Introduce Rod Martin, Chairman and CEO of ING U.S. Prior to his role at ING U.S., Rod was CEO of American General and had various leadership positions at AIG. ING U.S. is the newest public company that we cover. It IPO'd in May of last year. I believe this is going to be the last time I introduce Rod as part of ING U.S., as they're undergoing a rebranding initiative, rebranding as Voya Financial, and will officially change its name in April. With that, I'm going to turn it over to Rod for his presentation. Then joining him for Q&A will be Alain Karaoglan, Voya's COO, and Ewout Steenbergen, Voya's Chief Financial Officer.
Seth, thank you. Good morning, everyone. Particularly on a little bit snowy morning in the north, this is a very comfortable place to be. I'm reminded to call to your attention the forward-looking statements and cautionary statements that you'll see on slide two. We will be talking about some non-GAAP measures and some forward-looking information in today's presentation. With that as a backdrop, let's begin. It's a pleasure to be with you to share ING U.S.'s investment narrative. Let me highlight some of the key elements of our investment narrative and discuss our focus on execution to drive our ROE improvement. First, we have a leading franchise in attractive markets. Second, we have a strong track record of execution with a 12% compound annual growth rate in operating earnings from 2010 through 2013. Third, we have an experienced management team executing a comprehensive ROE improvement program.
In fact, we've targeted a 400 to 500 basis point increase in the ROE to 12%-13% by 2016. Fourth, behind the strength of our Retirement Solutions, Investment Management, and Insurance Solutions business, we've cast our vision to be America's retirement company. ING U.S. is dedicated to helping Americans become both financially and emotionally ready for retirement. 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. ING U.S. is one of the largest retirement-focused companies in the financial services industry. We have more than $511 billion in assets under management and administration, more than 13 million customers, more than 200,000 points of distribution, and over 7,000 employees dedicated to helping Americans and our customers with their retirement readiness.
Our ongoing business has a diverse earnings profile that generated $1.2 billion in operating income and operating earnings in 2013. Approximately 74% of those earnings came from Retirement Solutions and Investment Management, which are our least capital-intensive businesses. The remaining 26% from Insurance Solutions. 2013 was a year of extraordinary transformation and value creation for ING U.S. First, we executed the initial public offering of Voya and the Voya stock in May, and the 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, increasing by 80%. In fact, only Twitter's IPO outperformed ING U.S. last year. We're pleased with that 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 on 5 separate occasions. We did this while maintaining an RBC ratio above our target of 425% throughout the year, including an estimated 504% RBC ratio as of year-end 2013. Finally, as was just announced or discussed by Seth, we introduced Voya Financial, our new brand, which is a derivative of the word voyage, and symbolizes the journey that all Americans are on to become retirement ready. We recently announced that ING U.S. would officially change its name to Voya Financial on April 7th. We're excited about the transition to Voya Financial, and we'll move in a deliberate manner to ensure a seamless transition for our customers, our clients, and our distribution partners. ING U.S. has identified 3 sources of value creation. Our first source is our ongoing business.
The second is the potential value in our closed block variable annuity segment, the third is the potential upside in our tax assets. I'm going to highlight the 3 components of our investment narrative. We've established a solid foundation. We have a premier franchise, we're focused on driving ROE improvement. Let's talk about our solid foundation. Our management team is transforming the culture from a past that was focused on top line measured by league tables to a company focused on value creation. Today, our value creation philosophy emphasizes efficient capital management, improving the profitability of the ongoing business, maximizing the synergies between the operating segments, and increasing operating efficiencies. Our value creation philosophy is anchored in 3 key metrics: risk-adjusted returns, distributable earnings, and sales at or above our targeted IRRs.
