Good morning. They've given me 5 minutes, so I'm going to speak slowly. Today is September 18th. It's an even-numbered year. We are in Tokyo. Welcome to Prudential Financial's Tokyo Investor Day 2014. Believe it or not, this is the 6th such event we've had, all in this one place. I've been at all of them myself. Thinking back on the 1st one in 2004 and scrolling forward, John Hanrahan is the only member of our management team to have presented at each of these. Looking out at you, I know that Eric Berg has been at all 6. If anybody else has been at all 6, please raise your hand and be recognized. Come on. There we go. Fantastic. Okay. Attendance is up this year, and we very much appreciate your interest and thank you for your attendance at this meeting.
As a reminder, this event is being webcast. It'll be accessible for 2 weeks. Think of it. You'll be able to analyze every facial tick and verbal inflection ad nauseam. In addition, the slides will be archived at www.investor.prudential.com in perpetuity. Actually, I think they'll be worth looking at. If we've been successful, they'll be worth looking at for some time to come. There is an agenda for today's proceedings in your binder. You'll see that we plan 6 presentations and 3 Q&As. If all goes reasonably according to plan, we'll wrap up around noon. We do offer a buffet lunch. It's worth staying for if you're able to. We hope many of you will be able to stay. If you've got to bolt, we understand that too. Part of my responsibility is to tell you that these next 3 slides are very important, and you should review them.
Fortunately, I have not been asked to read the forward-looking statement today. We have a lot to do today. Let's get started. The 1st speaker is Charlie Lowrey, Head of International Insurance.
Thank you, Eric.
You're welcome.
Before I begin, I would just like to say one thing, and that is Eric and I were talking just before this, and he wasn't going to mention it, but I will. This is Eric's last official act as head of investor relations. This is his last investor day. Please join me in thanking Eric Durand. I hope it's a good one.
I hope so too.
Yes. Anyway, welcome. We are delighted you're all here. It's my pleasure and privilege, actually, to make some introductory comments about our international businesses, in particular about our Japan businesses, before the leaders of the Japan businesses speak to you today, along with John Hanrahan. Let me start. I have a few slides, but I'd like to make some comments. The first comment is that we think we have both a proven and a superior business model that can really drive sustainable results over time. The core of that model has been and will remain the captive distribution system we have. We think that that's a sustainable competitive advantage on the basis of how it was created, which I'll talk about in a few minutes, and how that captive distribution system is run today.
The core of the distribution system is death protection, and you'll hear that from Kurashige-san when he shows you some charts about the proportion of death protection that we have. In order to sell death protection, we used a needs-based selling analysis that again is fundamental to the way in which we do business. Over time, we've expanded through diversification and agent count, also through acquisitions. It's not only the acquisitions that are important, it's the integration of those acquisitions. We have made 5 acquisitions in Japan and successfully integrated each one of those. One of the reasons for that is we have a very solid risk management process, which we use in the day-to-day management of the business, but we also use it in the due diligence for those acquisitions. That has led to a conservatism by which we run the businesses.
We have very strong SMRs as well as a balance sheet, that in itself has led to the ability to have capital redeployment and capital generation. All of this has led to the dual attributes of a very high ROE and low volatility earnings, that comes back to the core of the business, which is death protection. We spoke at the U.S. Investor Day about being optimistic about the Japanese insurance market, we remain optimistic about the market. We have a leading position in the market. Part of the reason we're optimistic again comes back to the captive distribution system we have and the high retention rates, which Ichitani-san will talk about in our life planner business. What that means is that our life planners and our life consultants follow our clients through their life cycle.
You'll see a slide that Kurashige-san will show of the different ages of our clients and the products that we offer. There's a consistency and a continuity of our planners and consultants with their clients, that leads to an excellent fit with the demographic trend that we'll talk about in a minute. We've supplemented our captive distribution with third-party channels, the result of those business systems leads to a very profitable business and having sustainable returns. Now let me speak for a minute just about the derivation of our business, because it's extraordinarily important to understand where we come from. 26 years ago, our business was started by a visionary named Kiyo Sakaguchi. Sakaguchi-san had a very bold idea, that was to change the way life insurance was sold in Japan.
Before him, life insurance was sold by hundreds of thousands of part-time housewives, essentially pushing savings products. He had the idea of professionalizing the sales and professionalizing the industry. He took a completely opposite approach. He hired only men who had college degrees, who had never worked in the insurance industry before. He was very selective about who he took, probably two or three out of every hundred people, most of whom played sports, so they were team players, and many of whom had young families, so they were going to be focused on what they were doing. That was his vision. His vision was to focus on death protection through needs-based selling. You couldn't go out and just sell. You had to understand the financial needs of the client. Through that, create a lifelong relationship with the clients. That was his vision.
Today, we support and adhere to that vision with one major exception. We now hire women as life planners as well as men. He targeted the affluent and the mass affluent market, as the customers aged, as they became successful professionals and started small businesses, we followed them into the small business market and the professional market. Over time, we diversified from the life planner model through the acquisition of Kyoei into the life consultant model in order to access a different client base, namely the middle market customers and the affinity groups. From that, we then added on supplemental distribution, third-party distribution in the bank channel and the independent agency channel. As our client base aged and changed, we added other products. Finally, we pursued outside of Japan opportunities in a limited number of countries.
Countries where we thought there was significant potential, like China, India, and Brazil. All the while maintaining the kind of discipline and the relentless focus on execution that has been the hallmark of our Japan businesses. Here is a picture of the acquisitions we've made. We've made five acquisitions from the initial core of POJ and Kyoei, Aoba, Yamato, Star and Edison. The result of which has been an 11-fold increase in the in-force policies and a quadrupling of the annualized new business premium. We've spoken about the aging of the population, the aging of the demographic. There is no question that the demographic is aging. You can see in the bar charts the population of 55 and over, and it will grow as the actual population of Japan decreases. What seems to be a challenge is also an opportunity.
When you think about our life planners and life consultants that have lifelong relationships with their clients, they will follow their clients into new areas such as retirement, healthcare, and inheritance. Those are tough products. Those are tough ideas, and you need a sophisticated sales force to be able to have those kind of conversations with their clients in order to sell these products, and that's exactly the kind of sales force we have. When we think about opportunities and challenges, clearly there are some of both. On the opportunity side, we continue as our core to focus on death protection, even when others are getting out of the marketplace. That is our core, and you will hear that over and over again today. In addition, you have retirement inheritance and ways of mitigating the low yield in Japan today.
Again, in order to do that, you need a sophisticated sales force that is backed by a company that has a strong brand and strong reputation. That's exactly what we have. Are there challenges? You bet. There are lots of challenges. There is the depreciation of the yen, and John Hanrahan will talk about that and talk about putting bookends around that. There is the attrition of the book, the books that we have acquired over time. There's a moderating pace of policy size increases, that policy sizes don't grow to the sky, and the increases may moderate. There's also our belief in the high quality of our franchise. We will not hire life planners just to hire life planners. We will only hire the highest quality people to be life planners. That will limit the growth.
Life planner growth over the past five or 10 years has been between 1% and 10%. Some years more 1% and 3%, rather. Some years more, some years less. Probably will stay that way. We will hire between 2 and 3 out of every 100 people that we interview. We will not sacrifice quality. If it's one message I want to give you, it is that this business is all about quality, and we will not ever sacrifice that for the sake of growth or for the sake of expediency. With that, I'd like to turn the podium over to my colleague, Kurashige-san, the leader of the business, to talk about the Japanese businesses in general. Thank you.
Thank you, Charlie. Today, I'll discuss Prudential's life insurance business in Japan and opportunities that we see to continue to grow our differentiated businesses. Prudential has a leading preference in Japanese life insurance market. I'll discuss the way that we leverage our leadership position to meet the ever-growing needs of customers in changing insurance market in Japan. First of all, I'd like to talk about the attractiveness of the Japanese insurance market. Japan is the second-largest insurance market in the world, next to the U.S. Household asset amount to JPY 1,630 trillion, or $15.8 trillion. Of that amount, JPY 864 trillion, or $8.3 trillion, are held as deposit. This is the largest amount of deposits in the world. With the aging of the population, retirement market is rapidly expanding. A growing awareness for the need of self-reliant effort to prepare for post-retirement living expenses make customers think of retirement product.
More customers prefer safer product, such as insurance product in managing their money rather than riskier product such as equities. Further, bank and independent agencies have gained traction as important insurance sales channels. I believe we have growth opportunity in this area. This slide compares household asset between Japan and the U.S. The key point is the size of Japanese household assets is below one-quarter of the U.S. However, the amount of Japanese deposit is about the same as in the U.S. On the other hand, equity, which accounts for 33% of household asset in the U.S., only accounts for 9% of Japanese household asset. This shows Japanese customers' tendency to seek safety in their investment. By meeting customer needs for safety, I believe we can further expand the life insurance market. This slide shows the importance of Japanese market compared to other market.
As I mentioned, the Japanese market is the world's second-largest after the U.S. Among Asian countries, the Japanese market is almost the same size as that of the rest of Asia. China, Taiwan, and Korea are sizable, as you see, the Southeast Asia market is still relatively small, even if all of them are aggregated. This slide shows the importance of Prudential in Japanese market. The most recent financial result for FY 2013, Prudential ranks fifth or better in all major indexes for new business and in-force business. Notably, Prudential ranks third in new business face amount, which represents the amount of new business calculated based on death benefit. This reflects Prudential's strategy of focusing on death protection product. We believe the dynamic of Japanese insurance market conduces towards our growth objectives. The left column shows major events that create customer needs in the Japanese life insurance market.
The right-hand side describes Prudential's position and strengths that correspond to such need. Let's look at some of them specifically. We believe the need for death protection, such as whole life or term insurance, will remain high. Prudential's sales agents who are trained in needs-based selling are very well-positioned to sell death protection products. The number of pre-retirement and retirees is increasing. Prudential sales agents are able to meet customer needs that vary with their life stage from death protection to retirement products with a wide range of products. Importantly, Prudential agents have among the highest persistency in the industry, which enables them to sell products through their lifetime relationship with customers. Also, with upcoming changes to the inheritance tax law, the number of people subject to inheritance tax is expected to increase.
Our experienced sales agents who have gone through Prudential's unique training will be able to meet such inheritance needs with their advanced sales skills. I think Prudential has the opportunity to meet more customer needs with a broadened access to the market through our bank channel and independent agency channel. Now, I will talk about how we meet customer needs over their life cycle using some examples. Among relatively young families in their 30s, the need for protection against premature death is high. In this scenario, term insurance combined with whole life insurance is an effective solution. As people age, the risk of loss of income due to injuries and illnesses or risk associated with medical treatment expenses increases. Prudential offers medical policies and riders as a solution to protect against such risk.
Among pre-retirement people and retirees in their 50s and 60s, the need for asset accumulation for post-retirement income is higher. Prudential offers products such as whole life insurance or retirement income as a solution. Prudential sales agents have built lifetime relationships with customers with their advanced sales skills. There are various kinds of protection needs, but I would like to talk about three basic protection needs, products corresponding to such needs, and characteristics of those products. Term insurance is a more affordable product to protect against the risk of early death. Term insurance offers death protection for a stated period with a level premium. It is also possible to add third-party riders such as medical insurance. A feature of Prudential's Family Income product is that the amount of benefit decreases as time passes and the corresponding need for protection declines as children grow.
Family Income is an efficient way of obtaining the required level of death protection over time. To satisfy need for death protection with a saving function, whole life insurance is an effective product. Typical whole life provides an interest rate guarantee and the insured receives a defined cash value. It is also possible to add a medical rider to this product. For asset accumulation need and to provide for post-retirement income, we offer retirement products. These products provide this protection and an asset accumulation fund is embedded in the product. When people reach retirement age, premium is paid up. Customers have the option to elect an annuity payment. This shows Prudential's sales result by product category. Due to the acquisition of Star and Edison, growth of third-party channels, including bank and independent agency channels, and the organic growth, the sales for 2013 are more than twice that of 2009.
As a result of maintaining a death protection-focused sales strategy, death protection product account for more than half of total sales in 2013. Retirement product account for a little more than 20% of total sales in 2013. Lastly, saving-type product account for less than 20% of total sales, of which half the sales related to the product we discontinued. This slide shows our in-force business. Our total in-force business also increased more than 1.5 times from 2009 to 2013. The percentage of death protection slightly decreased due to the acquisition of Star and Edison, but approximately 50% of premium in-force still related to death protection. The other 50% is comprised of retirement, saving-type, and medical product in a balanced manner. This graph shows the growth of the population age 55 and older to Japan's total population and expectation for further growth through 2030.
