Welcome. We may not arrive on schedule, but we will have an on-time departure from the gate. Today is the 2014 Investor Day of Prudential Financial, Inc. This event is being webcast. The webcast will be archived for two weeks at www.investor.prudential.com. Wherever you are and whenever you check this out, we thank you for your interest in Prudential. We hope you find your time well spent. Those of you in the room will find an agenda in your binder. As you can see, the scheduled arrival time is 12:30 P.M. this afternoon. Now on to something really important, that's the forward-looking statement. I should say forward-looking statements. I have been told that my treatment of these statements in the past has not been-
Respectful
as respectful as is appropriate and necessary. Therefore, I have been asked to read a statement. I'll get to the forward-looking statements, I've been asked to read this statement. These are the legal disclaimer slides for forward-looking statements and non-GAAP measures. They are included in your binders. With all due respect, is this going to work? We really have a problem. I'm hitting the little F button, I'm not going forward. There we go. one. I'm hitting it again. two. Please. This won't happen when Figre-
Is here.
I'll handle the jokes here. four. Come on, guys. five. six.
Yeah, now you really don't want to have to work.
Seven.
Oh, yeah. That's right, you asked them to.
Seven or eight. You will note that there are more forward-looking statement slides than there are slides in some of our presentations. I certainly hope the latter are less obtuse than the former. Notwithstanding the above, I will now make a forward-looking statement. Today is my last New York investor day. News travels fast, so probably everyone in the room knows that Mark Finkelstein will be joining Prudential, and that Mark will succeed me as Prudential's Director of Investor Relations. Mark will do a great job. I'm happy for Mark, I'm happy for Prudential, I'm happy for my staff in Investor Relations, and I'm happy for all of you. Rest assured, Mark will have the support of Neil Stern and the other members of our Investor Relations team. I think you will be very well-served after this change.
As for me, I've had a blast representing Prudential to the investment community, and just as importantly, representing the investment community to Prudential. I will tell you that if mortality were not a fact of life, I wouldn't be leaving now. They'd have a hard time getting me out of Prudential. Mortality is a fact of life, so I'm going to be leaving. I expect to savor my remaining time in the job, and then I will hand the reins to Mr. Finkelstein, and I will ride off into retirement. Much for that. Now on to the program. Prudential's first speaker. Thank you. That's very kind. Prudential's first speaker is John Strangfeld, our Chairman and CEO. John?
Good morning, everyone. Thank you, Eric. We appreciate your interest in Prudential. We have a very lively and high content agenda today, and we look forward to going through it with you. Without any further ado, let's get going. I have a number of macro comments I'd like to share with you before turning it over to Mark.
Hey. Come on.
Thank you, Eric.
You're welcome, John.
Okay. First, our investor proposition. Probably back it up. I can't go that quickly.
Back it up, please.
We're just teasing Eric.
Back it up again, please. Forward one, please. Oh, come on. The first slide, please.
Eric. Don't get mad.
Okay. There we go. We're good? We'll hold it right there. We thought it would be really important to begin with some comments about our investor proposition and how we deliver on our investor proposition. As we think about it, our investor proposition has four primary components. First, superior ROE. By superior ROE, we're thinking in an absolute sense and also in a relative sense, relative to our peers and relative to our cost of capital. Second, strong cash flow and smart and balanced capital deployment. Third, high value-added business models where we provide value and we get paid for it. Finally, conservative balance sheet. These are the four components of our investor proposition, which are frankly simple to say and hard to do, which brings me to the how of the way in which we deliver on the investor proposition. There we go.
If this is the biggest bug we had to deal with, I think we're in good shape. First and foremost is our business mix. It's the driver of performance. It's also the front line of risk management. In many respects, our business mix defines us. I will return to this business mix topic actually in the next slide. The second is talent and culture as a differentiator. Some would view this as the soft stuff. To us, the soft stuff drives the hard stuff. It defines how we operate. It defines the expectations that we have of ourselves. We also believe that in the long term, it's the most important driver of success and sustainability of our business.