We've established a solid foundation to create long-term value for our shareholders, at the center of our value creation philosophy is our plan to improve our ROE to 12%-13% by 2016. We're currently executing on over 30 ROE improvement initiatives. In 2013, we improved our ROE by 200 basis points to 10.3% from 8.3% in 2012. In addition, we've strengthened our balance sheet, stabilized our ratings and ratings outlook, de-risked our investment portfolio, and prudently managed our closed block variable annuity segment with a hedge program designed to protect regulatory and rating agency capital. With respect to our closed block variable annuity segment, we've undertaken some very decisive actions over the past several years. For instance, ING U.S. ceased sales in early 2010 of variable annuities. We've increased reserves.
We've developed a hedge program designed to protect capital from market movements, we're proactively managing this closed block to optimize value for our stakeholders. With that as an overview, I want to turn to the growth of our premier franchise, which we manage from a one ING U.S. perspective. While each of our businesses are strong on its own, it's the power of those businesses coming together that allows us to deliver a differentiated value proposition. Our retirement, investment, and insurance businesses are the foundational building blocks of our franchise. With these 3 businesses, we're able to offer our customers and our clients quality asset accumulation, protection, and distribution products and services, in addition to guidance and advice.
Our entire organization is committed to helping Americans become both financially and emotionally ready for their retirement years, as retirement readiness is one of the most daunting financial challenges facing Americans today. Retirement Solutions is our largest earnings contributor. We're one of the largest defined contribution retirement plan providers in the U.S. Our business profile converges with some very powerful demographic trends that present us solid growth prospects. Investment Management is our fastest-growing business. The key to profitable growth with our Investment Management platform is to convert our strong investment track record into scale on our higher margin asset management categories. In fact, 93% of our fixed income assets and 84% of our equity assets outperformed their benchmark returns on a five-year basis in 2013.
Insurance Solutions is our refocused business. We're focused on product segments of the market that best match our lower capital, higher return approach to the market, such as our indexed universal life product portfolio. While we've scaled back our presence in individual life, we see opportunities to expand our Employee Benefits business, particularly in the Stop Loss, Group Life, and Voluntary Benefits areas. Retirement Solutions is a market-leading platform and franchise that will drive our long-term growth. We're well-positioned in all segments of the defined contribution market: 401(k), 403(b), and 457. In fact, there are very few retirement plan providers with a scaled presence in each of these market segments. We offer a comprehensive suite of retirement income solutions to meet plan participant needs. We have access to these individuals through more than 50,000 plan sponsor relationships.
In fact, the breadth of our expertise can be demonstrated by a case win that occurred in late 2013. It was a multi-employer client arrangement that included a $2 billion of assets, 2,800 plan sponsors, and 57,000 participants. We also earned a billion-dollar Investment Management mandate with that case win, which demonstrates to us the synergies between Retirement Solutions and Investment Management. As I mentioned a moment ago, we have over 30 ROE initiatives underway. Specifically, within Retirement Solutions, we're benefiting from initiatives such as improving the economies of our full-service corporate markets book through repricing and lowering of crediting rates. We're running off less profitable business, like our Multi-Year Guarantee and our Annual Reset blocks. We're driving growth of our individual markets business through investments in people, products, and technology. Our Investment Management business has a scalable platform that leverages its strong investment performance.
Our key growth initiatives include growing our third-party business, improving our sales force productivity, expanding our share in higher fee asset categories. As I mentioned just a moment ago, our strong investment performance, 93% of our fixed income assets, 84% of our equity assets outperformed their benchmark returns on a five-year basis in 2013. In Insurance Solutions, we're focused on capital-efficient products and aligning our cost with our new targeted level of sales. For example, within individual life segment, we've shifted our sales focus to the index product portfolio. We've cut our administrative expenses by over 13% in 2013 from 2012. Our key initiatives in addition to that include improving our loss ratio for Stop Loss, expanding our Voluntary Benefits business and adjusting crediting rates where possible. Let's turn to our ROE improvement program. We're making steady progress toward our ROE target of 12%-13% by 2016.