This segment of population was 17.7% in the 1980s and grew to 37.4% in 2010 and is expected to grow to 46.7% in 2030, or nearly half the population. We see this demographic change as a favorable opportunity to sell retirement product to supplement our death protection-oriented product. We believe this demographic shift will help us continue to expand our life insurance business in the future. I will now talk about changes in the inheritance market in Japan. In January 2015, the inheritance tax law will be revised. There are two main changes. The first is a decrease in the basic exemption amount. Before the revision, it was a sum of JPY 50 million and JPY 10 million multiplied by the number of successors by law. After the revision, it will be reduced to the sum of JPY 30 million and JPY 6 million multiplied by the number of successors by law.
The second change is an increase in the tax rate. For the taxable amount of JPY 200 million to JPY 300 million, the current tax rate of 40% will be raised to 45%, and for the taxable amount of JPY 600 million or higher, the current tax rate of 50% will be raised to 55%. With the reduction in exempt amount, it is estimated that about 20% of the population in Tokyo metropolitan area, as an example, will be subject to inheritance taxes. Insurance need will therefore increase as the solution for expanded inheritance taxes, and we think this will lead to market expansion. Prudential will promote the use of recurring premium whole life insurance as a solution for broadening inheritance taxes. By setting the amount of this benefit to the estimated amount of inheritance tax, it is possible to reserve fund for inheritance tax payment.
Another use for this type of product is to reduce taxable inheritance asset by using lifetime gifting. Such lifetime gift amount is used to make the recurring premium payments. Designation of beneficiaries will help to divide the estate among successors. I believe that our needs-based selling approach can effectively help customers prepare for inheritance tax changes, and this is a positive opportunity for Prudential. I will now discuss at a high level our different sales channels in the Japanese life insurance market. We sell life insurance through four channels: life planner, life consultant, bank channels, and independent agencies. Life planner target more affluent customers and business insurance and professional market and build their customer base mainly through their own prospecting effort and referrals. The life consultant channel, bank channel, and independent agency channel, which are part of Gibraltar Life, target mainly middle-class market.
Gibraltar Life also has marketing agreements with associations such as teachers. Through the bank channel, we effectively access our customers with investable funds and cumulative sales of death protection products. Gibraltar Life also expands sales of business insurance in the professional market, mainly through the independent agent channels. This graph shows the number of sales agents registered with Japanese life insurance companies and changes in the population per sales agent. Between 1993 and 2013, the total number of sales agents decreased by 45%. At the same time, the population per sales agent increased 88%. Therefore, we believe the field for Prudential's highly skilled sales agents is expanding. The chart shows the effectiveness of Prudential's agency force as measured by the number of agents qualifying for the membership in the MDRT. MDRT is a Million Dollar Round Table.
Prudential Japan has achieved first place in Japan for the number of MDRT members for 17 consecutive years, and notably, the total number of MDRT members who belong to Prudential Japan or Gibraltar account for about one-third of all MDRT members in Japan. I will now discuss Prudential's bank channel and independent agency channel. We started significant sales of fixed annuities in the bank channel in 2006 and started selling life insurance significantly in 2008 when the bank channel was fully deregulated. In the independent agency channel, we started selling insurance in 2010 and AIG Star Life Insurance Co., Ltd., the independent agencies network, in 2011. The bank channel and the independent agency channel are relatively new channels but are growing as supplementary channels to our captive distribution focus. We view these channels as more opportunistic as sales can be volatile, and we don't pursue growth that doesn't meet our profitability objectives.
We intend to build in these markets that give us access to areas we haven't been able to penetrate with captive distribution with a continued emphasis on this protection product. Now, I'd like to discuss the advantages and challenges of the bank channel and independent agency channel. As previously mentioned, one advantage is that we are able to use these channels to access customer segments which we haven't been able to access with only captive agents. Prudential's brand appeals to safety-oriented Japanese customers by instilling Prudential sales skills in banks and independent agencies through training. We improve sales capabilities and build a long-term and positive relationship with them. On the other hand, we have several challenges. First of all, sales volume can vary significantly. Particularly in the bank channel, sales can swing due to market changes, such as movements in interest rates.
Competitors launching new products can also greatly affect sales. We cannot control these channels in the same manner as with captive agents. We also need to closely watch our sales mix by product to ensure profitability, not just focusing on top-line growth. For example, in the past, as a result of competitors' cuts on the sales of single-premium yen-denominated whole life insurance, sales of our single-premium yen-denominated whole life insurance sharply increased. At that time, in considering the appropriate product mix, Prudential reduced sales of the product and ultimately suspended it. This chart shows the sales in the Japanese life insurance business for each of four channels. Over the period 2009 and 2013, sales significantly increased, more than doubling. The acquisition of AIG Star Life Insurance Co., Ltd., expansion of the bank channel, and starting to sell through independent agencies contributed to the growth.
Looking at this by year, sales are extremely high in 2012. This is due to, as I mentioned earlier, the sharp increase of sales of single-premium whole life insurance in the bank channels following other companies cutting on sales of product. The sales surge due to the price change in dollar-denominated product and high demand before tax system revision to specific product also affect sales. As I have mentioned, there are external factors affecting our sales amount each year, but we aim to achieve sustainable growth in the Japanese life insurance market by continuously hiring quality life planners and life consultants, providing Prudential's unique training to them, enhancing sales capability of captive agents, and by expanding businesses in the bank channel and independent agency channel while maintaining appropriate profitability.
Thank you very much for your time, and I hope you found the overview of our approach to the Japanese market and growth strategies helpful. Thank you.
We like to think we have a simple story and a simple business model. Just to balance things, I have to tell you that the protocols for the Q&A today will not be simple. Let me run through them with you. First of all, remember, this is all being webcast. I will call on you. Please wait for the mic. Please identify yourself by name and by firm. Please keep your questions simple. No 18-part questions, please. That's because all of the questions I will be repeating, paraphrasing, editing all of your questions. I'll try to be gentle, but the way you ask the question will have something to do with how much editing I have to do. Okay? My paraphrase will be translated into Japanese. The paraphrase will be the question or questions that our Japanese speakers and our U.S. speakers address.
Occasionally, you may ask a question that we ask you to defer until the end of the day or until later in the day on the theory that someone else may be better suited to address your question. Finally, please be respectful of your colleagues. Don't hog the mic. We're going to have plenty of time for Q&A. I think you'll all get a bite of the apple, so no reason for you to try to overdo it in the first opportunity that you have. All right. Again, we have people with mics. We'll start in the middle of the room. If there are any questions in the middle of the room, just to keep it simple. Ryan Krueger, the gentleman on the aisle.
Thank you. Ryan Krueger with KBW. I had a question about the estate planning market. You mentioned that recurring premium whole life is the product that Prudential will use to target this opportunity. Is that the only product that a customer can buy to, I guess, reduce the amount of estate that is subject to the new tax? Or is there an option for them to buy a single premium product as well that would accomplish the same thing?
Okay. The question has to do with the statement that a recurring premium whole life product was the product we thought best suited to meet the need for estate planning purposes. Is that the only product that we think works? Would single premium products also be appropriate in some circumstances?
The recurring premium whole life product can be used as a life gift in the time that the customer is still alive. On the other hand, as for the single premium product, you can use it to change the current fund you have to an insurance policy. I think the inheritance function, it can be used as an inheritance fund. As Prudential, we will be focusing on mainly recurring pay products. However, single premium products also can be used to meet the need of inheritance market. My answer to your question would be that we will be selling both.
Any more in the middle of the room? Okay. The lady a couple rows up in the middle. Please keep your hand up. There we go.
Joanne Smith, Scotia Capital. Just wondering if you could discuss the decline in agent counts in the first half of 2014 and whether you believe that there is still a linkage between agent counts and premium sales growth. Thank you.
Okay. We've been asked to address the decline in agent count. I think the POJ is the cover, or did you mean Gibraltar as well?
Both.
Okay. The decline in agent count at POJ and Gibraltar, very different reasons in the first half of the year. Do we believe there is a continuing linkage in the ability to grow the number of life planners and life consultants and the ability to grow sales?
As for POJ, in April 2014, POJ have promoted quite a number of life planners to sales managers. That number is 70. 70 people of life planners were promoted to sales managers. For POJ, tentatively, the number of life planners reduced. However, the key for recruiting life planners would be to have good and capable sales managers. In that sense, to produce a high number of sales managers would, in the future, lead to a growth in the count of life planners. On the other hand, as for Gibraltar, we have achieved a three-way merger in January 2012. It has been about three years since the integration in Gibraltar took place. During that period, Gibraltar introduced and penetrated the concept of Prudential Group, which is contribution equals compensation. For those low-performing life plan consultants have left Prudential or Gibraltar in two years and a half.
We had a transition measure in place at that time. I believe that the count of life plan consultants would not decrease so much going forward, and the count of life plan consultants will stabilize. There will be a presentation about Gibraltar as well as POJ after this session. In terms of Gibraltar, the count of life plan consultants have decreased. However, the new business AP has increased. I believe that the high productivity life plan consultants are remaining in Gibraltar, which is a favorable situation for us.
If I may just add a couple of points, because it's interesting when you peel back the onion and you look at the reasons for the decrease. When you look at life planners, there are really three reasons why life planner count changes. One is the hiring and the terminations, just sort of normal ins and outs. The second would be what Kurashige-san talked about, which is the change in jobs from LPs to sales managers, which bodes well for the future growth of LPs in the future. The third is, don't forget the secondees. We take some life planners and second them to the bank channel. Depending upon the quarter, we may do more or less of that, which can affect life planner growth in any given quarter.
For instance, in the second quarter, as Kurashige-san said, we did change the jobs of some life planners to sales managers and had a slightly higher level of secondees than we might have otherwise. If you did not have those, life planner count would have gone up in the second quarter by 1%-2%, which is exactly what you would have thought. There are really three different levers that you have to look at, and depending upon what we do in a particular quarter, that will affect it. In terms of Gibraltar, what Kurashige-san said is exactly correct, which is the level of decrease is slowing. If you look at the past four quarters of life consultants, the decrease has been 20%, 18%, 14%, 11%. We're getting to the bottoming out phase there.
The other important point is in every single case, the level of sales decrease was less than the level of life consultant decrease, such that means that the productivity level is going up. That's exactly what we expected to see as we increase the quality of the life consultants over time. The story kind of hangs together, but you need to kind of go a level deeper. Thank you for asking the question.
One last part of your question, Joanne, that I'd like Kurashige-san to address, that is the relation between the percentage rate of growth in life planners and life consultants and the rate of growth in sales in those channels.
生産性は最近上がっているということも、あとPOJとかがありますので、その辺を考慮して正の関係があって、ほぼ比例して動くと思っております。
With regards to the number of life planners and also the increase or growth in sales, I would say that there is a correlation between these two, which means that if POJ is able to grow the count of life planners, then overall the sales volume will also increase. It goes the same thing for the life consultant. If you may ask how much, the number of policies, productivity and also AP per sale would be multiplied to understand the new business AP. In POJ, the productivity has increased. I would say in both channels, there are a correlation between the number of life consultants or LPs and the sales volume.
Thank you. The gentleman next to the lady who just asked the question with his hand up. Steven? There we go.
Steven Schwartz, Raymond James. Yesterday at MetLife's meeting, they made the statement that about 50% of their new A&H sales came from people who had riders attached to annuities or life insurance, people were switching from riders to standalone A&H policies. Riders, your chart number eight, that seems to be how you provide A&H. MetLife makes the statement that not only do they pick up the A&H, they can also pick up the life insurance. The life insurance is suddenly in play. Do you buy that?
Let me see if I can do justice to your question. A competitor mentioned that they are seeing in the marketplace, or perhaps it's just their experience, the customers with A&H riders attached to annuity products or life insurance products are detaching those and are buying the unattached pure A&H products. Are we seeing a similar
Not only that, their argument is that not only is that happening, that also puts the life insurance policy in play.
At risk, yes. Are we seeing it happening and does it put the life insurance policy in play? In other words, does it increase the risk of a lapse of the life insurance policy?
Yeah.
