings compared to the size of the business versus overall Lincoln. Expense efficiencies I haven't mentioned yet. I've talked about sales. The record-keeping platforms, once completely live, will produce a 25% improvement in efficiency in our operating areas. That's earnings. All right? It's critical to us to get this done and get it done right.
What's the leading indicator in an asset gathering business, that things are happening the way you want them to? For us, it's net flows, and it's an improving deposit picture. You can see the numbers here, 2011 versus 2010, 5% increase in deposits, 274% increase in net flows. Given that the number was negative in 2010, I'm not sure that the percentage number is what matters. Two quarters in a row and three out of four have positive flows, and we expect positive flows in the first quarter of this year as well. Here's an interesting number for you. This number includes Multi-Fund. Now, if I extract Multi-Fund from the net flow picture, in 2011, the net flows in the mid to large market and the small market were actually up $1.5 billion.
What that says is we're gaining traction in both sales, also something else that's more important, which is retention of current plans. As you all know, retaining current customers is cheaper than getting new ones, particularly if they're putting in more into their 401 plans or 403 plans, or more people are enrolling. The lapse rate on the mid to large business was about 9.4% in 2010, and it dropped to 4.4% in 2011. The lapse rate in the small business went from about 11% to about 9.5% in 2011. Significant improvement. The small business has more churn into it because it's sold by advisors, so it's not as sticky. Those numbers are very significant improvements for us. We've worked very hard at this.
We align our account executives and our account managers, our distributors are all incented in part on retention because it's important to hold onto business. This says things are starting to go the right way. We're excited about the net flow growth in our actively sold product lines. Let's talk about bottom-line results. 2011 was about an 8% increase over 2010. Over the course of this period, it's about a 10% annual increase in income from operations. You can see we've been holding the margins. They jumped up a little bit in 2011 from 2010 on the pre-tax margin side. ROE and ROA have been holding in the north end of our pricing expectations. Account values are up 35%. Spread compression matters here, right? As we've talked about before, this business is affected because of our mix of business by spread compression.
You will see a decline in spreads relating to what happens, as our CFO has talked about. There is a $10 million-$15 million decline in earnings 2011 to 2012 because of spread compression. You have to layer on top of that the strategic investments, which also have some impact on earnings. We continue to want to sell more business, right? The numbers will move around. There is headwinds about this. I told you about the 3%-3.5% GMIR business. Our current stable value product is sold at 1.5%, and we are doing some contract revisions right now to bring it down to 1%, which obviously helps as we put more business on. The other thing about this business is, in the life insurance context, it has relatively stable statutory earnings attached to it.
It is roughly in the years here, 2010 and 2011, statutory earnings are about 75% of the GAAP number you see on this slide. It is steady as we have been going forward. We appreciate that, and we know that our parent does because we are throwing off the kind of statutory earnings that you can use to generate excess capital, et cetera. Significant tailwinds on net flows, spread compression, strategic spend puts some headwinds into our earnings picture for 2012. The business is getting bigger, and that is what we wanted it to do. That is really the story. The story is we have been talking to you about this business for a long time. The difference now is we are actually proving that we can get it done. We had $39 billion of assets under management at end of year.
We are feeling good about that number given the trends I told you about from 2011. We are getting buzz in the industry now. Those product introductions I mentioned to you, along with our version of protected funds, which are being introduced into both our retail variable annuity product and this business, and we are investing some significant $ marketing dollars there. We also think brings down the risk characteristics of the businesses we are in. Implementing strategy, targeting growth markets, executing on strategic initiatives. We are actually getting them done. We have competitive advantages, particularly in healthcare, maybe how we think about marketing and the customer experience, and how we have turned around perceptions of what value we bring. This will add diversity to Lincoln's business mix because we have lower capital requirements than life or annuity, and we have lower risk.
The business does not have guarantees in it of any appreciable nature. We are excited about this business. We are excited about the fact too that we are managing it now like it should be managed, which is an asset gatherer. Which leads me to my last point, the rollover business. We are not superb at gathering rollover assets. However, what we have been doing is building out a whole team of people to start gathering rollover assets. Remember those 350 planners and retirement consultants I talked to you about? They do individual sales on rollover. We have also built a phone team that now is up to about 25 people, that will continue to grow, that makes outbound sales calls to gather rollover assets. We introduced a multi-manager IRA last year.
We also introduced a rollover annuity, which is extremely competitive because it has very low compensation and therefore little or no surrender charge, but very competitive with any IRA offering in the marketplace. We have very significant growth plans. Last year, our individual sales of rollover business went up about 80%. Not from a big number, but that tells us that the progress is there. As this market starts to shift towards rollover, we're going to put ourselves in a position where we can get that done and with lower risk business. We're excited about this. We think that it's a great growth story for Lincoln and that we are looking forward both to 2012 and beyond to numbers that are significantly bigger in terms of total deposits and sales. I think I'll stop there.