We have a comprehensive plan with clear goals to improve profitability, efficiently manage our capital, and focus on ROE and ROC as the key measures of our success. We developed our plan in 2011 with our executive committee, McKinsey & Company, and Milliman. We executed a series of business performance reviews and diagnostics to better understand the profitability and capital intensity of our products and our businesses. During this assessment phase, more than 30 ROE initiatives were identified, and a detailed roadmap was created for executing our plan. We have clearly defined projects, milestones, deadlines, and reporting tools in each of these initiatives so there would be an infrastructure in place to track and measure the success. We've established a robust governance structure that involves actively managing each one of those work streams.
We identified a baseline ROE of 8.3% in 2012, and we established our goal to reach an ROE of 12%-13% by 2016, which is a 400 to 500 basis points of improvement. We focus on ROC for the businesses because we did not allocate debt to the business units. We identified a baseline of ROC of 7.2% in 2012, and we established our goal to reach an ROC of 10%-11% by 2016, which is a 300 to 400 basis points of improvement. To achieve these goals, we need and expect tangible improvement each year, which equates to approximately 110 basis points of ROE improvement on average per year. What I really like about our plan, it's really all about our execution. We're also making steady progress with our ROC. Our ROC improved 140 basis points to 8.6% in 2013, up from 7.2% in 2012.
We're making steady progress toward our 2016 ROC of 10%-11%. Our margin growth and capital initiatives each contributed to the ROC improvement. Our margin initiatives were the primary drivers, contributing 112 basis points of improvement. They included repricing actions, the runoff of less profitable assets, aligning, excuse me, our costs with lower sales in certain capital-intensive products. In 2013, we also achieved $30 million of cost savings as part of our long-term plan to reduce costs by $100 million by 2016. Included in the margin initiatives were several notable items that contributed 42 basis points. These include limited partnership income, prepayment fee income, and record-keeping change orders in excess of our normalized run rate. Second, our growth initiatives contributed 39 basis points.
These partially reflect higher fee-based margins on assets under management and administration which were due in part to positive net flows from both our retirement and our Investment Management business. Third, our capital initiatives contributed 40 basis points. These include reinsurance actions and progress in shifting the composition of our product portfolio to less capital-intensive products. Finally, low interest rates negatively affected our ROC by 44 basis points. While the effect of low interest rates were factored into our plan, the increase in rates following the IPO has mitigated some of that expected impact through 2016. Each of our businesses contributed to our ROE and ROC improvement. Reaching our 2016 ROE and ROC targets involves all of our businesses and functions. There's no silver bullet.
If we achieve our targets, we would expect to generate $1.2 billion to $1.4 billion in excess capital by 2016 after funding new business strain and holding company expenses. We expect to provide you an update on our capital position at the latest during our first quarter 2014 earnings call. Let me quickly recap our investment narrative for you. We're pleased with our steady progress that we're making with our transformation. ING U.S. is a premier franchise with leading positions in attractive markets. The management team is committed to continuing executing on our ROE improvement program. We'll build on our solid foundation, which is based on a recapitalized and de-risked balance sheet. We have three solid businesses offering quality products and services to meet our customer and clients' needs for asset accumulation, protection, and distribution. We've got an exciting new brand.
We have a lot of confidence as we head into 2014 based on our track record and continued focus on execution. With that, I will ask Alain, our Chief Operating Officer, and Ewout, our Chief Financial Officer, to join me on stage as we begin the Q&A segment of our session. Thank you. Do you have a question, or are you ready with your answer?
I have quite a few. Open, of course, for everyone else. Maybe we could start just to talk about the closed block VA, and you laid out the ROE progression plan for the ongoing book of business. Of course, the overall ROE is somewhat pressured by capital allocated to the closed block. What options are you considering for capital relief going forward there? How has the change in capital markets, if that's higher equity markets or higher interest rates, which have actually changed pretty sharply since the IPO, impacted those options?
Ewout, want to start?
Let me start to give a few of the statistics around the block, and then we can speak afterwards about some of the strategic options. If you look at the risk of the block, you can measure that in different ways. One of the metrics we use very often is called the net amount at risk for the living benefits. This is basically what kind of exposure do we have above the account values in terms of potential payouts we have to do to the customers. If you look where the block was one and a half years ago, there was a number somewhere between $5 billion-$6 billion. Where we are today, or at the end of 2013, the net amount at risk came down to $2.2 billion. A very sharp drop of the net amount at risk.