生命保険商品もしくは年金商品と医療保険がパッケージされている場合、生命保険商品もしくは年金商品で一部減額をするとか、そちらの方はもう十分だから医療だけ残したいというニーズがある場合に、それにはパッケージだと対応できないという問題があります。なので、それぞれを分けるという方策はあり得ると思っていますし、Prudential Groupでも特約以外にも医療保険関係を単品で持つということはあり得ます。リスクがどうなるかについては、質問の意味がよくわからないですけども。リスクについてはよくわかりませんと。
As for the life insurance product and also annuity product packaged with A&H product, if a customer would like to partially surrender, for example, life insurance policy or annuity policy, it would be difficult to do that if it is packaged with an A&H rider. It's possible to divide A&H and also the life insurance or annuity product. In Prudential, we do have a standalone product and also a rider for that. Could you clarify the second or last bit of your question around risk?
Well, why don't I try it and you can correct me if I'm not getting it right. The suggestion was that the tendency for holders of these hybrid products, if you will, to strip off the A&H rider makes the rider vulnerable to a lapse of the underlying life insurance or annuity product. Is that our experience?
特約でA&Hがついてしまっていると、それを分けてしまうと、その特約の方が失効ですとか、そういうリスクが出てしまうんじゃないかと。
そうですね。医療保険などはdemand productなので、いろいろなところから安い保険料で提供されることがあります。したがって、医療の切り離された医療については、ある意味価格競争にさらされているかもしれません。だからリスクはあるかというと、リスクはあると思います。
Yes, you're correct. I would say that the medical product are a demand type of product. The medical product will be subject to possible cheaper premium or price competition. If you have a standalone A&H or medical product, that also will be subject to potential price competition. I would say that yes, there is a risk.
Okay. Let's move on. The gentleman in the middle of the row, two rows up. Eric, keep your hand up, please. Oh, there we go.
Thank you. Eric Berg from the Royal Bank of Canada. Prudential is as much in the asset management business around the world as it is, or certainly it reports asset management results as being very important, what with your interest in Jennison and your global fixed income money management business, real estate, and so forth. I would think that here in Japan, you would be in a very good position to sell to wealthy retiring or close to retiring people, not only life insurance, but other financial products. After all, your agents have grown up with these people. Presumably, these people trust the agents. The question simply is, what are your plans, if any, to sell your older customers, your mature customers, more than life insurance?
Okay. How would we assess the opportunity-
Yeah, sure
to sell asset management and other financial products to our affluent life insurance customer base?
Perfect.
Yeah, Eric, let me take that. At this point, our business is much more on an international basis, is an institutional business. What we've been concentrating certainly in Japan, is expanding the institutional client base that we have. I understand the question, and we may get there, but at this point, we're concentrating in Japan on expanding our institutional business as opposed to the retail business.
All right. Thank you.
Okay, Jimmy Bhullar, the gentleman right on the row behind the gentleman who just asked the question.
Hi. Jimmy Bhullar, JP Morgan. There isn't a discussion here on your other international markets outside of Japan. Maybe if you could briefly talk about Brazil, how that business is doing, and then secondly, Korea, where you have a large operation. We've heard from other companies that historically the market's been pretty competitive with poaching of agents, price competition, what you're seeing in Korea and Brazil.
Sure.
All right. We're asked to provide an update on our businesses and our market conditions in Brazil and Korea.
I'll start with Korea. Korea is a tough market. We have a small market share there. We have, I think, a very good position in the business. It's a Life Planner business, so it's perceived to be a very high quality business that we have, but it's an extremely competitive market. We have a small, but, I think defensible market share, and we'll seek to grow that over time. As I said, it's a tough market to be in. We're there. We like the market. We like the products we're in. We like the positioning we have. We seek to grow it over time, but you have to be pretty careful in that market. We will not sacrifice profitability for growth. That's a market where many of the larger players compete on market share as opposed to profitability. We won't do that. That's Korea.
In terms of Brazil is going along very well. It is one of the largest growth markets for us. We continue to grow at significant double-digit rates, both in terms of Life Planner and in terms of new business premium. That is a market that we continue to be extremely bullish on. All systems are go there, so to speak. I would caution people, as I did last time, in the U.S. Investor Day, it's for us, a relatively small business right now. We have just over 800 Life Planners. It takes a while to get to profitability. We are profitable there, but it will take a while to become a material part of our international business. All the metrics are going in the right direction, and we remain very positive about that market.
Okay. Let's go to the left-hand side of the room. The gentleman on the aisle, Thomas Gallagher.
Thanks. Thomas Gallagher, Credit Suisse. I wanted to come back to Steven Schwartz's question for a minute, take another crack at that. Are you seeing a trend of customers moving away from riders and buying standalone A&H products? If so, is there a plan in place for Prudential to emphasize more standalone A&H products?
Okay. A two-part question. Are we seeing a trend of customers moving away from A&H riders to standalone A&H products? If so, what plans would we have to address that change in the market?
Base policyとして売る会社が世の中増えてきているなと思っています。
As for a medical product, I would say that there are more and more companies selling medical product as a base policy rather than a rider.
PrudentialのPOJもGibraltarも特約にするものもあれば、単品、base policyであるものもありまして、その商品内容に大きな違いはないということで、両方そろえております。
In Prudential, we offer a rider for A&H and also a base policy for medical product in POJ and Gibraltar. There are no major difference between the rider and also a base policy in product features.
答えになっていますか？
Does that answer your question?
Well, as a follow-up, I just like to know whether you are seeing a big drop in demand for riders.
Okay. That's a fair question. Are we seeing a big drop in demand for A&H riders?
特約が大きく落ちたかという点では、だいぶ前になりますけれども、POJで特約しかなかったのに、単品を作った時に、その単品の方に保険の販売が動いたことによって特約が減ったということは過去にあります。けれども、現在それで大きな動きをしているとは思っておりません。要するに、特約とbase policyとの違いが販売上大きく問題があるということはないと思っています。
Regarding the rider of medical product, in the past, we did have an experience that we saw a significant drop in the rider sales when we, POJ, launched a standalone or a base policy of medical product, and the sales shifted to the base policy of medical product and dropped in the rider. However, as of today, we do not see any major trend or movement that the riders are being surrendered or decreasing.
Thank you.
I think we need to take a break. Let's take a 10-minute break, and we'll pick up with our next presentations after that. Before I introduce the next speaker, I want to say that notwithstanding the fact that third sector product is not an area of emphasis for us, and is sold primarily through captive distribution at both Gibraltar and at POJ, we understand your concerns. I would like to defer any additional questions, such as the ones that we were just asked, to the end of the day when John Hanrahan would be delighted to address them. Our next speaker is Katsunori Ichitani-san, who is the CEO of Prudential of Japan.
Good morning, everyone. I am Katsunori Ichitani, CEO of POJ. I would like to start my presentation. I will discuss the core values and business principles that have driven Prudential of Japan's sustained history of success and support our confidence in our ability to continue to produce superior returns and steady growth. I do not mean to be presumptuous, however, since I joined the company about 25 years ago, soon after it began operations, I see my personal history with the company as history of POJ itself. Why has POJ achieved steady growth over its history? How have we grown such a strong company? When we answer those questions, we focus on three key drivers. First is high productivity of our life planners. Second is the high persistency rate of the policies sold by the life planners. Finally, the high retention rate of our life planners.
These three factors are the crucial drivers for success for any insurance company using captive agency distribution, and our core principles have driven exceptional strength in each of them. One measure of our history of success is sustained growth in face amount of business in force, as you see here. The engine that powered this steady increase in the in-force face amount, reflecting the steady growth in the number of customers who have entrusted their financial security to POJ, were the three key drivers I mentioned. In my introduction, I mentioned my career in this company. I joined POJ in 1991 and worked as a life planner for two years. During those years, I served only a small client base of just under 200 customers. During the years that followed, I became a sales manager and later an agency manager.
I dedicated myself to recruitment and development of new life planners therein and there. Life planners leave a previous career, usually with a fixed salary, and take a risk joining us. They are driven to pursue a career as a life planner by their dreams for their future. They want to find their work rewarding and challenging, and they want their work to be part of their enjoyment of life. They want to serve their customers' needs, and of course, they want to achieve financial success for themselves. The stories of each life planner are the threads of POJ's history. Now let us look at our achievements in terms of the three key drivers I mentioned. Productivity of life planners is high and stable, both in terms of annualized new business premiums and policy count.
In addition, life planner retention has continued to increase, and policy persistency has also remained strong. Sales were exceptionally high in 2012 due to very strong sales of cancer whole life products, due to a tax law change and accelerated purchases of U.S. dollar-denominated products in advance of a repricing. Taking a look at our sales trend over the past five years, you can see that overall sales hit a peak in 2012 due to the factors I mentioned. Sales of our core death protection products have grown steadily, as you can see in the blue portions of the bars. To ensure that our life planners conduct business in a manner consistent with our high standards, POJ emphasizes the four core values you see here. One, worthy of trust. Two, customer-focused. Three, respect for each other. Winning.
These values help life planners adhere to the basic principles that drive their success and the company's. We would sum this up by saying, focus on the quality of your work, the quantity of business will follow. At POJ, the core values are not a mere mantra, but the guiding principles we share and keep from the day we join the company. These are three Qs that support our business model. I will explain the beneficial cycle of our life planner model here. Yes. Let's look at the keywords in circles and squares in alternate sequences. High productivity of our life planners generates high compensation for them. This high compensation, in turn, results in a high life planner retention rate. The needs-based selling principles and high customer service standards of the life planners drive a high level of customer satisfaction.
Satisfied customers keep their policies in force, driving a high persistency rate, also generate referrals to new prospects. The life planner model, with the beneficial cycle it generates, is a foundation of our business. As you've seen in our results, it generates outstanding returns and stable growth. Our focus remains on quality people, quality products, and quality services. The first Q is quality people. I would like to talk about our people, especially life planners. POJ seeks out people with a track record of sales success outside of the life insurance industry to hire as life planners. POJ is very selective when hiring life planners. We hire only about three out of every 100 candidates. Successful candidates leave behind successful careers with their prior companies in order to make their dreams come true at POJ. Thus, life planners' commitment for success is very high.
To become a successful life planner, a strong sense of entrepreneurship is indispensable. The life planner's job is not simply selling life insurance. Life planners aspire to become lifetime advisors for their customers based on their missionary zeal. Life planners may change their career paths and become a sales manager and eventually an agency manager. Such change of role could enable them to broaden their reach in the process of delivering policies to customers who can benefit from our financial security solutions by recruiting and training others to be successful life planners. It takes a long time to develop skilled LPs who can serve as lifetime advisors. We also need to continue such lifetime relationships with customers into the next generation. Before leaving this subject, let me add one more thing.
POJ has rolled out initiatives such as changing appointment criteria and compensation rules for sales managers, which led to 78 appointed sales managers in this spring. The efforts already started to bear fruit as we have had recent success in our recruiting efforts, which we expected to continue. The next Q is quality service. Our high standards of service are reflected in well-regarded independent surveys. According to J.D. Power, POJ ranked the highest in customer satisfaction for sales of life support insurance policies, the term for death protection for the fourth consecutive year. Since death protection insurance products and services are the centerpiece of our business, I am very proud of our consistent achievement of top rankings in that segment. Last but not least, we offer quality products to meet customers' financial security needs over a lifetime. Customers' needs change or increase throughout their life cycle.
The products recommended by our life planners are tailored to their needs, reflecting their training in needs-based selling. As our customers grow older, so do the life planners who serve them. This shared perspective, coupled with a long relationship as a trusted advisor, provides a solid opportunity to offer a wide variety of products and services as customers' needs change with age. As you can see from the chart, there is a shift from death protection to retirement-oriented products at older ages. In offering estate planning products or services, we need to talk to both the wealth-transferring generation and to the heirs, which means we have opportunities to approach all age groups in the inheritance market. This chart shows the range of ages for our insured clients.
It also can be used to show the ages of our life planners as they are typically similar in age to their customers. I would like to add more good news. We have benefited from the opportunity to make second or third sales to existing policyholders, especially for death protection products, which form the core of our business. We have a large base of younger customer segments. As those customers gain more responsibility with age, subsequent sales adding further death protection have contributed to our growth. Our business model, driven by quality people, quality products, and quality service, has allowed us to achieve high productivity, high agent retention, and high policy persistence. This beneficial cycle has driven our sustained history of superior returns and steady growth and supports our confidence in our future performance. Thank you very much.
