Good morning, everybody. I'm Yaron Kinar , Deutsche Bank's North America life insurance analyst, and I'm very pleased to have Robert Falzon from Prudential Financial with us today. Rob is the CFO of Prudential, which is one of the leading life insurance companies in the world, with a very large and significant presence in the two leading markets, the largest life insurance markets in the world, here in the U.S. and Japan. Rob, I look at the business today, I see a business that's about 45% retirement oriented or AUM oriented here in the U.S., another 45% or so death protection oriented, mostly internationally, mostly Japan, and then the remainder really a U.S. life insurance business. Could we maybe start by looking at the platform overall? What do you see as the challenges and the opportunities in today's environment?
Sure. Thanks, Yaron. Yeah, let's start with the opportunity side of that. It's still early in the morning, start on the upbeat side. I think I'd start with the fact that we actually like the mix and the quality of the businesses that we have today. One, it generates a very high ROE. We think one of the leading ROEs in the industry. Two, that platform has actually generated a substantial amount of growth. If you look at our compound growth over the last three, five years, we've grown at 12% per year, and we think that it has the potential to continue to grow in the future, whether you look at our challenges in the macro environment, look at our U.S. business is well-positioned for the retirement.
What we think is probably the single greatest macro growth factor in the financial services area being sort of the retirement dynamic in the States. We're in the thick of that across our platforms, asset management and retirement. Even in the insurance business, we're seeing opportunities for accelerated growth in the traditional U.S. insurance businesses beyond what we have in Japan. That high ROE and growth also has the ability to produce what we believe is a stable and high-quality earning stream. We recognize that in the past there have been some issues with volatility around our earnings, we've gotten on that. There are some things that we have done and are doing in order to make sure that those strong fundamentals are actually mapping well to our published earnings. As evidence of that, those earnings are translating into a very high cash flow.
We increased our guidance of our cash flow from earnings as being about 60% of the operating earnings that we report. We've evidenced that. We brought our dividend up by around 21% from end of last year. We increased our stock buybacks by 50%, from $1 billion to $1.5 billion during the course of this year. If you just take what we've authorized this year for stock buybacks, and you take the dividend that we're currently paying and you just annualize that, it's around 60% of the guidance kind of numbers that we gave out for earnings. You can see that what we articulate as our cash flow is actually well mapped to demonstrating that it's there and that we're actively redeploying it.
From a business platform, we actually feel as if there are lots of opportunities by virtue of having a very strong existing platform that doesn't have any material gaps that we feel a need to or some way compelled to have to fill. I'd say the second thing that we like is our financial strength. First, it's an important part of our customer value proposition. We get that. Because that success is predicated on our financial success, it's also an important part of our investor value proposition. It's an important part of our proposition, frankly, to our employees and our community as well. We think it puts us in a good position for changes that are occurring in the regulatory arena. We're not particularly concerned with some of those outcomes, given what we view as being a very strong position from which we start today.
We think it also allows us to be opportunistic in the event that opportunities come up like they did post the financial crisis. Right now, we don't see a lot of that happening, but to the extent that there are things that are attractive for us to undertake from an acquisition standpoint or inorganic, like we did with the pension risk transfer business, we have a strong balance sheet in order to be able to pursue those things. Those are the things that we like a lot. In terms of the concerns, I would really think about concerns or challenges as being in two areas. First, the things over which we have control, and that's mainly around execution. We do that well, we believe. It really starts with, you'll hear our chairman talk a lot about talent. We're maniacal about it.
We think we have a focus on talent that differentiates us from our peers, we think that that's the thing that's sustainable in terms of the value that we have as a platform above anything else. That with a culture of collaboration has generally led to good innovation, it's led to really good execution. You look at the innovation in the pension risk transfer market, you look at the innovation of just getting into Japan, which was perceived to be a mature market when we got into it, and growing to be the largest insurer in that market that's a non-Japanese company, one of the two largest even including the Japanese.