All right. That's really exciting stuff, Chuck. I'm going to start off with two questions and then open it up to everyone else. I guess first, Chuck, just to frame it, being that mid-large corporate and healthcare are one area and then small market is another area, you kind of separated those two. What type of return on capital do you get in each of those businesses? I could kind of frame that.
Yeah. The return on capital, as we think about it, we price for about 12%-14%.
Both businesses.
Yep.
No difference. Okay.
Yeah. The Multi-Fund business is a higher ROA business and somewhat lower ROE business than what we sell now. In the mid to large market, as you know, the cases are priced each one at a time. They carry different characteristics. However, the pricing targets remain the same. If we can put stable value into that business, Andrew, the ROAs go up by some amount, depending on the case. In the small market, the GVA produces numbers that are in line with the total you saw on the slide.
Just kind of framing the competitive landscape in each of those different businesses, maybe you just give us a sense of two or three of the larger players there, what the competition is like, that's part B. Maybe thirdly or part C, yesterday we had one of your competitors, Principal, here, and they talked a bit about fee pressures. Maybe you could give some granularity on that.
Yeah. In the mid to large space, the competitors we run into most often is Diversified Investment Advisors, which is a subsidiary of Aegon. They've done a lot of aggressive activity in this market in the last three to five years. We also have seen a resilient VALIC in the 403 market. They sort of went away for a little while. Didn't lose as much business as some people thought they would. They've made a comeback there. The additional players you see there, of course, is you see the money managers. You see Fidelity, you see Vanguard, you see Putnam. They of course, have always been very interested in proprietary offerings. They now are taking differing positions depending on the firm about that. They do not offer our value proposition. We send people into these employers.
That makes something of a difference, it's also part of our view of the methodology of gathering assets in those cases. In the small market, it's The Hartford, it's John Hancock, and it's Transamerica. Those are the market players you see there. How they compete are all very different. DIA does it on education materials. Their pricing is a different methodology than ours. There are times that their pricing will be lower. I will say, we are never the low-cost provider because our value proposition is not about that. It's about providing the plan sponsor a participant experience. In the small market, it's really more about the packaging that's around the product. We have a set of funds through a company called Stadion that limits downside risk.
That's been very popular in the last couple of years as investors have looked for risk protection as opposed to return. Transamerica does it through a giant field force that reaches a lot of people with their group variable annuity product. John Hancock, also very large distribution force. They made the pivot away from only doing TPA-based business, it remains to be seen what that does to their results. The Hartford offers a product very much like ours. The fee disclosures will have pressures first on distribution. If you're an advisor in the small case market, you now have to disclose your fees to that TPA and that plan sponsor. If you're the kind of advisor that's only sold a few small case 401(k) cases, I think you're going to have trouble proving your value to the plan sponsor.
That's where I think the churn will happen first. If you're very good at it, you might not have as much. That's where you'll see the fee pressure first, I think.
On the distributors.
On the distributor.
not on you.
Right. It will come, though. On the manufacturing side, you see fee pressure in a couple ways. You see some of the jumbo competitors are starting to move into the mid to large market. Some of them, not many.
Who's come in?
You'll see some of the ones that really focus most of the time in the very large market, like a Vanguard, has been doing some work in the mid to large space. They, of course, run on much smaller margins in the jumbo cases. How they price for the mid to large market probably remains to be seen. Then, you'll see it in the small market as the contract level fees and the charges for the sub-advised accounts become clearer to the plan participant.
If you're a plan participant in the small plan, you're going to get the notice, "Hey, we take $100 out of your account to fund the actual contract." That number is without context, but it will cause people to say, "Well, how come they only charge? Shouldn't they just charge $80 or $50?" Then there's fees, if you do some math, but you'll be able to figure out the fees on the sub-advised assets as well. Yeah, eventually manufacturers will have to respond to that. I would say, remember I talked about the efficiencies of the gain from the platform?
That's how we help with that on our side. Also, we have a lot of new folks at Lincoln on the distribution side, and as they ramp up, they start to reach the right productivity levels, and that reduces some of the pressure on expenses, too.
Just fleshing out that fee issue, and I know you mentioned it would kind of happen in 2013.
More of it, yeah
the pressure point. Is that going to hit Lincoln as hard as everyone else? How are you going to fare when all that is said and done?
I can't speak for the absolute level of how our fees might look with other competitors. We offer a differing value proposition, we're going to focus on that. What we're going to have to do, though, is defend ourselves with the right kind of approach about why those services matter and why they're part of your fee. Again, we'll never be the low-cost provider. It won't be outsized on us. I think actually in the near term, particularly if that small market NAV product gets taken up, it might be a little bit less pressure than some others that have much bigger books that other companies will go after, particularly with dynamic changes in plan providers.