Before going on to the next speaker, I want to apologize to Ichitani-san for mispronouncing his name when I introduced him. I doubt that any non-Japanese speakers in the room knew the difference. Our next speaker is Sato-san, head of Gibraltar.
Okay. Hello, everyone. I'm Sato of Gibraltar. Thank you for coming all the way to our Investor Day in Japan. I'm glad to see you again for those of you who were here two years ago. Before going through the details of my presentation, let me give a high-level overview of the two companies that are recognized as Gibraltar segment in Japan, Gibraltar Life and Prudential Gibraltar Financial Life, or PGFL. Gibraltar Life has two distribution channels. One is a life consultant channel, which is our captive agent sales force, and the other is the independent agency channel. We usually refer to them as the LC channel and IA channel, respectively. Gibraltar Life has a wholly owned subsidiary called PGFL. PGFL includes our bancassurance business in Japan. Tanigawa-san, sitting there, is the president of PGFL, and he will discuss bancassurance in more detail after my presentation.
2013 sales and the number of in-force policies for each distribution channel are shown here. The bank and IA channels have a relatively short history for Prudential in Japan, and in terms of the number of in-force policies, they each have a share of around 6% of total policies in force. In terms of annualized new business premium, these channels are expanding their share successfully, driven by their sales capabilities and network. Now they serve as a good complement to the leading LC channel. I will now compare the customer segment, customer needs, and the products between the LC, IA, and bank channel. Tanigawa-san will explain the bank channel in more detail later, so I will focus my comments on the LC and the IA channels. In the IA channel, agents sell insurance to customers on a face-to-face basis. It's similar to the LC channel.
The difference is that the LC channel is a business-to-customer model, meaning Gibraltar has direct interactions with customers, whereas the IA channel is business-to-business model, meaning that Gibraltar's direct interactions are with agencies. Understanding this difference, our focus is to continuously enhance the quality of LCs in the LC channel and our market representatives or MRs, who are the contacts to each agency in the IA channel. Further, what is common to both channels is they offer solutions that focus on death protection as well as longevity. The main differences between LCs and IAs relates to market characteristics and approach to reaching the market. We aim to build a complementary relationship between these two distribution channels, in which a customer segment that cannot be covered by one channel is covered by the other channel.
For those of you who recall my comments from the Investor Day of 2012, I discussed the three key philosophies that would represent the overriding objectives in how we would operate our business or as we refer to it, the new Gibraltar. This is the slide I explained at that time. The first one is to focus on death protection, the primary function of life insurance. The second one is to pursue our three Qs. That is quality people, quality products, and quality services. The third one is to foster professionalism with the concept that contribution equals compensation or C equals C. We also highlighted the five major integration initiatives. In implementing these initiatives, we established two phases for the integration process. In the first phase, we focused on maintaining consistency with the business practices of the former Gibraltar.
We carried out our business with a view to create a new Gibraltar in the second phase. As background, there were differences in history, culture, and practice among the three merged companies. We estimated that it would be impractical for the companies with different values and business infrastructures, including IT, to combine best practices together quickly. We chose to initially follow the Gibraltar model. To proceed with the first phase, there were several temporary negative impacts that we were prepared to face. The employees from Star and Edison needed to significantly change their practices, which led to the impression that they would have to accept Gibraltar's culture and values. Employees of the former Gibraltar also faced difficulties and needed to accept changes.
They experienced physical changes such as office relocation or a change of superior. They had to revise some of their traditional practices following the implementation of a new set of rules. Mergers are not easy, especially when they involve three companies of relatively similar size with different cultures. We believe the hardest part of the merger is now behind us. I set the theme of Gibraltar in the third year of the merger as adaption and evolution. This theme contains my belief that we have moved on from the first phase to the second phase. Now Gibraltar has started moving towards a new stage. I'm going to talk about some of the key indicators that help show our progress following the changes we made with the following slides. Let me explain the LC channel.
First, let's take a look at changes in the number of LCs and the productivity. The number of LCs was 12,000 at the time of merger. It has decreased to about 8,500 now. This is relatively consistent with the projection we made at the time of the merger. We predicted that a significant number of LCs in the lower-performing segment would leave the company over time, as they did not meet the sales target we set for them. At the same time, we also predicted that there would be many LCs that would accept the changes and improve their performance. That has occurred. As shown on this slide, the productivity has greatly improved, recovering to pre-Star and Edison acquisition levels. The figures in 2011 include the consolidation with Star and Edison.
We had more than 12,000 LCs. The overall productivity, as measured by annualized new business premium per LC per month, was $6,700. Subsequently, productivity has greatly improved to $7,400. As mentioned, in line with pre-merger levels. As you see, the LC organization has become more effective. Our next challenge is to continue increasing our effectiveness. We have completed the transfer to a full commission-based salary consistent with our principle of C equals C. Although the number of LCs has been going up and down for the past several months, I think this decline is nearing the bottom at this point. Going forward, we intend to steadily increase the LC count by hiring quality people and developing them. As shown on this slide, we are also making solid progress in developing new LCs.
On slide six, I showed the sentence, "Active management of the sales force by introducing proven training and compensation approaches." It is very important to hire and develop LCs who will help create the new future of Gibraltar, as well as continually train existing employees. We have been screening and hiring LCs under high recruitment standards and providing education to them. For this reason, the number of newly hired LCs did not exceed the number of retired LCs, so the total LC count did not increase. However, as you can see, the productivity of LCs that have been with Gibraltar for less than two years has significantly improved. Now, let me talk about the type of people that are successful right from consultant in Gibraltar.
Gibraltar has people with various backgrounds, LCs who have been with us for years since Kyoei, and LCs who joined us with the acquisition of Star and Edison, and those who joined us after the merger. What successful LCs have in common are, first, they accept and understand the Prudential's philosophy and have been trained to provide customers with protection and retirement solutions. Second, they are able to engage in continuous and steady activities in support of our affinity group markets, such as schools. Third, they develop an extensive network of contacts in their region based on strong sales and interpersonal skills. In recruiting, we hire people with high potential, using their academic background and sales experience, former job, annual income in former job, age, and so forth, as criteria based on our past experience. This slide shows the geographical breadth of our LC sales offices.
As you can see, we have 83 agencies throughout Japan and also have 756 sub-branch offices that are under the agencies. Last spring, we completed our organizational restructuring of field offices. Some areas have been bolstered with additional offices, and some areas have been streamlined by elimination and consolidation. With this sales office network, we cover affinity groups like public schools and Self-Defense Forces across the nation and conduct sales activity that meets the needs of customers in each region. Now, let me talk a little about the teachers market, the largest affinity relationship in Gibraltar's LC channel, which we view as a distinguishing part of Gibraltar. As you can see, the teachers market accounted for 25% of the entire new business annualized premium in Gibraltar. With the merger of Gibraltar, Star, and Edison, markets that the three companies had separately serviced, converged into one Gibraltar.
For example, in the Self-Defense Force market, the individual market shares of the three companies were aggregated, as well as other smaller affinity markets. Among affiliated relationships, the teachers market continues to be our largest and the most important relationship with good future opportunities. The teachers market is based on our relationship with the Japan Educational Mutual Aid Association of Welfare Foundation, which we have maintained a partnership with over the past 60 years. This foundation is an affinity organization in the educational community that supports Japanese public schools and children. We offer insurance to teachers of public schools around Japan based on the partnership with the organization. Major products we sell are term products that are customized to this market. We have 950,000 teachers in the nation. 5,000 LCs visit schools to sell general products, including term insurance.
About 33,000 teachers and support employees were hired last year, and 36,000 people retired. This leads to a continued opportunity to offer death protection and post-retirement products. With the declining birth rate and the aging of the Japanese society, the government has been working on eliminating and consolidating public schools over the past dozen years. The number of teachers, particularly the number of support employees, which represents about 5% of the number of teachers, has decreased. On the other hand, in order to address the issue of falling educational level among children, the government has taken measures such as allocation of two or more teachers to a class or to increase the number of English teachers. The number of teachers remains unchanged, making this large market extremely stable.
Over the next several years, there will be a large number of teachers reaching their mandatory retirement age among those who have been educating the second baby boomer generation, as well as new teachers being added to replace the retirees. Next, I would like to discuss the IA. As a general rule, a company has more control over captive agents who are part of the company, but it is more difficult for a company to control IAs that are independent of the company. Independent agencies manage their own business, we have a relationship of business to business. Many companies offer higher sales commissions, lower prices, or more attractive product features as value propositions. It is not surprising that the agencies seek higher commission and want to sell products from which a large volume of sales is expected with lower rates and high cash value in operating their business.
We believe it is important to build partnership with agencies where we can share each other's corporate philosophy, aligning our interest with their customers' needs. Gibraltar does not offer excessive commissions and does not compete with overly attractive product features. We believe offering value that contributes to the long-term and stable management of agencies to be our value proposition. Specifically, we extend the term for renewal commission to contribute to the stable management of agencies, and we provide information that benefits the agency management. We also provide information and skills with sales representatives in the agencies that support their sales activities and to help them develop a sense of mission. The key to our success is how many partnerships we can build with agencies and the producers who share a common philosophy with Gibraltar and accept our values. Our strategic initiatives are gradually producing results.
This slide shows the change in the number of agencies with which Gibraltar has an agency contract and the changes in annualized premium for each quarter. At the time of the acquisition of Star and Edison, we had more than 5,000 agency relationships. Since then, we have reduced the number by almost half. We terminated contracts with agencies that had remained inactive before the acquisition, as well as those with low performance. As a result, about 3,500 agencies remained at the time of merger. After that, I mentioned earlier, we selected partner agencies, and currently, the number of agencies is about 2,600. While the number of agencies is decreasing, as you can see in this line chart, new business annualized premium has steadily increased over the most recent one-year period.
As I noted, LCs in the captive channel and the marketing representative in the IA channel play a central role in Gibraltar's strategy. The source of our future growth is to continue increasing the quality of existing LCs and marketing representatives, and to increase the number of new LCs and marketing representatives while maintaining the quality. Let me talk a little bit about myself. I was with Kyoei, that was bought by Prudential in 2000. Since then, as a member of Prudential and under the clear philosophy of it, I have experienced the changes to Gibraltar's culture and practices, sometimes personally feeling the negative impact attached to such changes. Since the merger in January 2012, I became President and CEO. I have learned from my own past experiences and believe that going through these times requires patience.
I believe Gibraltar has just gone through its transition and is well prepared for its next phase.
Thank you very much.
Thank you, Sato-san. Kanagawa-san, our next speaker, is the President and Chief Executive Officer of Prudential Gibraltar Financial Life, also known as PGFL, also known as Gibraltar's bancassurance.
Thank you. Good morning, ladies and gentlemen. Thank you for coming to our Investor Day. My name is Sakichi Kanagawa. I'm President and CEO of Prudential Gibraltar Life, or PGFL. It's a great honor for me to speak here. I will discuss Prudential's bancassurance business, focusing on the Japanese bancassurance market and our strategy. We entered the bancassurance business back in September 2005 and began sales through banks in 2006. This month commemorates the beginning of the 10th anniversary year of our journey. First, let's take a look at the market environment for bancassurance in Japan. The table on the bottom half of the slide shows the demographics of Japan divided into 2 segments, 50 years old and up, and under 50. Japan's population is aging, and 45% of the entire population in the country is now 50 years old or over.
What is noteworthy is that they own 84% of household wealth in Japan. This senior segment is the bank's prime target for distributing their diverse financial products. As their business partner, we can effectively access seniors through bancassurance. Currently, banks in Japan are very busy handling the phenomenal amount of money coming from the maturity of Japanese government bonds and variable annuities, most of which were sold mainly to seniors. Annually, up to $tens of billions of each product matures, and a large portion of it flows into the customer's bank accounts. Direct access to such opportunities is a great strength of our bank channel business. It is not an exaggeration to say that the recent growth of the Japanese life insurance industry has been driven by bancassurance.