We also believe that it's reflected in the quality, the continuity, and the seasoned nature of our management team. I also would return to this with a separate slide in a few minutes. The next item you see is proven acquisition and integration track record. You've seen this from us time and again, Star Edison, Hartford, many other things that have preceded it. We are very mindful that success is not in the announcement. It's not even in the close. It's in making things work. In making things work, we're talking about it from the perspective of the customer, from the perspective of the regulator, and eventually the perspective of the shareholder. We take great pride and put incredible emphasis on execution. It's not the announcement, it's not the close, it's making it happen. We feel very proud of our success in this regard.
Next is active and balanced capital management. Our businesses generate substantial deployable capital, and we deploy that capital to support organic growth, outsized organic, like pension risk transfer and M&A. We also distribute excess capital to our shareholders, whether it's via substantial and consistent dividends or whether it's more periodic stock buybacks. Mark will elaborate on this more in a few minutes. Finally, financial strength and brand. They're key to our long-term promises that we make to our customers, and we believe each of these attributes represents competitive advantages for us. Let me turn to what I meant by high quality and attractive business mix. Our business mix drives performance, and as I mentioned before, it's also the front line to risk management. Our business mix is by design. It's not by default. It's not an aggregation of historical decisions.
For many of you that have followed us for many years, you know we've worked this very actively, from major moves and acquisitions to quite a number of quite substantial divestitures as well. When you combine those actions with outsized organic in the form of PRT and the normal organic evolution of our core businesses, it creates a very attractive business. As we think about it, while we have scope and scale and some geographic breadth, we're really focused on three things, sometimes independently and sometimes taken together, namely life, retirement, and asset management. We have leading market positions in what are by far the two largest financial services markets in the world. I'm referring to the U.S. and Japan. Those are our two anchors, and then we have a growing presence in other parts of the world. Frankly, it's not just about the mix.
It's not just about the geography. It's also about the quality of the businesses that make up that mix, meaning well-run, well-led market leaders reflected in strong market positions and high customer satisfaction. These attributes create the strong vital signs, which in turn create superior financial performance. In sum, our mix of businesses brings attractive returns, growth, stability, sustainability, all achieved with a balanced portfolio of risks. When you look at our attributed equity picture, you get a more specific sense for both the choices that we've made in terms of our business mix and our overall risk profile. This is a March 31 snapshot of the allocation of our attributed equity, and it's done in a pie chart format by primary line of business.
I'd like to emphasize just one key aspect of the risks that underlie these businesses, namely, the more insurance-oriented risks are on the right-hand side, the more market-related risks are on the left. We manage the mix, and we like the mix from a risk and a return point of view, and we like the businesses that make up that risk, the quality of those businesses. In 2010, many of you know we articulated our belief regarding our potential earnings power, expressed in ROE terms, a goal of 13%-14%. Since then, we have worked very hard to prove it out, and today it's not an aspiration, it's a reality, as shown here. There were a lot of things at work over multiple years that brought the step function change in earnings power that you see in 2013, and capital deployment was an important part of that.
I'm talking about the strong organic growth across our businesses, outsized organic in terms of the large pension risk transfer transactions, the successful acquisition and integration of Star and Edison, which is now complete, the promising success of The Hartford Life purchase. These factors, coupled with some tailwinds and complemented by the shareholder distributions, produced the step function outcomes that you see portrayed here. These results were accomplished all the while strengthening our balance sheet and reducing leverage. In other words, we haven't resorted to financial engineering to achieve the result. In fact, just the opposite. We see this as distinguishing performance relative to our past, relative to our peers.
While tailwinds may become headwinds from time to time, most of that performance step function, we believe, is sustainable, meaning absent a tail event, we expect to stay in our aspired range of 13%-14% or better throughout the cycle. We're not declaring victory. We never will. We like where we are. That brings me to my final slide, which is touching on the topic, which I believe over the long term matters most, namely talent and culture as a performance driver. This is the soft stuff that to us is really the hard stuff. I think it's very unlikely that any other major financial institution spends as much time as we do on this or makes decisions that are so directly based upon this. To us, to me, talent and culture is the single most important driver of our long-term success.