From an execution standpoint, being able to do things like the acquisition of Star, the acquisition of Edison, the acquisition of Hartford, the acquisition most recently of our Chilean business, to execute well on those. Buying is just the first step. Actually integrating and then performing subsequent to that is important, we've got a track record of being able to do that well. That innovation and execution leads to good commercial outcomes for our customers, that then enhances the overall franchise value. The things over which we don't have control that would be challenges are really the markets. You think about the things that people talk to us most frequently, that would be FX, interest rates, and equities, right? FX we actually feel pretty good about. We have two hedges in place.
We have an income hedge that really provides stability on a year-to-year basis, you don't have a lot of inter-quarter volatility in our reported earnings. We have a plan rate for the year that's fully hedged, you can sort of know what the impact of currency is going to be for the year. More importantly, we have an equity hedge in place. The function of that equity hedge is to allow us to have hedges in place where if JPY depreciates, there are gains on those hedges. We can harvest those gains, and we can redeploy them in a way that preserves the overall ROE to the enterprise. We do that either by reinvesting into the business or by buying back stock. The whole thing has been calibrated to do that.
The gains on the hedges on an after-tax basis are sufficient to offset any of the dilution that would occur on a long-term basis on our ROE. That doesn't happen instantaneously. We harvest those over time. You get them in, you have to redeploy them. Subject to some amount of lag, we're able actually to preserve the ROE that we deliver as a platform. Interest rates and equities are more challenging. We believe relatively we're less sensitive to interest rates than many other of our peers. It's a result of having a big presence in Japan, that you mentioned, Yaron. We've been operating in a low interest rate environment there for decades and generate very high returns despite that, and growth. Our asset management business is relatively insensitive to interest rates.
In fact, when interest rates go down, we have a big fixed income franchise, our AUM goes up and our fees actually go up in that particular case. While we have the typical interest rate sensitive businesses like our annuities business and like our insurance business, we have other businesses that, or U.S. insurance business, we have other businesses that offset that. We've given out sensitivities to that. I think we're pretty clear about what level of earning sensitivity we have to rates. While we think we're relatively less sensitive, we do recognize it's a drag on growth and it's a drag on ROE for the entire industry, and we're not immune to that. Equities is a similar phenomena. We're not immune to that in the way that others are similarly affected.
It manifests itself in the account values that we have and the assets under management we have and just the fees that we can then earn off of that. Those things tend to rise and fall with the level of equity markets. When we get choppy periods in equity markets like we saw in the first quarter, that has an impact on us. When you get sustained low interest rates, that can over a period of time be challenging as well.
Thank you. We touched upon some of the challenges, at least from interest and equity markets. If I look at MetLife, they're talking about separating their retail business, which has a lot of those sensitivities. I believe Pru's management team has been consistent about saying that it actually sees the value in that business, and it's an integral part of the business. Can you maybe talk about the value you see there and why it doesn't necessarily make sense for you to go through a similar route?
Yeah. We feel very differently about this. I'd sort of put it into two pieces. Well, first, if you look at those businesses for us, they're already very well-capitalized businesses, and they're generating very high returns for us. There's nothing we need to do that we're concerned about in terms of infusing capital in order to support those businesses on a prospective basis from whatever exogenous factors. We feel as if they're in a good position to begin with. With regard to the distribution piece of that, we believe that you want to have an ability to reach and communicate with your customers in whatever channel they prefer. To do that, you're going to have to have a breadth of channels that you're covering.
That goes everything from over the kitchen counter or kitchen table, to workplace, to institutional, so wealth advisory type stuff, and to digital, online, and e-type mechanisms for that. You got to have that span. We also think within that, having both proprietary and third party is an important way to address that market. We think there are real value to having. We don't have an outside, we have some 3,000 agents or so in the U.S., much larger in Japan. Having that proprietary distribution, we think is an important piece of that as well. With regard to the other part of that retail business, which is really the annuities business, I think that gets most of the headlines around that. Again, well-capitalized, getting a high ROE.