The division of the inheritance tax system scheduled for January 2015 is an emerging opportunity for the Japanese bancassurance market. In Tokyo, which is known for its expensive land prices, approximately 20% of people will be subject to inheritance taxes. This is a large increase from today's 7%. This means one out of every five people in Tokyo will pay some inheritance tax. The inheritance tax division gives a new life to insurance products as a tool for inheritance planning, helping the affluent to prepare for tax payment and estate division, on top of their traditional role as survivor protection. Since banks are highly trusted distributors in this country, our participation in bancassurance gives us significant access to the inheritance market. Now I would like to explain the Prudential bank channel business strategy. To put our goal in one phrase, opportunistically grow profitable business.
Profitable growth is a common goal among all Prudential businesses, and the bank channel is no exception. We have 2 product classes to achieve this goal, protection product and savings product. Each has a different set of strategies. Protection product can provide survivor benefits and inheritance wealth transfer, as I explained before. However, it's challenging for bank salespeople to sell protection product on their own without strong support and expertise. Therefore, we provide full support through our skilled personnel and offer quality product suited to bank channel clients. Next are savings products, which are similar to mutual funds and other financial products. Therefore, they are relatively easy for bank employees to sell. The sales of savings products are largely driven by price competition. Accordingly, we pay close attention to ensure an appropriate pricing in this area.
Both protection product and savings product open an important market for us. We emphasize protection product with our unique approach. It helps us to achieve the high-quality sales at attractive margins. On this page, this slide shows the number of bank channel relationships through which we are currently selling product. These are the key foundation of our business. We already have the partnerships with all seven mega banks and major trust banks in Japan. We also have relationships with 53 regional banks and one of the leading brokerage firms in Japan. As you can see, we have a first-class partnership base. These financial institutions have a nationwide branch network, and we can access diverse groups of customers through them. This page shows the product lineup we offer now. We offer a comprehensive product lineup through banks with emphasis on protection product such as whole life.
Our sales support program is a great strength of our company in the bank channel. In Japan, seven years ago in 2007, bancassurance was hugely deregulated, and constraints on the types of product we were permitted to sell were removed. Just after full deregulation, we actively engaged in protection product sales from an early date, making full use of Prudential strength in sales consulting expertise. This approach has yielded great result for us. We have successfully developed the substantial marketing expertise and skilled employees to serve the bank channel over the last seven years. Currently, our bank business has about 120 wholesalers actively providing the sales support to the bank. We also dispatched about 210 insurance consultants or ICs to certain banks.
Their job is to sell insurance product at bank branches and to train the bank employees to sell the insurance policies on their own. We also have about 10 training specialists. They provide a custom-made training program according to the bank's request. We actively rotate these individuals from one job to another. By now, most ICs, wholesalers, and training specialists have already experienced both sales and training position at banks. This provide us with a huge competitive advantage and is a major source of differentiation. I will give you the further explanation of the IC secondment model, which is one of the sources of our strength. Under this business model, we second former POJ life planners to the partner banks as insurance consultants to sell insurance product and train bank employees in insurance sales.
This is an important model for us since it brings the strengths of Prudential's expertise in protection product sales directly to the banks. The banks also enjoy several benefits when they accept our ICs. First of all, ICs brings POJs accumulated expertise in insurance sales. Second, ICs sell insurance policies directly to bank customers and benefit the banks with quick sales results. Last, ICs train bank employees so that they can sell protection product on their own. The graph at the bottom show the number of ICs over the past several years. The number of ICs at banks has been steadily increasing over the last few years. This page shows the sales track record of our bank channel. Since full deregulation in 2007, we have grown our business with no significant negative impact from the financial crisis.
The yellow part of the bar graph is the sales contribution of our yen-denominated single premium whole life. We had high sales in 2012 that led to our single premium whole life product, which we subsequently discontinued. Our objective is not just to grow the top line, but to ensure an appropriate level of earnings from the sales and avoid undue product concentrations. We implemented measures to control the sales volume of this product in a well-planned manner, and finally suspended sales at the end of September 2013. The blue part of the bar graph shows our sales excluding this yen-denominated single premium whole life product. As you can see, our base business has grown consistently year after year.
In conclusion, our success today is a result of the unique business model we created for the bank channel by taking advantage of our particular capabilities rather than by copying the success of other companies in the market. Our goal is to realize the full potential of the bancassurance distribution of life insurance products in Japan. At present, Japanese bancassurance mainly distributes savings product as a subset of investment products. We want to utilize Japanese bancassurance as an effective platform for an insurance business offering protection products. In this way, we can expand the number of people benefiting from life insurance protection. Our commitment to this goal will not waver for years to come. This concludes my presentation. Thank you for your kind attention. Thank you very much.
Thank you, Kanagawa-san. Let's take questions for Ichitani-san, Sato-san, and Kanagawa-san. We'll stay on this side of the room, then we'll rotate. We'll take the break later. Okay? Change in plans. Okay. The gentleman with his hand up. Seth. This fellow with a white shirt here. There we go. I called an audible.
Hi. Thank you. Seth Weiss, Bank of America Merrill Lynch. Demographic trends, which you highlighted, support opportunity in the retirement markets seem to put pressure on sale of death protection products. What's your appetite for shifting your mix to more retirement products versus death protection? Maybe if you could speak about returns and cash flow profiles of those products versus your core protection products.
Two-part question. The second part of the question I'm going to defer to John Hanrahan, who will be addressing it, I think, in normal course of his presentation. The first part of the question is one we can take now, and that is our appetite for shifting our product mix from traditional death protection towards retirement income products.
Let me answer this question one by one by president of each company. Let's start from Prudential of Japan. POJ doesn't have any intentional plan to change the product mix because of this demographic change. Demographic will change. There is aging happening. However, we will stay focused on death protection. There's always a new generation of people coming. We'll continue to sell death protection. There's no change to the strategy.
In terms of Gibraltar Life, we also don't have any intention to make intentional shift from death protection to retirement. Of course, there will be change in demographic. However, we are also selling retirement products today, too. The base and foundation is death protection. We'll sell death protection and also retirement products.
シングルプレミアムのwhole lifeを中心に適切な商品を提供し、また銀行はやはり高齢の方が多いので、死亡保障については既に説明がありましたように、高齢者の相続ニードにフォーカスをした平準払いの死亡保障。このリタイアメントと死亡保障、それをバランスよく適切に対応していきたいと思っています。
In terms of bancassurance business in PGFL, we actually do see the needs in the market already for retirement and death protection. We are actually responding to both needs, retirement and death protection. As explained in my presentation, for the retirement inheritance purpose, we like to sell a single premium whole life to address that need. In terms of the nature of the bank's customers, they are rather senior customers. They have inheritance needs. We like to sell recurring products, death protection products to serve this need. Our point is, we like to sell both in a well-mixed and good balance.
If I may add one other comment, and that is, we look at the overall business mix. I think looking at retirement in isolation doesn't look at some of the other trends that are happening in terms of, say, inheritance. If you look at the inheritance market, where we're selling recurring premium whole life, which is death protection, I think that can balance out any retirement income issue that may come up. I don't mean issue, if we sell a little more retirement income, we're also selling more recurring premium whole life as a result of the inheritance issue. We do look at the business mix closely, I think there are checks and balances in order to maintain the business mix that we wish.
I'd like to just add a very quick point of clarification here. When we talk about retirement income products, we talk about traditional life insurance products with mortality content that have been altered somewhat to meet retirement income needs. The retirement income products that POJ has sold, both dollar-denominated and yen-denominated for a number of years now, are essentially whole life products with mortality content and a higher proportion of the premium going into the cash value. We distinguish these kinds of products from savings products. We also sell savings products, our emphasis is on traditional death protection and retirement income products. Okay, the next gentleman, Erik Bass, red tie.
Thank you. Erik Bass with Citigroup. In Charlie's section, he had a slide highlighting challenges, one of them that you mentioned was potentially moderating pace of policy size increases. I think you've highlighted in the past that growing average premium per policy has been one way that sales have increased faster than the agent count. What is your outlook for average policy premiums going forward?
Good question. What is the outlook for continued growth in the average premium per policy sold?
In terms of POJ, Prudential of Japan, our answer to that is our main focus is on death protection. Our primary focus is not necessarily stretch our average premium per policy or extract attention to focus on that. Instead of that, we like to do that need-based sales and grow according to the growth of LP counts.
Gibraltarですが、Gibraltarは先ほどプレゼンテーションでも少しご説明をいたしましたが、アフィニティマーケットというマーケットが存在をしています。そこに我々のLCが保険を販売するということをやっております。したがって、POJとはやや ビジネスの中身が違うというふうに考えていますけれども、基本的にはポリシーサイズが急激に大きくなるということは、我々Gibraltarの中ではないだろうなというふうに思っています。ただ、ニードベースセールスをベースにすることによって、お客様のニーズに合った形のポリシーサイズにしていくという努力はずっと継続をしていきたいというふうに考えています。
In terms of Gibraltar Life, our business nature is slightly different from Prudential of Japan because we have affinity market. We believe that there is no rapid growth of policy size. However, the base point is we like to provide need-based sales to the customer and satisfy customers' needs. From that perspective, we like to grow our business.
バンクビジネスにつきましても、商品の単価というのは、特に平準払いにおきましては、ここから先、数年少しずつ大きくなっていくのではないかと思っています。それは通常の死亡保障に加えて、先ほど申しました相続問題の解決策としての契約形態の場合、通常の死亡保障に比べてAP単価、商品の単価が大きくなる可能性がありますので、そういう契約が増えていけば、全体のaverage premiumは少しずつ上昇していくのではないかというふうに考えております。
In terms of the bank business, because we have a nature of satisfying the inheritance needs. Considering that next few years, most likely our policy size will increase. If we sell this recurring pay death protection products, and to satisfy the inheritance needs, inheritance needs tend to have larger premium size. In that sense, average premium might increase.
Okay, let's move on to the side of the room that we've neglected so far. Randy Binner, the gentleman on the far aisle in the middle.
Thanks, Eric. Randy Binner, FBR Capital Markets. I guess the first question is, it just seems like you're using recurring premium whole life as the product to address this opportunity, but is there anything that Pru can do to be differentiated to have a branded product offering or something that kind of specifically goes after that change in the market? As far as the quantification of 20% of urban Japanese being affected instead of around 5% now, is there any way to kind of quantify that or size that as a new premium opportunity set out there?
Okay. Let's take the second one first, I'll try to do justice to your first one. The second part of the question was asking if we would be able to size the size of the market for products that addressed inheritance tax needs. The first part of the question asked whether we had the ability to develop a whole life product that was differentiated from those that competitors offered to meet the same needs.
Let me just start by answering the second part of the question. Eric and I were having a little sidebar here. We don't want to quantify the market exactly, but what we will say is that many of our customers, especially POJ's customers, are in urban markets. We expect that the inheritance issue will be pertinent to POJ's customers. Gibraltar's customers tend to be spread out, as you saw on Sato-san's slides, all over the country, in part because of their affinity group affiliation. This has great pertinence to POJ in particular and ancillary pertinence to Gibraltar and especially the bank channel. The first part of the question.
何かビジネスのサイズをターゲットを決めて行うとか、そういう発想はPOJの場合は基本的にはありません。POJのライフプランナーは本当にトータルしたニーズセールスをしているので、一人のご担当から一家の担当にと。その中で親子関係も含めてですけれども、ニーズセールスの一環としてこの相続の問題というのを取り上げるケースが非常にこれから増えていくんだろうなと。それは結果的にはビジネスチャンスも広がるという、そういう考え方をしています。
In terms of Prudential of Japan, we don't go after the size of the market. We don't put that as our objective and do our business. We do the total need service, going through the need-based selling of understanding customers' needs. There's parent and child, there's a certain need there. We look at it holistically and find business opportunity and go after that.
質問に正しくお答えできているのかどうか分からないですけども。まず、相続で商品、ポリシーのサイズがどうなるのかというご質問だとしたらば、そこは我々もPOJと同じで、あらかじめ大きさをターゲットにするということはございません。あくまでもお客様のニーズに応じてということになろうかと思います。ただ、オポチュニティとして、今回相続のマーケットというのがハイライトされているというのは、日本のタックス、税法が変わるということが原因でございますので、それで言いますと、課税対象者が増えるという要因はあろうかと思います。そこがオポチュニティというふうになっているんだと思います。それに関して、ディファレンシエーションができるのかというご質問があったかと思いますけれども、基本的には相続に対応する商品ということでございますので、あまりそこは差別化をするということは商品ではできないかもしれません。差別化をするとすれば、お客様に対して正しくコンサルティングができるかという、そちらの方のキャパビリティの問題ではないかなというふうに思います。
I hope I can answer your question correctly. In terms of whether we're going to go after policy size or not, just like POJ, we don't put the policy size as our target. We try to satisfy customers' needs and grow our business based on that. However, tax law will change in Japan, and there will be the inheritance needs that's going to attract more attention, and that is going to be the opportunity for us. We have more opportunities because more people will be taxed. There will be opportunities there. In terms of differentiation of the products, I don't think product will be our tool to differentiate ourself. There won't be much opportunities there. However, we believe the capability-wise, how are you going to understand customers' needs correctly and offer proper products? That's the area where we can differentiate ourself from others.