If you look at the resources we have put aside for this block at the end of the year, and now I'm looking at that from a statutory basis, the statutory resources we have put aside. At the end of the year, we were at $4.1 billion. $4.1 billion of resources, and these are statutory reserves. As we announced yesterday during our earnings call, for the living benefits, for the death benefits and cash flow testing reserves of $3.3 billion, and then we have another $800 million of additional assets aside on a statutory basis for this block. In other words, clearly a very good improvement. The risk profile is coming down. We have a significant asset still aside to deal with that block. All very positive. We are focusing for this block in terms of the prime objective to protect regulatory and rating agency capital.
Because the most important is that this block doesn't create any capital surprise, and therefore we're very comfortable where we are today, and the capital surprise is on a statutory basis. Therefore, we are so focused on a statutory basis. If you look at the GAAP capital, what is allocated to this block, it's very interesting. If you would look at where we were at the IPO of ING U.S., approximately 36% of the overall company's capital was allocated to the closed block variable annuity. In the meantime, our total capital has gone up. Our book value has been growing since by over $1 billion. And of that higher book value, now 21% is backing the closed block variable annuity. In other words, more capital and a lesser, much lower percentage that is now needed for the closed block. Another very positive sign how this book is developing.
Rod, would you like to speak about strategic options?
Sure. As we discussed during the roadshow, we put a significant amount of capital behind this book, as you pointed out, in fact, with your question. We are asked frequently, and quite understandably, what alternatives are you contemplating, and on what basis would that thought process be evaluated? The piece that we have signaled to the market is we will give an update first, no later than the end of the first quarter, on the cash flow analysis that we did and we shared with the investment community and investors during the roadshow. We will update that as of year-end numbers and give you that no later than the first quarter earnings call. That's step one. Step two, given the amount of resources we've committed to this, we're going to do something that's economic for all stakeholders. This business and block has improved significantly, as Ewout has pointed out.
We are open to and believe we're evaluating all alternatives and ideas that you would expect us to be looking at in the course of anyone that has a block of business and looks at these alternatives. You all know we have a large book of business. There's not likely a singular silver bullet to this solution. We're going to do something that makes sense, and one of the points of value that I talked about was the amount of capital we've committed to this, that we signaled during the IPO roadshow. Do not expect a return of that capital on this book of business sooner than five years. We did that to be conservative. We are highly motivated and aligned, I think, with all shareholders. If we can find a solution that makes sense, we would certainly consider that.
Given that we put a lot of resources behind this business, we're going to be smart about it for all stakeholders as we go through this. I think the first step is to update that cash flow analysis, give you a perspective on the first quarter call of where we are, and the alternatives we're considering.
Maybe one follow-up on that, just given the size of the block, and I think it's about $40 billion in terms of the VA balances. Would it need to be one singular solution? Is there anything about the block that makes it needed to be one singular solution, or are there solutions available for reinsuring or offloading portions of the block?
I don't think it absolutely needs to be one single solution. It could be a combination of ideas, and we're certainly looking at those. Please don't look at closed block. I said this during our roadshow. It's passive management. We have a substantial amount of capital behind this book of business. We take this every bit as seriously in managing that capital as we do the ongoing business. We're going to behave in a smart and predictable economic way with this book of business. We think, given the amount of resources we've given to it, that makes sense.
I just had a question on the brand name to Voya. Should we expect to see a temporary slowdown in sales because of it? Will you be spending incrementally more on advertising to promote the new brand?
Let's take it in two steps. We've been very thoughtful about how we've gone about this process, as you probably would expect. By way of example, we very intentionally, at the listing, wanted to pick a stock ticker symbol that wouldn't change when we moved to a new name, and that was VOYA. We also wanted the stock ticker symbol to be not some interpretation of our name. Again, the V-O-Y-A. We also promised our distribution partners and our institutional clients that we would give them a long runway in terms of the process. At the time we announced the name, which was some period of time ago, in fact, right before or right at the IPO, we've had very active communications with both stakeholder groups, our distribution partners and our institutional customers.