Most importantly, that's part of what we view as being that retirement proposition that I talked about before. Big opportunity financial services firms. For an insurance company, the advantage we have in serving that market is around creating stable lifetime income outcomes for consumers, for investors. That's differentiated versus what anyone else playing in that market can do. The annuities business is a component of that. Now we're in the thick of that retirement opportunity in our retirement business. The pension risk transfer business is doing that. We're in the DC and DB business. We have our investment-only stable value wrap products as well. All of that is geared toward that retirement opportunity. The annuities business is geared toward that.
We think in that business, it has to continue to evolve to have more simplified products with alternative forms of distribution to really meet that future need, but it's clearly going to have space in that. Our asset management business incidentally has sort of a symbiotic relationship with all of that and therefore helps to have us well-positioned. When we think about what have been labeled those retail businesses, we think about it from a distribution standpoint as having this integrated holistic view of distribution and not wanting to give up any of the access points to the ultimate customer. We think about having an annuities capability, and rather than calling it annuities capability, call it a lifetime income capability. You need to figure out how is the optimal way to deliver that into the customer.
That's an important service on a go-forward basis. We think it has the opportunity for very significant growth that probably will look very different than how the VA business has grown to date, but is going to be an important part of that growth going forward.
Great. If we look at the international segment, you talked about contending with the low interest rate environment in Japan for decades now. Nonetheless, the interest rate environment seems to continue going down.
Yeah. Low is different than negative, I guess.
Right.
Yeah.
how are you dealing with the new interest rate environment today, and how do you maintain your ROEs in that environment?
Well, again, just to reiterate, if you look at the business model we have there, it's very unique. The distribution we have there is unique. We have succeeded in a market that was highly competitive when we got into it. Despite that, have grown it very dramatically. As I said, since we've been in it, has had low levels of returns, both from equities and from interest. Despite that, have managed to grow. The reason for that is most of our margin, the vast majority of our margin in Japan, comes from underwriting and expense. It doesn't come from spread. We earn very little spread in Japan. There's not much portfolio turnover in Japan. 1%-2% of our portfolio turns over on an annual basis, a very long liability.
We don't have a lot of the portfolio that's rolling over into reduced interest rates. We sell a substantial amount of non-yen business. We have foreign currency, both fixed annuities and foreign currency life insurance, both US dollar and AUD would be the two primary currencies, and they're not as affected by the interest rate environment, particularly in the context of the Japanese. What we view as being low interest rates here are actually relatively high to a Japanese investor. The combination of all that has meant that we've been much less susceptible to any kind of grinding of our margins as a result of low interest rates in Japan. Now, as I said, negative is different than low. We're not investing in negative yielding instruments. What we've done are two things.
One, we're further out the yield curve than where the negative points are in the yield curve in Japan. Again, that matches up with our liabilities. Two, we have a certain portion of our portfolio where we're backing the yen liabilities with dollar assets hedged back into yen, but we're able to pick up yields in US dollar assets and then hedge it back in order to get a higher yield on that. We've got, I want to say, about $4 billion of that in the portfolio today to help offset it. The franchise is not particularly susceptible. With some modest tweaks to what we're doing on the portfolio investment side, we're actually able to sustain our margins there.
Our yen-based products are being repriced, and/or we've been exiting out of some of the yen-based products because you just can't get the same margin for that and create any kind of a value proposition for customers.
As you pull out of some of these yen-based products, some of them also being quite large premium products, how do you ultimately maintain the profitability or the productivity, really, of the agent, which is another real focus for the company?
Yeah. Well, actually, our foreign currency denominated, so the non-yen products in Japan are more profitable for us than our yen products. The shift out of yen into USD and AUD is actually a positive thing for us, both from a productivity standpoint and a profitability.