Thank you.
Randy, let me just add one part to Sato-san's answer, and that is that for instance, in POJ, we've been anticipating the inheritance law change for quite some time and have actually trained over 1,000 of the 3,000 and change life planners for inheritance tax. What's as important, or I would argue even more important than the product, is the training to be able to understand the client's needs and to be able to therefore recommend the appropriate product.
Yeah, I guess what I'm thinking of is if one in five people in Tokyo are affected by this, would it make sense to advertise it and say, "We can help you with this." Kind of if you build it, they'll come. That's what I'm getting at. Can you brand something where you're good at helping folks with this new problem?
I think that's the basis of how we have grown the business. We don't advertise. It's all by referrals. It will continue to be, but if we're good at this, we'll get the referrals. It will go viral, and we'll get the business.
Advertising is anathema to Prudential of Japan. Okay, who's next? Mr. Devine, gentleman on the aisle here, a couple rows up.
Colin Devine, Jefferies. I wonder if we could go back to the teacher market and Sato-san's discussion on that. First of the 5,000 life consultants that target that market, are they exclusively targeting that market? Then perhaps could you discuss your penetration of that market in terms of has it changed over time? How many of the active teachers have you sold policies to, of the retired teachers? Perhaps how many policies have you sold to teachers of, I think, the 7.3 million policies you referenced having in force? Just to get a sense of that.
Okay. Let me take a stab at a summary of your question that does justice to it. We mentioned that there are 5,000 life consultants who work with the Teachers Association. Is that exclusively what they do? Secondly, how would we like to speak to the penetration of this particular market, both with respect to our penetration of the market of active teachers and with respect to our penetration of the market of retiring or retired teachers?
というようなシーズナルリーズンがありますが、概ね4割ぐらいの先生方にお入りいただいてます。
For your second question, we have about 950,000 school teachers in Japan, which was in my slide of presentation. Out of that, 40% of the teachers have Gibraltar's policy, and that policy is tailored to the school teacher school market. There is some seasonality in these numbers because every year school teachers retire and new teachers come as newly hired teachers. A retired teacher is gone, and then the new teacher comes. There's some time lag there. There will be some differences in number you might see a little bit, but that's the seasonal factor. In general, it's 40%.
Thank you. Just the follow-up. Of the 7.3 million policies, roughly how many of those will be to the teachers?
It's a clear question. Of the 7.3 million policies, how many of those would be to the teachers association, both active and retired teachers?
930万件の契約があるんですけども、そのうちの何%ぐらいが学校の先生方なんでしょうか。こういう契約でいうと、先ほどのプレゼンでもちょっとお話ししましたけども、25%に現在なっていると思います。
In terms of our in-force policies, out of that, about 25% is the school teachers policy. That was in my presentation, too.
Okay, who's next? Suneet. We move back into the middle of the floor. The gentleman on the aisle.
Thanks, Eric. Just for Charlie, you mentioned that you've been training life planners for the inheritance tax. I think you talked about this a couple of years ago. Have some of the sales that you've been reporting over the past a couple of years have already reflected the fact that this tax is coming? In other words, you've already seen some of the incremental market opportunity in your sales already?
Right. Do our sales already reflect?
Have they been reflecting?
Yeah. Have they been reflecting in recent years the anticipation of this change in tax rates and exemptions in Japan?
Let me let Ichitani-san answer that.
ライフプランナーが提供する相続マーケットのサービスというのは、支払う相続税の準備を保険金でするという側面はもともとあります。けれども、一番大事なのは相続財産をどうやって分割していくのかって、そこに彼らの知識をどういうふうに生かせるかということなので。この教育は以前から始めているものがありまして、それが有効に活用されて、直近ではまだほんの数％ですけれども、売上の中の相続の部分で伸びた売上がもうすでに確認されています。それはどういう目的で保険に入ったのかということを契約時に確認してますので、わずかではありますけれども、そういう数字の伸びが確認できています。
To answer your question, we ask question to the customer, what's the purpose of buying this policy? Based on that, it's small growth, only a few %, but it's coming and growing because of the inheritance needs and inheritance sales. Inheritance, there are two parts. First, you are going to use life insurance to prepare for inheritance requirements. The second one is how to divide your estate and use the life insurance. We're providing training, and seems to be it's working. It's small growth yet, however, there are some numbers reflected because of that.
Okay, just to be clear, in terms of the opportunity. Whatever your clients have in terms of coverage today, that will provide some solution to the inheritance tax. We should really be thinking about this as just an incremental for the folks that are affected?
I don't really know what to say except do we view this inheritance tax opportunity as incremental to the other products we're selling? Does it displace demand that we would otherwise have absent these changes in tax law?
I'm just saying that the insurance that people have today-
Right
That will cover the inheritance tax, right? It's really just the increase in the inheritance tax that we're focusing on here is the opportunity for the people that already have coverage. Because life insurance, the penetration rate is pretty high.
I'd stick to the first. I don't really know what more we can say.
基本的には生命保険ということですので、相続になってくる人にとっても、今の生命保険の顧客に販売していくというか、そういった感じの取り方なんでしょうか。
もちろんそういう側面もありますけれども、なんといってもライフプランナーにとってみれば、この補償の必要性をお客様に理解していただくということが一番大事ですので、POJのライフプランナーにとって。その中に相続という大きなニーズがたくさんの人にこれから発生していくというのは、このビジネスそのもののチャンスが広がる、機会が増えていくというふうに解釈しています。
Yes, it is. In a way, you can say it's incremental to existing business. However, the key point is life planner go out and meet customer and find out their needs and confirm that. People have more inheritance needs than before. That is why we think inheritance market will bring new opportunities for us.
Yeah, I think that's the key. The reduction in exemptions and the increase in rates creates a need for life insurance that wasn't there previously. It really is incremental.
The other, if I may.
Yeah.
The other channel where we'll see an increase in interest in inheritance tax and coverage for that is the bank channel. In the second quarter, we already saw that. Year-over-year recurring premium whole life essentially doubled from 26 to 57. We attribute that increase to this inheritance tax issue. In the bank channel, as in the LP channel, we're already seeing evidence of people thinking about this, even before the tax law goes into effect.
Okay, to stay more or less on schedule, I suggest we take a 10-minute break. We'll come back for Hanrahan-san. By the way, if we haven't exhausted the questions that you'd like to address to the other speakers, at the end of the day, everything's fair game. We're on the home stretch. We have one more presentation, that of the veteran John Hanrahan. What are you guys doing? We're playing musical chairs. Oh, musical chairs. That of the veteran John Hanrahan. Then we'll take questions. As I mentioned before the break, you need not necessarily address the questions to John, although I suspect you'll have more than a couple for him. If there are any subjects that you didn't have the opportunity to address earlier in the day, you're welcome to ask us to address them now.
John will be addressing your concerns about the change in the A&H market and the effect that that change may have, or those changes may have on the persistency of our life insurance block or for that matter, the persistency of the A&H block. He will address those concerns before he takes additional questions from the floor, but after his presentation. John.
Okay. Okay, well, thank you, Eric, and I was glad to see in the beginning where we had a number of you that have been here for 10 years ago and each consecutive session. I'm going to miss Eric. It's been great working with you on each of these presentations. You don't know how much he's cleaned up everything I was trying to say initially and tried to make it better.
You going to thank us?
You did. I was also spoiled. I had a few years in Japan where whenever I was giving a speech, it would be in a very broken Japanese and then translated, or if I had questions asked, my poor answers would then be fixed in the translation to sound somewhat intelligent. I'm kind of spoiled. My Japanese colleagues were able to have a chance to rethink and get their questions squared away and all that, now I'm back to English. I'm going to cover five areas related to our financial results. The first is just to remind you about the core drivers of our sustainable performance, a lot of that is really what you heard from Charlie. One of the things about this model is you see each person as they come into this business understands this is what makes this model work.
You'll hear that again from me. The next two areas that I'll talk about are related to things that affect the trends of AOI. In this case, foreign exchange, which you've noticed quite a bit of fluctuation in the last couple of years, interest rates, we continue to have a low interest rate environment. I'll talk about those in the sensitivity. The fourth area I want to cover very briefly is the investment portfolio. The fifth area is capital. Here we say, what's driving our performance? For years, ever since we've been a public company, you've heard us talk about our international insurance business, particularly Japan, how strong the performance results have been. At the same time, the industry in Japan has been struggling, dealing with negative spread and other things.
The key question we've asked over the years is why? Why was Prudential able to continue to deliver these positive results when the industry was struggling quite a bit more? You heard earlier, you heard from Charlie, you heard from each of our business leaders in Japan, it comes down to that quality focused distribution. They really mean it, hiring really capable people, having very good training. That was a key. Then the focus on needs-based selling of protection products. That underlies all of what we do. That's the hardest product to sell, the protection products. It's a need that many people have, but they have to be sold. Other types of products, maybe I'll slip in the comment about the A&H type product. Those types of products are demand products. They can be sold. They can be sold through all different types of distribution channels.
Protection products, you really need a stronger training, needs-based selling, and that's what we've emphasized. On the investment portfolio, we have maintained a relatively conservative portfolio, well-managed. As you know, I was the CFO back in 1997 all the way through. Very limited impairment losses over those years. You've also had a policy, a sound capital management policy. These businesses generate superior returns, we've been able to access that and redeploy a lot of that excess capital that has been generated, not before we maintain a very strong capital base here in Japan, because our first priority is to meet the claims, meet the promises that our life planners, life consultants have given. Very strong capital here but still generating excess. The first measure, the main measure that Prudential uses is return on equity.
This is a measure that's really driven by organic performance that we've had, it's also by the successful acquisition integration. The thing that unites those two, the common measure, is execution. I really think of ROE as return on execution. One of the things I was very fortunate. I was able to come to Japan and work here for several years with the people here in Japan, and they get things done. They know how to do it. They just find a way to get it done, to get it done right. You can see the most recent acquisition with Star and Edison. You can see when we first acquired them, of course, with the initial purchase gap and everything, the ROE dropped down in 2011.
By the end of last year, we were able to achieve the synergies that had been committed to at a lower cost than was committed. Sato-san covered the improvement in life consultant productivity, bringing it back around. Gradually delivering on everything and sometimes over-delivering on what was committed. That's execution. That's what gets done here in Japan. The other measure that we use besides ROE is AOI. What you see here, I went back a little bit further to show how AOI continued to grow new record earnings every single year right through the financial crisis. A primary driver, the underlying thing, is organic growth. That's what's happening inside the business. The Star and Edison acquisition clearly added significantly to the growth, and you can see that the first of that was in 2011.
When you couple that with the synergy benefits that were achieved over the next couple of years, you throw in some other tailwinds, I'm going to talk about that. You can see the foreign exchange rate has also had been a tailwind over that period. Back in 2007, it was 102. Actually weakened a little bit to 106. These are our planned rates, so the average hedge rates. As of 2013, the average hedge rate was at 80. There was a number of tailwinds that sort of accelerated the growth. One point we want to make very clear is you can't extrapolate that level of growth. 2013 included all the good guys. The business that underlies it, that remains very strong, very sound.
This slide is intended to show you sort of how our earnings would have looked if the yen had remained constant at this year's hedged rate, the average hedged rate of 82. What we've done is we've gone back, changed nothing else, just restated the earnings using an exchange rate of JPY 82 per dollar. You can see there's still significant growth, instead of going from reported AOI at the actual plan rates of $1.6 billion growing to $3.3 billion, we would still have significant growth, now it'll be going from $1.8 billion up to a little bit less than $3.3 billion. One, you may notice that this is a little less of an impact than you might have expected, that's because, I'll talk about this later, not all of our income, even in Japan, is in yen.