At this point, this is the kind of season that you have meetings with those stakeholders. I've been to a number of them just recently, for example. It's really where at least I wanted it to be, and that's get on with it. We know it's coming. We're there. We're mentally prepared for this. Get on with it. We've got a staged approach, as we just announced. The holding company on April 7th, Investment Management and our Employee Benefits on May 1, the rest of the business on September 1st. We're doing that in a staged way so we can just be deliberate and thoughtful and not miss any deadlines. There's an awful lot of, and you've all been through this with other companies, what I call wiring and plumbing that's needed to just change all of those things.
We've signaled it, I think, very comfortably well a year in advance. Alain and Glover and our branding team have done a terrific job of, I think, the communication process with all stakeholders, and people are excited about it. We're really ready to move on to this. I don't think there'll be, and I'm not expecting any drop-off from sales as we go through this. The expense piece, there's two components of that. We talked about actually both of those on the earnings call yesterday. One is the operational rebranding piece. Think about that as the plumbing and wiring that you have to do to change all the legal entities and all of the stuff on websites to get that done. That cost alone is $50 million. That is a 2014-2015 expense.
Okay.
That number hasn't changed. We've been discussing that number for some period of time. The amount of additional marketing we're going to do, we're still debating, and maybe, Alain, you want to just talk a little bit about that?
Yeah. We haven't announced yet the number in terms of dollar amount on advertising that we're going to spend. It is costly to rebrand, but we will do so at the appropriate time. One of the things that we want to make sure is that every dollar we spend, we get tremendous value of it. In fact, Jay, what we'd like to do is not to see a slowdown in sales, but a pickup in sales as we advertise. We have very well staged in terms of Investment Management, Employee Benefits, and in September, the rest of the business. A lot of our customers are also institutional customers, where you get a chance to have a conversation. The impact of the rebranding may not be as significant as a retail brand that has to rebrand.
We will announce at some point in time this year what our expectation in terms of advertising. We will make sure that we get enough out of it and that our brand awareness score is as high, if not better, as anyone else that has rebranded before.
Yes. Concerning the closed block, from a credit perspective, I understand what you're doing is to try to have the hedge program protect reg capital and rating agency capital. Could you maybe give us a broad-brush view of what would cause a tail risk outcome? What would cause the hedging program to kind of go off the rails? What macro factors or external factors would you have to see? I also have a follow-up.
Let me explain a bit what is exactly the different components of our hedging program. The hedging program is stated around the movements of the liability in case of a market shock, both for equity markets and interest rate risk. The most important is that our equity hedges, which are more short futures positions, as well as our rho hedges, which are more swaps positions, that they are able to offset the liability movements in case the market turns negative. That those hedges provide sufficient offset for the additional statutory reserves we have to post, or the additional rating agency requirements we have to hold in such a situation. It's more a shock kind of offset that we are able to cover. If you look at the hedge effectiveness, it's very positive. It's very strong.
We are showing that every quarter, you see the difference between how the hedges have moved as well as how the reserves on a statutory basis have moved. Over the last few quarters, the hedge program is having a very high hedge effectiveness. If you speak about what is really the tail risk, that is more a secondary order effect. What is happening, in case markets go down or markets go up, let me speak about the up scenario. It is more the secondary order effect that is then going to help. Markets go up, we will see higher fee income over our asset balances. The gross fee income is going up. We see the hedge notionals that come down in such a scenario because the policies get more out of the money. The hedge costs are coming down.
If the policies get more out of the money, we see a pickup in the lapse rates. The lapses go up because the lapses are dynamic and we expect higher lapses where there's lower in-the-moneyness. The book is running off faster, and that is the overall positive development. The hedge program is really focused on the short-term impact and to deal with it. A long-term impact with respect to positive markets, as we have seen over the last half year, three quarters. That is really helpful for the book. If, for example, if you look at the lapse rates for the last quarter, the fourth quarter 2013, that was for the first time over 10% on an annualized basis. Another very positive development.