Okay. As this low interest rate environment continues or is moving the wrong way, do you see increased competition for these non-yen denominated products or for death protection oriented products that you hadn't seen before?
Well, first, all of the major insurers in Japan have had foreign currency denominated products. Most of them have been in the fixed annuity arena as opposed to the life arena. We've had competition in the life arena as well. Both obviously JPY denominated and non-JPY denominated. I think it's natural to expect that others will try to pivot in the same way that we're already positioned. Yes, you'll see, I think, some of the larger Japanese insurers providing traditional insurance on a non-JPY basis. I think we've seen that with one insurer to date, but we expect to see more of it.
Having said that, again, not particularly concerning because we were out competing on a JPY basis and will out-compete on a USD and AUD basis as well, given that distribution capability that we have in that market and how unique that business system is. Yeah, there'll be more people that are providing those products as they look to optimize their own portfolios. It's a pretty competitive marketplace. We've done well despite that, we don't think that dynamic changes particularly.
Okay. The concentration of non-JPY denominated products, does that open you up to disintermediation risks should the JPY appreciate? Are there actions that you can take to mitigate that?
Yeah, that's a good question. If you ask me what would keep me up at night, it's more about not the JPY appreciating so much as Abe actually got his way and interest rates went up by a couple of hundred basis points in Japan. I think you have some risk of disintermediation. I don't think unless that happened, frankly, there's a large risk of it. Yes, we're relatively protected from it. The products that we have that are really savings oriented products is a minority of what we sell there. Things that we would classify as pure savings are 10, maybe 15% of our book there, of our sales. Within those, they're either market value adjusted, so if they were to cash them in, there's an adjustment on it, and/or there are surrender charges associated with it. We're protected on that.
We also have surrender and MVA on our life and on our retirement oriented products. Because they're not as savings oriented or near-term savings oriented, they have more of an insurance component to it. We think they're less subject to disintermediation because you're going to have to re-underwrite some of the life protection that you're getting built into those products. On the margin, yes, there's some risk of disintermediation. I think it has more to do with the dramatically escalating interest rate environment than it has to do with what happens to the yen. We have a fair amount of protection against that. All things being equal, I wouldn't mind seeing interest rates come up in Japan as it would across the world. I'll take the risk of a little bit of disintermediation for a more healthy interest rate environment.
Okay. Switching back domestically for a second, we saw variable annuity sales come under pressure for the industry last year. Some industry groups are talking about sales pressure continuing at least for the coming year and a half. Do you share that view? If so, what kind of impact does that have on earnings, and what actions can you take to mitigate that impact?
A couple thoughts there. Let me answer the last part of that first, which is recognize that the way the annuities business works, we have such a large installed block that near and intermediate-term earnings are going to be driven by what we have on the books today. Sales have a relatively marginal impact, particularly in the first year, because all the expenses associated with the distribution make it a marginally profitable first year. Obviously, earnings grow over time. You wouldn't see any material change in our earnings picture on a near to intermediate-term basis as a result of even a significant drop-off in sales. Now, longer term, what happens is you have some lapse over that book, and if you're not replacing it with new sales, the book will shrink over time.
You will get, over a longer period of time, some impact from that. I think over a longer period of time, the industry will figure this out. I do think you're going to have some short- and intermediate-term disruption as the industry, in particular the distribution partners within the industry, are trying to adjust the DOL rule and figuring out what needs to be done, both from a product design standpoint and from a customer interface standpoint. We don't have terrific clarity at this point in time on all the things that will need to be done. I think the DOL rule, as it came out, provided more clarity, was a little bit more constructive than some of the earlier versions of it. Having said that, there's still a lot to be worked out.
I guess as we think about that, I would say that when we think about the costs associated with implementing those changes, there are going to be costs of that. In the context of our overall size and enterprise, those costs are not going to really be a driver to us. It's really going to be more around getting clarity around, particularly for distribution partners, litigation risk, such that they feel comfortable selling that product. We've got to get product design right, and we've got to get customer interface right, such that we can pick sales up. As I said, I think there'll be a transitional period around that. The industry is quite clever, and I'm sure it'll get resolved or get solved.