Any questions from the audience?
At a conference at the end of last year noted that there was a low penetration amongst advisors across the product set. Is that including this line of business as well too? Is there a large opportunity just in that one area?
There's a huge opportunity in the small market to get far more advisors selling the product. We weren't reaching them because we didn't have enough distribution capacity at the company level. At the mid to large market, we were not touching a series of regional consultant firms, whether in the West Coast or in the South, say, who had heard of us but had never been visited by us. Yeah, the penetration opportunities are enormous. Absolutely enormous. Yes, sir.
Yeah, I want to ask about from the operating and business standpoint, the small case market is harder in terms of operating cost and handling. With your strategic investment and upgrading of the system, how does that change your capability? Does that give you ability to maybe grow to support a much larger space or system in that area?
Yeah. That's a great question. The system we have supporting the small market now is not scalable as much as it should be. It costs us more money than it should to put plans on it right now. If you think about the margins are still strong, but the new system is completely scalable. In fact, it's up to DST to spend the money on the infrastructure to support the business. It's not our cost anymore. It's their cost. It will allow us to become a lot more efficient at putting plans on. Yeah, absolutely. The internet presence will get better, and we'll be able to shift more transaction activity into the internet space, which means less cost in the home office. Absolutely.
Judging from the CapEx spending, would you say that they're pretty much done this year or?
The small business gets done in 2013. That's where you'll start to really see the shift over there. That small market NAV product is already on the new platform. That's why we're excited about seeing a lot of activity in that product line. Yes, sir.
I just wanted to get a better sense as to what the growth might be. The 40% of the business that's in runoff. I wonder if you'd give us a sense for how fast that might run off, how long that might take, and what impact that might have on the overall growth.
Yeah, it's running off slower than we thought. It's running off. Last year was around a 9% lapse rate in that business. Its negative flow characteristic was about -$600. It's taking a lot longer to run off than we thought it would, in part because of those 3% GMIRs. It'll take quite a while for that business to go. You can't replace it because it's primarily individual contracts that was sold so long ago. It's impossible for somebody to come in and just kick us out of a case, which is one of the reasons why it's sticky.
You highlighted, Chuck, the takeover opportunity in one of your slides, $40 billion in small, $53 billion in mid-large. Can you talk about where you're going to take that over from? What's the dynamic there, and why is Lincoln positioned to capitalize on it versus all the other players?
Here's one dynamic. In the 403(b) business in particular, it was not normal to go out and just do an RFP, request for information, RFI, if the case was already in, say, a hospital. Now it's routine that every five to seven years, those mid-to-large cases go out to bid. That's one dynamic. In the small market, it's advisors looking for additional ways to sell plans. Secondarily, I would say there, as plan size grows in the small market, the needs of the employer of a $3 million plan, when her plan gets to $5 million, they need a different plan. As plans just normally grow, they create takeover opportunity. Why are we positioned? The technology changes. Our distribution guys know the markets. We have very talented mid-to-large consultant support now and a much bigger business development team.
We also have a great deal of experience in the kind of value that a lot of employers are now looking for. We're not just going to go in and say, "Here, we'll charge you this cost." What they're interested in, interestingly, is what can you do to help my employee retire more successfully? We can put people into their plan. That's a big advantage.
That makes a lot of sense. Dennis Glass has talked about opportunistic M&As in both the pension and the group business.
Yep.
It's been so quiet. We've seen nothing. What do you think?
That's all recent.
Is there any activity? All right. There might be something on the block that I think I saw over the news wires. Talk about what you're seeing in terms of what's the landscape look like? Is there more activity coming, and do you think there are opportunities for Lincoln to do stuff in the very near term?
We would very much like to do acquisitions in this business because it would accelerate what we think is a very strong organic growth plan. There hasn't been really much offered, and there are still more buyers than sellers. Where we have seen some pickup in market are European financial institutions who are in what I would call the institutional stable value or wrap business, who because of their increased capital requirements, don't want to be in that business anymore. We're starting to see some pickup there. Depending on the kind of business that is, if it's not a wrap that contains investment risk, for example, we might be interested in that. On the plan side, still not seeing much with the recent exception. Yeah. Here's the other thing, right?
The other thing is opportunistic acquisitions are great, but it's got to be measured against the IRR from buying back shares. The hurdle rate is higher now probably than it has been historically, particularly for Lincoln, given our price to book.
When you talk to the financial team at Lincoln, what do they like better? Do they like capital management as opposed to M&A?
I think they would say they'd like to see a blend.
A blend.
if it delivers the right level of shareholder return.
Okay. Chuck, terrific insights into the pension market and what Lincoln's doing. Thanks so much for being here.