I'm talking about leader-led proactivity on talent and culture. I'm not talking about an episodic HR exercise. I'm not just talking about attracting smart people. It's about the culture and the expectation. By culture, what I mean is no drama, low ego, high impact. I'm talking about people who understand the power and the wisdom of teamwork and diversity. I'm talking about cross-discipline collaboration, which tends to be a key aspect of innovation and execution, whether it's across businesses, whether it's across corporate functions. Examples where those are very real in terms of the impact of collaboration on outcomes would be pension risk transfer because it's multidisciplinary in nature, or the Star Edison acquisition, or our response to regulatory oversight. This culture enhances execution. It enhances innovation. It also encourages early identification of opportunities and early identification of problems.
It's our best step also for high quality control. It reflects the recognition that we have one company, one stock, and one reputation. Our talent also reflects a healthy blend of internally developed and mid-career hires. What they have in common is smart people with strong skill sets, for sure, but people who understand and embrace the power and the wisdom of teamwork, diversity, and collaboration, and who recognize the joy and the responsibility for bringing others along to maintain and enhance the culture. We all buy into the notion of this being the key driver of long-term success. I'd like to comment briefly about orderly transitions. Last year, we had the CFO transition from Rich Carbone to Rob Falzon. This year we have the transition of international from Ed Baird to Charlie Lowrey or the U.S. business from Charlie Lowrey to Steve Pelletier.
There are many more key moves that are less visible to you but highly critical to us. Thoughtful, orderly, and a balanced mix between internal moves and outside hires. Eric just mentioned the most recent announcement, meaning the baton pass from Eric Durant to Mark Finkelstein. Eric has held this role for 13 years, and you know what? He takes great pride in what he's done, and well he should. He also takes pride in the quality of the transition to his successor. That's part of the culture. That's how we think about our business. Earlier this week, we also announced a transition vis-à-vis our head of internal audit from Tom Carroll, who had held this role for 15 years, to Kevin Simons, who joins us from the London office of Ernst & Young.
For certain kinds of people, our culture and their opportunity to help shape it, perpetuate it, and enhance it is a highly attractive personal value proposition to them. For the company as a whole, we believe that this type of culture and philosophy is what drives client satisfaction, innovation, performance, and sustainability. The ultimate judge of that is not ourselves. It's the clients, it's our associates who have choices, and it's our shareholders. That's my overview. Thank you. At this point, I'd like to turn it over to Mark.
Thank you, John. Good morning. I apologize for my voice. I'm at the tail end of dealing with an allergic reaction to something that hit me pretty hard, but I will get through this. Let me start off with some comments on talent, picking up where John left off before I get into some other topics. I want to make a couple of brief comments on both of the recent transitions that John mentioned, Eric's departure, and then also the retirement of Tom Carroll. We're very pleased to have Mark Finkelstein joining us. He comes with a package of capability and experience and cultural fit that we think is going to be just great for Prudential, and we're looking forward to what he can do in the role in investor relations, but also whatever broader opportunities he may have within the company.
He's not coming into something that's broken. As you've recognized and as you've heard, Eric Durant and Neil Stern and the team have done a fabulous job in investor relations. So Eric will be handing off a function that's in very good order to Mark Finkelstein. With respect to the internal audit function, this one should probably be of more interest to you than it might otherwise be because of our status in transition to a company that's supervised and regulated by the Federal Reserve. The internal audit function plays a very important role with respect to interaction through the supervisory process. Having an internal audit function upon which the Fed can rely is critical.
Tom Carroll and Colm Keogh and the staff there have also done a fabulous job of building capability and meeting professional standards that make us very comfortable with our ability to present to the Federal Reserve supervisors an internal audit function that is world-class and fully capable of meeting all of the expectations that they will have. Having said that, though, Kevin Simons has been a chief risk officer in a large insurance company. He's been general auditor in a large financial institution, and he's been heavily engaged in work on risk governance and internal audit standards and risk management processes. Kevin is also very well known to the regulatory community. He's London-based and is British and better known to the European regulatory community, but also known to the U.S. community. He also brings extended skills beyond the functional capabilities that he has in internal audit.