Okay. If maybe we can move to talking a little bit about regulation. PRU is one of the designated non-bank entities here in the U.S.
Fewer than there used to be.
Fewer than there used to be. We've started hearing some comments from the Fed talking about rules or framework coming out imminently, including some comments from Daniel Tarullo talking about, I think, a U.S. GAAP consolidated-oriented framework for enhanced capital. What is the latest comments, I guess, from Tarullo, is it a positive development? Are you well-positioned to withstand or handle such rules when they come out?
A few things. One, we believe that the presentation that Governor Tarullo made was very constructive. It was very constructive because what became very clear were a couple of themes. The first is that what they're developing is going to be tailored to the insurance industry. We spent a lot of time with the Federal Reserve up front, educating them as to the differences between insurance and banking. That was a big hill to climb initially, because some of the initial reactions were, "Well, we can use our existing methodologies, Basel, and just bring insurance in under that regime and then make whatever modifications we need to make." That would have been disastrous for the insurance industry.
We spent a lot of time educating them on the different business models and how the business models then are reflected in financial statements, and how the items in your financial statements need to be looked at differently when they're in an insurance context versus when they're in a banking context, right? One of the things that Governor Tarullo said that I think was telling on this point was, and I won't get the quote quite right, but what he said is that an asset on an insurance company's balance sheet can and should be treated differently than an asset on a bank's balance sheet because of the liability that it's backing. That was huge because that was not the language that was coming out of the Fed a couple of years ago.
The understanding that an insurance business model is different, and because it's different, you have to look at the risks associated with the balance sheet differently, has been huge. The other thing that I think he said that I think was quite helpful was when he referred to the consolidated approach, he said that with regulatory adjustments. When you think about GAAP on the surface doesn't do a particularly good job, we believe, of capturing the economics of insurance. It's sometimes difficult and opaque. Through GAAP, actually, you can see the economics there. If you make adjustments to GAAP and use some of the tools that are available in GAAP, you can actually get to the underlying economics of insurance through those financial statements.
We're hopeful that those regulatory adjustments are the sorts of things that we've been talking to the Fed about, primarily on the international front, that you need to do in order to pierce through GAAP in order to get to underlying economics. Part of your question was how do we feel about this? I think we're encouraged by the initial direction that they're going. We expect that when the ANPR, the advance notice of proposed rulemaking, comes out, that it's going to be very high level and sort of structural as opposed to detailed, and that they'll have questions Around requests for input around some of the detail. As the saying goes, "The devil will be in the detail." The first step is a very positive and constructive step in the right direction.
There's a lot of work to be done to make sure that in both the constructs that have been proposed, that the right details get worked out such that they in fact follow that initial direction, and make the appropriate adjustments in the context of the GAAP methodology on the consolidated, and even for those that are going to be subject to the building blocks approach. There's a lot of detail that has to be worked out in that to make sure that the aggregation and calibration mechanisms that are used there are done correctly.
The fact that he ultimately is talking about a U.S. GAAP-oriented approach, even with adjustments, and saying that the Solvency II approach is not necessarily the approach that the Fed wants to use or the IAIS approach. A, is that positive from your perspective? B, does it mean that ultimately some of your international businesses have to meet two frameworks or three frameworks?
The first part of that is yes. That's very encouraging. We're not particularly fond of solvency. I don't think that it does a good job of really capturing insurance risks. It has a lot of pro-cyclicality and artificial volatility in it. Those are the things that I think gave the Fed pause as they looked at whether or not that was an appropriate approach. Second piece of that is that there was some concern I think by many, that what was happening on the international front, even if it wasn't solvency. The things that the IAIS has been developing would get imported into the U.S. While it wasn't solvency, it shared a lot of common denominators or continues to share a lot of common denominators with solvency, and that wouldn't have been a good thing.