This slide has We've shown this before, but we try to emphasize again our product spectrum. On the far left, we have the term products, the A&H type of products, where the significant source of the profitability is coming from the mortality and expense loading. The majority, almost all the earnings are coming from there, with just modest investment spread. Then you shift it all the way over to the right side, where we have our fixed annuity, our multi-currency fixed annuity product, where that product derives its profitability from the investment spreads themselves. Somewhere in the middle, we have a retirement income product. Now, Eric described this a little bit before. This is sort of a whole life on steroids. What happens is you have a product that starts out, particularly in POJ, at a fairly high amount of protection.
Because it's a higher premium than a whole life policy, that extra premium is building up cash value at a faster rate. By the time you get to 60 or 65, when the policy reaches its maturity date, the cash value now equals that original face amount or even higher. That's what provides either a lump sum or an annuity, depending on the policyholder's choice. The point here is that those products have mortality and expense margins in them to a significant degree in those early years, while the face amount is very high relative to the cash value. Over time, the cash value builds and the protection element is getting smaller. Second point about this is that the retirement income product, primarily at POJ, the U.S. Dollar Retirement Income product was our largest seller cumulatively in almost every year, but definitely cumulatively since 2005.
That product not only had significant mortality and expense margins, but also because it was a U.S. Dollar based product, the investment spread was also more significant. The total profitability on that product can be very significant, very good. Now, later on, I'll talk a little bit about the fixed annuity product, because it's more based around interest rate, that product has a market value adjustment built into it. It's repriced every couple of weeks. If you have products that are tied to the markets that much, you have to make sure that you design them properly. Now, I came back to International Insurance the first time in 1997 as a CFO. Even then, interest rates were really low. The point of bringing this up is that we've been dealing with this for a long time.
The low interest rate environment, the U.S. it's more of a newer thing. At least it's new for a long time, a lot of years. If you look at this chart, you're going all the way back. The 10-year JGB has been below 2% for most of the last 17 years or so. The majority of our book of business at POJ has been written after interest rates have already come down substantially. Our Gibraltar, which includes Star and Edison, most of the in-force in that company was restructured and the interest rates lowered at the time of restructuring. On the one hand, we've been dealing with it on our in-force. We also have it on our new business.
We've been repricing each year, raising the premiums to reflect the lowered interest rate and the lowered investment income that we would expect so we would maintain our margins over the years. We've also done as much as possible to match our policy duration with our assets so that as interest rates have declined, we've been better matched than some others may be. Finally, our business model. Because it's a protection-based business model that provides more stable earnings, so it's less sensitive to economic impact, economic markets and changes, and so on. Finally, as I mentioned before, the fixed annuity products, because they are tied to the interest spread, that's why we have to be much more careful. Pricing done, updated every couple of weeks.
There's a market value adjustment, so if interest rates go up or go down, the change in value of the assets is reflected in the customer's cash value. Another thing about the interest rate that you may be interested in, we try a little bit of sensitivity is what would the impact be of a drop of 25 basis points across the yield curve? If you do this at the beginning, we took our 2013 results, looked at the cash flow from renewal premiums and maturities and so on, said, what would have been the impact if everything else was held the same, what would our income have been? How much would it have changed if the yield curve dropped 25 basis points or went up? What you see is the impact in one year is about $15 million.
That's really an average. That's not a full 12-month annualized impact because the cash flows are assumed evenly over the year. The annualized impact would be about $30 million a year. To put that in context, that's about 1% of our total AOI. There is a cumulative impact of that. If the yield curve dropped 25 basis points and then stayed that way, what you would see is a $15 million, then a $45 million, then a $75 million, and so on impact. I think all of you are pretty familiar with where interest rates are in Japan at this point. I suppose they could drop another 25 basis points. They've surprised me. There's not too much more room to fall. There is room to go up. The next topic I wanted to talk about was foreign exchange.
This is something that you've heard a lot about. The first two items, the accounting remeasurement, the asset liability management. In this case, I'm referring to the currency-based asset liability management. We have always matched our JPY liabilities with JPY assets, our AUD liabilities with AUD assets, and our USD liabilities with USD assets. That's key to making sure that we're not having too much volatility. Those are also complemented by the hedging that we do, I'm going to talk about this comprehensive hedging strategy in a minute. Before I move on, the accounting remeasurement, I think most of you have heard it several times.
The way the accounting works, the way it's structured today, where we're looking at all those currencies together in Japan, we have to take the market on the liabilities right through the income statement. The market on the assets that matches those liabilities is going to the equity account, so right to the balance sheet. That difference comes up as. The headline always seems to show up as derivative losses or derivative gains or something like that. It's really nothing. We keep saying it's non-economic noise, and we are working on that. Let me talk about the comprehensive hedging strategy we have in place. I think you're all pretty familiar. We have income hedges in place in our largest operations, so primarily Japan and Korea.
These income hedges are spread out over a three-year period to smooth the impact of changes in foreign exchange rate. We also have, in addition to those income hedges, we have other hedges in place that protect our overall capital and ROE. You can see the benefits of doing this is to provide that much more stable level of AOI because it has a smoothing effect. These hedges are put on over a rolling three-year period. We have to take into account many things, including the local solvency margin ratio. We want to have as stable as possible AOI. We want to be able to maintain the company's return on equity despite changes in foreign exchange. Tax leverage, all these things have to go into play to come up. We have an overall very, very extensive hedging program, which we've had in place for many, many years.
Here I want to talk a little bit about the yen earnings hedge itself to show you how this flows. We hedge. We talk about over a 36-month period. For instance, in the first quarter of 2011, we began to hedge out the first quarter of 2014 income. That's the first point. We estimate what our 2014 income would be. Then we begin to hedge it, maybe a fraction of that, one-ninth or so per quarter. In the second quarter of 2011, third quarter of 2011, each of those, we hedged another portion of that first quarter 2014 expected income. Over the period of time, we adjust what we think our expected income will be. Over a period of nine quarters, ending one year before that quarter, we have hedged all of the yen income for that future quarter.
By the time we get to an end of a year, at the end of 2013, 100% of our yen income expected in 2014 has been hedged. You note that about 50% of our AOI coming out of Japan is in yen, and that's after netting the effect of yen expenses in dollar products and investment income on our dollar assets and so on. The net effect is about 50%, and that's what we're hedging. You can see what's happened over time. You see the plan rates, which are on the bar. Those represent the average of the hedges that we put in place. Here we just wanted to show you. If you look at where we are now, this is as of June 30th. Of course, all of our 2014 expected yen income was hedged.
About 93% of our expected 2015 JPY income is hedged, even about a little over half of our expected 2016 JPY income has already been hedged. Here I just wanted to show you, if you break down our Japanese portfolios, and this is strictly the reserve liabilities. You can see by currency what amounts we have. You see that if you look at the JPY liabilities and the JPY assets, they're covered. There are unrealized gains across the portfolio. You see the footnote, about $11 billion of unrealized gains are included in the investment portfolio. On top of that, you can see the impact of the additional capital ROE hedging that we do over and above the USD liability.
We have a large portion of our surplus, essentially our equity is held in the Japanese portfolio, is held in USD assets, those are internally hedged. Next is just to give you some idea of the sensitivity of our AOI to various changes in the JPY rates. What you can see here is we took again our 2013 AOI as reported and adjusted and so on. The exchange rate that we used, the hedge rate at that time was JPY 80 per USD. We went back, holding everything else the same, we restated those earnings under various-- assuming we had different JPY hedge rates. Whether it was 90, 100, or 110.
Even if you go out to a JPY rate of 110, if we restated our 2013 AOI, the net impact would have been about a 13% decline in our 2013 AOI had we been using a rate of 110 for 2013 instead of the actual average hedge rate of 80. We just want to provide a little bit of sensitivity around the impact of the FX rate. The fourth topic I wanted to mention just briefly is just a reminder about our investment portfolio. This contributes to the stability of earnings that we've had. Over 95% of the portfolio is either in JGBs or local government bonds or high-quality corporate bonds. A limited amount of risk assets in the portfolio. Our major source of earnings is mortality and expense. Our focus is ultimately on meeting our customers' protection needs and delivering on our claims.
Our portfolio reflects sort of our overall business strategy. The last topic that I'm going to cover is a little bit about our capital. Here we want to show not just what our solvency ratios are, but how they are relatively strong despite various changes. Our portfolio is a fairly, I don't want to call it conservative, but it's a portfolio where a lot of the assets can qualify for Japanese accounting called held for reserve. Under the U.S. GAAP, it means it's almost like amortized cost, like held to maturity type treatment. You don't have fluctuations due to changes. That way it's better matched against the reserves, which are also not adjusted for changes in interest rate. A large portion of our portfolio is classified as either held for reserve or held to maturity, that gives us stable solvency margin.
We also, as I've showed you before, we maintain our currency. AUD assets back AUD liabilities, JPY assets back JPY liabilities, As a result, we have modest impact on our solvency margin ratio due to foreign currency fluctuation. Although we do have some at Gibraltar. At POJ, we have almost none because we co-insure all the U.S. dollar business back to the U.S. First, let me just show you the most recently reported solvency margin ratios for the last fiscal year. Both of them are well above or in our target range, both at Prudential of Japan and at Gibraltar Life. Again, our first priority is to make sure our customer claims will be met, and we maintain those solvency margins to maintain strong levels. Second, we wanted to show the impact of the stress scenario.
In this case, we took some of the most severe shocks and stressed what would our solvency margin look like on the combined impact of all four of these severe shocks: equity, real estate, foreign exchange, and interest rates. What you see in the impact is even after that, we're maintaining solvency margin ratios that are in our target range. We want to show strong capital margin, solvency margins maintained, and the flexibility to absorb a fair amount of shock and maintain those solvency margin ratios. One of the things that I'm sure you're interested in is, okay, you hold these high solvency margin ratios. Your business is generating very, very high returns. How does that ultimately translate into shareholder returns and shareholder capital?
What we've found over a number of years is there are various ways to redeploy the excess capital that has been generated by these businesses, we list some of the items here. This is something that we have been doing for a long time, we've continued to do. If you look at this slide, what we're showing is we've had about a 60% ratio of redeployment of excess capital. That same ratio would apply even if you went back a lot further. You can see it's been done through various means. Bless you. One thing I just want to point out, if you see in 2010, you see a very low ratio, then 2011, a very high ratio. This is just one example. This was related to the Star Edison acquisition.
In anticipation of closing that acquisition and using some of the excess capital that would have been built here in Japan, we held back on redeploying the excess capital at that point. Then in the following year, we actually redeployed it as part of that acquisition to take advantage. It's not going to be a linear every single year set percentage, but over a long period of time and over the most recent years, you can see we have been able to redeploy excess capital from these operations. Let me just summarize here. The core of our business and what you heard from each of the people here in Japan, the focus on our quality distribution, needs-based selling, that's what drives the business underlying. All the other stuff is adjustments to that.
At the core, it's quality, really high-quality people that are focused on needs-based selling of protection products. That's what's differentiating us, that's what's generating these high returns. The investment portfolio has been well matched from a currency perspective and from a duration perspective. We have a comprehensive hedging strategy in place that protects the enterprise because this is such a large portion of the enterprise's value and earnings. The insurance operations themselves are very well capitalized, and we have significant capital redeployment opportunities and have continued to take advantage of those.
John, I already committed you to address the A&H question.
Okay. As I'm getting older it's good to have somebody remind you of these things. On the A&H questions, I had a chance to confer with all my colleagues from here in Japan. Really first, A&H it's never been our priority. It's a supplemental. We sell it. We make it available. We earn profits from that. First is protection. We look at persistency across our portfolio, and in aggregate, we have not seen any significant change. Even within these products, we have not seen a significant change in our persistency on these types of products. We don't see ourselves being spreadsheeted away. Our core distribution has a very good relationship with our customers. Our high levels of persistency demonstrate that. I think you saw Ichitani-san's slides talked about the customer satisfaction rates and so on.
A lot more of those drive whether the customer stays with you than other types of things. One, we haven't experienced it. Our persistency remains high. It's very stable. In fact, when I did a quick check as of second quarter, year-over-year, Gibraltar persistency overall was up. Even in talking in more detail with some of our people here in Japan, at the product level, we have not seen any significant change in any of those products.
Bear in mind that the vast majority of our A&H sales historically have been through our captive channels, where you're far less likely to be spreadsheeted, further to John's point, than you are in the third party channels, where I think some of our competitors basically spend most of their time.