He'll also play a role within Prudential that is broader and very directly supportive of the things that we have to do to be effective in being supervised by the Fed. We're also very pleased with the quality of Kevin and flattered, in fact, that people like these are interested in coming to Prudential and taking advantage of the opportunities that we can present. A couple of good things, one directly relevant to you as it relates to investor relations, the other directly relevant to regulation and supervision as it relates to internal audit. I have a short agenda. I want to spend a few minutes on the regulatory update, and there is action here. I've got some things that I think are worth talking about.
I want to talk a bit about risk management and partially in the context of the point of being supervised by the Fed. I want to talk about capital management, and particularly there as it relates to parent company cash flow and the deployment of capital broadly across the company. Starting with the regulatory update, there were a couple of developments this week that are important with respect to the supervision and regulation of insurance companies, but also, and really to the point of the current hot topic, directly relevant to the development of capital standards for the SIFI insurance companies, but also the insurance companies that are thrift holding companies and also regulated by the Fed. Those two developments are the following.
First of all, the Fed has engaged former Commissioner Sullivan, who was insurance commissioner in Connecticut, as an advisor to the board to address issues related both to the formulation and development of capital standards and also to the supervision of non-bank SIFIs and specifically insurance companies. The regulators in Connecticut are very high quality. We've worked with them through the years. We do have Connecticut-based subsidiaries, and we're encouraged by this development on the part of the Fed. It gives them access to someone who has experience and insight and understanding into not just the process of state regulation, but the substance of the solvency world as it relates to insurance companies. We look forward to working with him, and we look forward to the influence that he will have going forward on the thinking about the development of capital standards.
On that point, before I move to the second one, though, I would add that the statements that we've made in the past about constructive engagement remain true. We continue to have the opportunity to be heard in front of a variety of different regulators who are working on specifically now the development of capital plans, although there are other topics that bounce around. We're encouraged by both the interest and the engagement and the questions that we get and the tone of those meetings. I hope that Commissioner Sullivan will be complementary to a process that's already pretty constructive and I hope moving in the right direction as we've been saying for a while now.
The second point, a recent development just happened at the end of the day yesterday, that was the passage of the Collins-Brown-Johanns bill, which is an amendment to the original Collins Amendment in Dodd-Frank that clarifies the ability of the Federal Reserve to establish different, in quotes, capital standards for insurance companies than they establish for banks. That bill passed the Senate last night by unanimous consent. What that means is that all 100 senators agreed to pass the bill without debate. It has to go to the House, and of course, there's uncertainty around anything that's political. I think you have to be encouraged by the very strong statement on the part of the entire Senate that this seems kind of like a no-brainer.
The bill was well supported with sponsors from both sides of the aisle, we'll have the same situation in the House. We're optimistic that that can get through. At the very least, there certainly is a strong message out there about how to think about this issue and the fact that it would be nice to get it behind us and move on without having the Collins Amendment issue hanging out there as it relates to capital standards. I do want to kind of move on a little bit in the arena of capital standards. The debate has kind of gone along the lines of we're not a bank, that was the assertion for a while. Then we started to think about, okay, if you're not a bank, what are you? We've been around that track a few times.
The third phase is, okay, then what does it mean? How should we be thinking about what you're asking for, which is capital standards that are appropriate for insurance business models. One thing to wonder about is whether or not there's something in here that says be careful what you wish for. I believe in this case, there's not. I believe that if you think about what's really behind the notion of capital standards that are appropriate for insurance companies, we will look very good. You've heard me say over and over again on earnings calls in response to questions about capital management, that we believe that we should meet or exceed any reasonable, properly formulated capital standards. That view is reinforced the more work we do on what we think of as capital standards that are appropriate for the insurance business.
Let me flesh that one out a little bit. I've made some of these points before, I think this is more in front of us now than it has been. I want to go through how we think about what that means. What it really means is starting with the GAAP balance sheet because the broad regulatory world, particularly at the federal level, wants to begin with consolidated things. The only place that we present consolidated things is in GAAP financials. We don't have consolidated stat. Stat doesn't speak to each other, so we can't just add up statutory numbers and claim that that's consolidated. We begin with the consolidated GAAP, in this case, let's say balance sheet. Then what we have to do is within that GAAP balance sheet, find these insurance business models.