I think the fact that the Fed has said that, "We're going to develop something here in the U.S. It's going to be GAAP-based because we use GAAP across all of our regulatory construct. And we like it." They recognize the limitations of sort of the mark-to-market conventions on solvency and some of the things the IAIS is doing. That's all very positive for us. With regard to how we're then operating it, to the extent that we have operations in regimes that are subject to solvency, of which we don't really have anything material today that would fit that. Japan hasn't adopted solvency, but they're looking at it, so they could at some point in time. Japanese operations, just like we today have to file something separate. We're subject to JGAAP and the FSA there. It would just change.
Instead of being JGAAP, it would be solvency. For us, it's not that we'd have an additional lens, it would just be a substitution for the lens that we currently have. From a consolidated standpoint and back here in the States, your group supervisor has responsibility for whatever happens that might be adopted by the IAIS on an international regime. That regime would be applied by the Fed, and they have the right to take the regime that they develop here in the U.S. and deem it to be equivalent to whatever international regime gets developed, and just implement what they're doing here in the U.S. Incidentally, there's precedent for that. They've done that in the banking sector as well.
We think whatever gets developed here in the U.S. is ultimately going to be what we're going to have to live with, and we won't have other group standards that are otherwise going to be applied to us outside of putting aside what the NAIC initiative might develop.
Okay. Then we started the conversation on regulation by saying there are fewer designated non-bank systemically important today than earlier. You've talked about possibly challenging the designation as well. What can you do and what is the timing of such a challenge?
Well, remember, we did challenge. People often forget that when we were designated, there was an appeal process. We appealed. We've always maintained that we're not systemic. We chose, after we lost the appeal, not to litigate. Every year we come up for re-designation or review for de-designation. Our case is the identical case that Met made in its appeal and its litigation. That's all on record today. There's nothing we have to add to our record that doesn't already match up with all the points that Met has made in its litigation front. That's all on record. Obviously, when we go through a de-designation process, it's annual, so we'll be going through it this year. There are new facts, the court case for Met being a new fact.
We would hope that that would then be factored into whatever decision comes about. Although I think both the Fed and all the industry observers will be watching how the appeal process goes between Met and the FSOC. That ultimately will have some determination on our de-designation. If we were not de-designated in any given year, we have the right to go to courts to have that reviewed in the same way that Met has with the initial designation. We've not lost our rights to litigate this at any point in the future, just it occurs on an annual basis as a part of this review for de-designation.
When during the year does that happen? Is it first quarter?
It's kicking off about now, and it generally takes well into the year. It'll probably be fourth quarter before we see any results from that.
Okay. Then still have a few minutes, so I want to touch upon capital a little bit. You start off by talking about the robust capital deployment in recent years and the increase there. What is the prioritization of capital deployment avenues today?
Well, I think about it this way. First and foremost financial strength, I mentioned that upfront is sort of one of the things that we feel good about from an opportunity standpoint because that financial strength gives us a platform to do lots of things and gives us optionality and flexibility. Secondly, feeding the existing businesses. We have businesses that are well-capitalized, are growing, and producing high returns. We think deploying capital into those businesses for organic growth is an appropriate thing to do. We're earning a return above or across the capital, and we want to continue to do that. After that, it's not so much a prioritization as I would say a balance. We look at a balance of shareholder distributions in the form of both dividends and repurchases, and I mentioned before that we've increased both of those, and for inorganic growth.
What you've seen us do recently is we got into the pension risk transfer business, did some jumbo transactions. We hope down the road there'll be more of those as well. We acquired the Chilean business, closed on that earlier this year. There are interesting occasional opportunities for inorganic growth, and we want to invest in that. We look at that not necessarily as a prioritization, but more as a balance. We want to be able to grow the platform. We want to be able to provide attractive returns to our investors, and we recognize that those attractive returns come in the form of both appreciation in stock price and current return. That comes through both the dividend mechanism and then, obviously, stock buybacks as well.