Okay.
Can we put that one to rest for now? If not, let us know.
It's always rough to be between you and lunch.
Is there anyone who has not yet asked a question who would like to? Vaibhav. You're the man.
Thank you. Vaibhav, the Citadel Investment Group. It's my understanding that given the conservative nature of the investment portfolio and the high allocation to JGBs, there may be some opportunity for yield enhancement there. I guess the question is how dramatically can you change the investment portfolio to migrate into higher yield assets? What's the comfort level in increasing the allocation to corporates and $ denominated assets?
All right. The question has to do with our appetite for increasing the risk profile of the general account investment portfolio in Japan, specifically with respect to $ denominated investments, also with respect to corporates. Any other change that would add risk could also be addressed.
Can you hear me okay? Or do I need to use this one? Okay. Obviously, we do have some room to change our portfolio to take on additional risk on the credit side or not. We do have the capacity in the U.S., asset management capacity to identify certain assets. Remembering that the first priority is to meet the customer needs and make sure that the capital and the local balance sheet is strong. There's room there and you've actually seen some after the Star and Edison acquisition, you've seen some non-coupon investment income, some room there. Our first priority is meet the policyholder claims. We make our profit primarily from mortality and expense loading. There is a little room there.
Let's see. Anybody else who has not yet asked a question who would like to ask one? Okay, Jay, sorry.
Thank you. Jay Gelb from Barclays. The redeployment from the international operation has been exactly based on your numbers here, exactly 65% in both.
60.
Well, I meant 2012 and 2013.
Okay.
On an annual basis, how should we think about that on a prospective basis? I apologize, jet lag. Will Pru, as a non-bank SIFI, will that designation have any influence on the % of capital repatriated? I mean, would it essentially move higher as a result of that? Thank you.
Okay. I'm going to spin this one a little bit differently from the way you asked it. We have shown that historically we've redeployed something like 60% of our AOI in Japan. Looking forward, without providing a hard number, what do we think the outlook is?
Okay. Well, the first part, I was perfectly willing to make a lot of forward-looking statements about MetLife. If you want to limit me to what I can say about Prudential, it's a little different. The first thing is, I mean, the capital redeployment, part of it will depend on the growth of the business itself and then the amount of excess capital that has been then generated. There are a couple things that longer term could have an impact on that ratio. One is the tax rates here in Japan are coming down. They've come down slightly, they are expected to continue to come down, which would generate additional after-tax income from the same AOI, local statutory after-tax income. Again, the maturity of some of the business ultimately leading to higher dividend capacity and so on.
Nearer term, we don't see a huge change, longer term, I could see that percentage potentially going up.
To the other part of your question about being a SIFI, we don't know. There's no clarity there yet. We'll wait and see.
Who's next? Mr. Gallagher, the gentleman just one row behind. Get you.
Thanks. Thomas Gallagher, Credit Suisse. John, I wanted to ask you about capital deployment just to get some perspective on the $1.5 billion repatriation in 2013, how that compared to JGAAP earnings. As the way you think about it, what did that ratio look like? I know historically you've been able to repatriate more than you've generated on a JGAAP basis, but I just want to get some perspective on where are we with that. Presumably your JGAAP earnings are going to be getting better over time, and I assume there'd be a crossover where you wouldn't be taking out more than you're earning.
Not to quibble, but we do not equate repatriation and redeployment. These numbers show total capital redeployment, not all of which represents a check that's cut to the parent company. Your question is still perfectly fine. How does the $1.5 billion of capital redeployment in 2013 correspond to JGAAP earnings and whatever more you want to say about JGAAP earnings and capital redeployment?
Okay. I mean, that amount for 2013 was a somewhat unique year to begin with. The redeployment was well in excess of the JGAAP earnings for that year. Now, part of the reason is the statutory interest rates had changed here in Japan, which had an impact on deficiency reserves and other things that were established, which could have impact on the fiscal year JGAAP earnings. The timing of our premium rate increases was delayed. You can't really match up the JGAAP earnings and our capital redeployment directly. Over time, what you would see is our JGAAP earnings are expected to significantly increase with the maturity of the businesses. We've seen some signs of that. Then again, after the repricing, the statutory reserving levels are back in line.
2013 had the blip in that fiscal year, had the first blip in the JGAAP earnings themselves. These aren't directly matched. We have, for instance, all of our U.S. dollar business from POJ is co-insured into the U.S. already. That business is there, and there are other types of things that are not directly tied to JGAAP earnings.
Well, I'd like you to pursue that a little bit further perhaps by addressing the impact on JGAAP earnings of reserve requirements in Japan, reserving requirements, and the somewhat different impact on statutory on solvency margin capital and what that may indicate about the ability to redeploy.
Okay. Yeah, the statutory reserving system in Japan really gets to a full net level reserve. Right away, ultimately, they want companies, and in our case, we are at the point where we're fully reserving on a net level basis at the time of issue, which means all the acquisition expenses, all those front-end expenses are expensed right away. There's a lot of conservatism. As you saw the new business volumes over 2012, 2013, very significant. All those acquisition expenses from a JGAAP perspective are immediately expensed. Plus, there's a buildup of contingency reserves and so on a statutory basis. I would call the Japanese reserving system is maybe one of the most conservative ones, at least that I'm familiar with. JGAAP earnings are going to lag. Now, ultimately, reserving systems have to revert back.
Higher reserves in early years in Japan would translate ultimately into smaller increases in reserve in the future compared to U.S. GAAP.
And-
That wasn't-
Can I ask a follow-up?
Sure.
The internal leverage that you're using to finance this, where are we at cumulatively? Is there a constraint to think about in terms of the way-- and when I say internal leverage, however you want to describe how you've financed this, is there a constraint to that we should be mindful of?
There is some constraint, as you saw in the presentation, there's still a fairly sizable amount of debt from Japan back to the U.S. that was used to fund the Star Edison acquisition. There is additional capacity within regulatory limits for affiliate transactions. As I said, there's ongoing and growing dividend capacity both at Gibraltar and POJ, and the co-insurance that's already exist. There's a number of items that come into play that would make us feel more comfortable that we can sustain the kind of levels in the near term and longer term that they would grow.
Can you quantify the constraint, though? What order of magnitude?
Which constraint? On the leverage amount, on the debt repayment, I think that was around the $2.5 billion range.
2.4
$2-plus billion range of affiliate transactions available within the regulatory limits. That's just two of the items. Again, there are other things in place where we are able to generate capital or redeploy capital through other means. The co-insurance itself, all the POJ co-insurance back to the U.S., the profits on that business, they're subject to dividend sharing, but the net profits are in the U.S. already on that business. So.
Thanks.
Okay. The gentleman two rows up in the middle, red tie. Erik Bass.
Thank you. Erik Bass with Citi. Can you just talk about the overall trajectory you expect for the ROE? I guess, how does the ROE on new business compare to your in-force? Maybe longer term, do you think that the kind of mortality margins on business are sustainable as you see the legacy spread issues that are affecting some of the domestic competitors will get smaller over time?
Okay. How do the returns on new business compare to the returns on the in-force? Please don't make a projection about where we see the total returns going forward. I'm sorry, the other part of your question?
Just thinking longer term, the sustainability of margins-
Mortality margins
on new business as domestic competitors should become healthier.
How do we view the sustainability of the M&E margins that we're earning today, if and as domestic competitors recover their health?
Okay. The first part, on the new business, we have been repricing our products to reflect the declining interest rate environment, which has been the main driver all the time. I look back, there was a slide we used back in 2006, and we showed for a typical plan as the older interest rate at 4.5% came down to 2%, the guaranteed rate, and this is going back a number of years ago. As that rate changed, the average premium rate per thousand went up about 70%. We've been repricing products to maintain reasonable levels of profitability all the way through. As the rates get lower, it gets tighter, and we do have to share some of the impact of the lower rates, either in lower profitability and reduced commissions, as well as increased premium for customers.
In general, our new business, we are targeting similar rates with each new portfolio. In terms of the sustainability, the reason we have sustainable earnings is the drivers, the productivity, the persistency. Those types of things allow us to maintain high levels of profitability, even while we're at similar levels of pricing to competitors, and that relationship hasn't changed.
The gentleman in the center, on the end, three rows up. Peter.
Peter Deutsch, Fidelity Investments. Just a question on your ALM position. I know Prudential doesn't talk about economic ALM matching, but some of your competitors, Sony Life, which was a JV partner for 10 years, does disclose pretty extensively. They talk about the duration of their assets is 20 years, and the duration of their liabilities is 30 years, so a 10-year mismatch. I know you guys are much better matched than that, maybe you could talk about why you're better matched and what the duration mismatch looks like across different companies and products.
We do talk about the duration mismatch, and John, you're free to do that and-
The question is, what is the mismatch between asset and liability durations in Japan? I think you might want to talk about Gibraltar and POJ separately.
Yeah. That's a key difference because Gibraltar, and I even split Gibraltar into the bank channel and Gibraltar, the legal entity, and then POJ. Gibraltar is a combination of companies that are relatively mature, and their average duration of those liabilities is quite a bit shorter, more in the 10 range or so. It's very well matched across that portfolio. Similarly, the bank channel, also a lot of relatively new business, but shorter expected duration business, and that's also very well matched. POJ is the one maybe closer to Sony. It doesn't have as long a liability duration for various reasons. There's a chunk of business that's sold in the small business market, where the employers may be looking for coverage for when an employee leaves and termination benefits and other types of things. That business has a shorter duration than some of the other business.
In general, we look at our asset liability duration matching on a we call a core-tail approach, where we try to match cash flows in what we call the core period, which now has been extended to up to 40 years. We try to match those cash flows with assets. The 40-year JGB became available, I think it's maybe 5, 6 years ago or so. That was an option to us. While I think we're a little short on our asset duration versus our liability duration, it's not significantly short at POJ.
Yes, Mr. Berg.
Thanks very much. Eric Berg from RBC. My question for John is, how would you suggest working with the publicly available information that we continue to monitor the progress of the business? The reason I ask the question is this. You've told us that while looking at your sales in total can be a little bit misleading because after all, you've been getting out of products. You've told us that looking at agent count can be a little bit misleading because you're seconding agents to the banks and you're culling underperforming agents. I don't think you publish a yen-based full income statement. Coming full circle to my question, you publish parts of your income statement, but not all of them. Coming full circle to my question, given what you disclose at present, what are the best measures of the progress of the business?
You're on your own with that one.
AOI is one. I think one thing is if you look at each company separately, you have to look at their driver. At the POJ level, I think you want to study life planner. At life planners themselves, the key drivers that Ichitani-san talked about, you want to look at things like persistency, life planner retention, productivity, because it's with those that we're able to achieve the above-average performance. As he said, when we say it might be misleading, it may lead you to a wrong conclusion if you look strictly at a single number. For instance, if you look strictly at average premium, you may see it go up or go down, but yet it may be a good thing when the average premium goes down if it means that we're moving to higher margin products more focused on our individual protection needs.
In the end, it has to translate into AOI and ROE. Those are the final measures that you look for. You can look at the overall face amount in force, which is a published measure here in Japan. Tracking what is the face amount in force of the total business. That's on the POJ side. Similarly, for Gibraltar, I think also looking at the in-force value, the size of the business' scale. Ultimately start now talking about the life consulting count. We believe that if it hasn't bottomed out, it's getting closer or soon will bottom out. Looking at life consulting count and then ultimately looking at face amount and sales, and so on. Those are a couple of measures. The bank channel and independent agent channel, we've said these are supplemental to our core captive agent distribution.
The key there is looking at what we're selling and ultimately what type of profitability you're seeing at it from those channels. On published data, I'm not sure what would get published locally on a PGFL. Maybe we'd have to turn that back to the local people.
Your answer is helpful. Thank you.
The other answer I would say is, you're not going to like this very much, Eric, but it's terribly hard on a quarter-by-quarter basis. There are so many things that happen. There are fire sales, there are various things that can occur which can either increase or decrease sales or, as John said, some of the other drivers. If you look at it more on an annual or a rolling quarter basis and you can begin to see the trends, that will give you an indication of the health of the business over the long term. It doesn't help you quarter to quarter, but it will give you an indication over the longer term about the directionality and the health of the business.
Having heard that, it's 20 minutes after 12:00. We're out of time. Thank you for being with us today, and I hope you're able to stay for lunch.