Right, that's what I'm trying to get to. It's been a positive development. Has there been any sort of thinking about what would cause it to maybe delink or go the other way? Are you saying it's hedged in all circumstances?
Well, the.
What sort of extreme scenario we have to see to go, "Oh, we're kind of in trouble here.
The hedge is, again, is to protect the downside. If there's a sudden shock of 10%, 50% equity market drop today for whatever reason, the hedge program is there. That's why we have the hedge program to deal with it and to offset the additional sudden capital requirements that we have to post. Let's say the opposite of what I just said in the up market is happening in the down market. If markets go down, we will see higher in-the-moneyness levels, lower lapses, lower fees. That effect will come in gradually over time, and that is still an exposure we have on the book.
The follow-up, you talked about the 500% RBC ratio, the target 425%, but from what I understand, the build in capital, that's a blended rate, right? Which includes closed block entities, or no?
No.
How should we think about then, the repatriation or the give back, the progress to the target RBC over time from 500% to 425%? Should we think about it that way? Is that kind of the plan?
Let me explain a bit the different components of our capital structure. The RBC ratio relates to our regulated insurance entities. Our five prime insurance entities that are having their accounts on a statutory basis. 504% RBC relates to approximately in dollar terms, $1.1 billion excess over the 425% RBC target level that we're aiming at. Of the $1.1 billion, we expect that we can take out in terms of ordinary dividend capacity, $800 million. $800 million will be available in ordinary dividends from the $1.1 billion. The RBC does not include our reinsurance entity, Security Life of Denver International, whereas most of the VA book reinsured. I just gave you those capital numbers. Certainly on a statutory basis, we are very comfortable where we are today. It doesn't include our Investment Management entity.
That is an entity where all the profits are available for upstreaming to the holding. It doesn't include the holding company itself. The holding company itself, at the end of the year, had a liquidity position of $600 million. Overall, if you look at the different components, we are very comfortable where we are from a capital perspective in each of the different areas. We have now to determine which part of that capital position is excess capital. We will go through the following process. We will first close our statutory accounts at the end of this month. The statutory financial statements will be ready at the end of February. We look at our operating plan for the next few years. We'll make a determination, what is the best way to do with excess capital? How much is available?
What is the most value-enhancing way to return it to shareholders? Have a discussion with our board. We will come back to you at the latest when we announce our first quarter results. That will be early May of this year.
Thank you very much. Sorry to go back to the VA block again. I wondered if you could speak to the effectiveness of the hedge program in the event that a bear flattener is the scenario that proves out over the next two to three quarters.
Can you repeat the question? What scenario?
What's the vulnerability of the hedge program now, particularly the interest rate portion, if you get a bear flattener yield curve over the next two to three quarters?
Our swap positions are very long positions, and they really match the duration of the liabilities. The average duration of the swaps is approximately 18 years. We think from a hedge program, a rho risk perspective, we are sufficiently covered. If rates do not move a lot, we also don't see a lot of movement in the statutory reserve. In that case, the hedge also is not contributing a lot, neither in a gain because the reserve doesn't move or in a loss if the reserve have some release. In more or less a flat rate scenario, the hedge doesn't do a lot. The hedge is really helping if rates would fall back. The hedge is having some negative when rates will move up. Again, that's then offset by some reserve releases we see at the same time.
Just a brief follow-up. I don't know if this was disclosed in prior discussions, but if it's at all possible to know, just on the interest rate portion, what is the gross notional value and what is the mark-to-market value of replacement costs relative to each other in the last quarterly close date?
Yeah. We do disclose in our Qs and Ks some of our hedge notional positions. You should be able to see the development of that. In terms of direction, what is very clear is that the hedge notionals have come down over the last 12 months in line with the market drop and the fact that we have to hold less hedge positions because the risk in terms of the book has also come down.
I think we're going to have to stop there. Let's thank Rod, Alain, and Ewout for their comments.