Okay. I want to give the audience an opportunity to ask questions as well, if there are any questions. One over there.
You mentioned the distinction between GAAP and regulatory financials. The SEC has put out some guidance on GAAP versus adjusted numbers, and I was wondering if you could discuss the impact of that.
That's an interesting question because our belief is that the investor community has already gotten there. You see a lot of research on that. When we look at how companies trade, it's sometimes hard to rationalize the trading on just the reported operating numbers, and you have to look beyond that. I think as we think about it, and I think one of the challenges in front of us that we're addressing, has been the volatility that can occur between that operating number and the reported GAAP number. We think that's important on a go-forward basis. Whether the SEC came out with their proclamation or not, we think that having a number that ultimately maps well to GAAP and doesn't have a lot of space between those two is an important feature of being able to report stable, consistent, high-quality earnings on a go-forward basis.
You want to have earnings that don't have a lot of volatility in them, and you want to have earnings that don't have a lot of space between what you're reporting on a GAAP basis and what you're reporting on an operating basis. Now, there are some things that I think will always have differences between operating earnings and GAAP. Realized gains and losses, right? If you included those in, you could game that till the cows came home, and you want to exclude realization from that. NPR, those are things that you want to exclude. The loss marks on the derivatives similarly. Those are things where I believe that you're always going to have some space between those.
Over time, the deltas on those should be somewhat symmetrical so that you have a balance out between over time, your operating earnings and your GAAP earnings should about equal each other over time because there shouldn't be a skewing to the noise, which would indicate that the operating earnings are, in fact, not really reflecting the economics of the business. With the SEC direction, I think is catching up with where investors already are in the sector.
Any other questions from the audience? Okay. Maybe I'll sneak one last one. Free cash flow generation has been improving. You've done so in a low-rate environment. Equity market's going sideways. A, I guess, how have you been able to improve cash flows in that environment? B, how much more room for improvement is there?
The cash flow generation is really just an outcome as opposed to something that we intentionally manage to. I mean, obviously we want to manage to high cash flow, but if you look at the mix of the businesses we have, that's what actually generates that cash flow capability. If you look at how the business has grown over time, particularly more recently, growth in our asset management business, within our retirement platform growth in the PRT business, growth in the investment-only stable value business. Those are all very high cash flow businesses, where the cash is virtually equal to 100% of the earnings coming out of there. As a result of growth in certain lines of our business, what you're seeing is those businesses have a very high translation of earnings into cash flow.
Secondly, when we've acquired blocks of businesses, those are blocks that are relatively mature and are paying out. When they get to that part of their life cycle, what you find is that there's a high correlation of cash flow to earnings because reserves are getting released as the blocks begin to wind down. The maturity of the blocks that we've acquired have contributed to that. Then finally, with the slowdown in the growth in our annuities business, that's a business that when it's not growing, throws off a lot of cash. When it's growing, as we talked about before, the upfront loads associated with the sales tend to eat up the earnings, at least in the first couple of years. That mix has really yielded itself to a higher component of our earnings becoming free cash flow. The 60% we feel actually very good about.
What you don't want to do is get carried away with that number because to the extent you push the businesses too hard and extract more cash out of them, what you then do is you impair their ability to grow organically. We think there has to be a balance between cash flow and distributions back to shareholders, some amount of inorganic growth, but you also have to make sure you're taking care of your organic growth, particularly when you have what we have, which are high-returning businesses. The last thing you want to do is starve them of growth opportunities and then put pressure on your ROE as a result of that. Right now we don't see anything different from that 60%. We think that's a good balance between that distribution and reinvestment and growth. Thanks.
Rob, thank you very much. This was very helpful. Thank you very much. Appreciate your time.
Thank you.