They are in there somewhere, we have to map the insurance business concepts to the items on the GAAP balance sheet. From that then formulate the right definition of capital narrowly, probably more appropriately, loss absorption capacity. The point of saying it that way is that there is an enormous amount of loss absorption capacity in the balance sheet that's not in the capital account. In a way, that's kind of the key thing. Considering the Collins amendment, for example, if you could consider all of the loss absorption capacity when you calculate a leverage ratio, you wouldn't be worried about equivalence to banks. You would far exceed the kind of leverage standard that the Collins amendment would imply. What that means, by the way, is that the Collins amendment issue is a lot more about form than substance.
We are not in economic terms more highly levered than the largest banks. Again, if you could properly consider loss absorption capacity plus capital, you wouldn't be worried about Collins amendment type restrictions. They would be irrelevant for a company like Prudential. Let me go through some of these mapping exercises and talk about what's in that bucket that I'm calling loss absorption capacity and how it might matter as you think about the real financial strength and the real, if there are any, capital challenges that we might face in an appropriately defined insurance-driven capital regime. The first one, most important and biggest, is the way in which we reserve. We have stochastic liabilities. We value those stochastic liabilities when we recognize reserves. Under the rule of for every action, there's a reaction, creating that reserve creates an investment.
Reserves are actually funded with hard, real money, in our case, almost all fixed income securities of one kind or another. Digging into reserves, there are, broadly speaking, two components. There's a best estimate, which is what we really think might happen. The best estimate, by the way, is absolute. It's agnostic to any accounting regime, stat or GAAP or IFRS or JGAAP. The best estimate is the state of the world. It's when people are going to die and we're going to have to pay their claims, or it's how long they're going to live and how long we're going to be making those annuity payments. Best estimate is the core thing. That's the real guess at what's going to happen. Then above that, there are margins, the margins are big.
The margins come from a variety of sources. I'm not going to track down all of them for you at this point. All you need to know is that when you look at reserves, that's not really our estimate of what we think we owe. When I say owe, meaning what it takes to meet the claims, that's the estimate of what we think we need to meet the claims plus a whole lot more. In our case, that whole lot more is $10s of billions. I've quoted that number before. It's a very substantial amount of loss absorption capacity that's in the books, but not in capital. By the way, it extinguishes capital. The more we reserve, the less capital we have, but we've actually enhanced the quality of loss absorption when we increase reserves. This is mapping item number 1.
It's the biggest difference between insurance companies and banks. They don't have stochastic liabilities. They have deterministic liabilities, and a dollar is a dollar is a dollar. For us, we have to estimate when people are going to die and how they're going to behave in order to sort out that best estimate liability. That's point number 1. The big mapping exercise has to put those liability products in the right light as they're booked and recognized and accounted for, but also remember, as they're supported by hard assets on the other side of the balance sheet. Second item on the GAAP balance sheet is separate accounts. We have a business interest in separate accounts. Our economics reflect the fees that we earn. The separate account owners are taking the investment risk.
They're not looking to our capital. The phrase that I've used is they don't have a line of sight to the capital of the company as it relates to investment performance. If there are guarantees, those are separate. They can be dealt with, valued, treated, and managed the right way. The pure separate account assets themselves include our commercial interest in fees, but don't include a line of sight with respect to investment performance. Again, for Prudential, a big number. This would now come out of the asset side. The reason for that is that the GAAP asset side is kind of a loose umbrella over just about everything we touch. It's not trying to define what we own as principal or where we take principal risk. It's a loose umbrella over just about everything we touch.
Next one is participating policies. In our case, particularly the statutory closed block, which is a system that has its own cushions built in around the dividend scale. It's a system that actually, by statutory agreement, passes investment and mortality experience on to policyholders. Again, our capital is not standing in the middle of that closed system. For us, that's $65 billion or $70 billion. Again, an adjustment that you would make on the asset side. Those kind of mapping exercises driven by reserving practices and driven by product design have a big impact on the risk view of the balance sheet and the leverage view of the balance sheet vis-a-vis the pure kind of face value GAAP picture that you get from failing to understand where loss absorption capacity actually resides and where real risk to Prudential's capital actually sits.
There are a couple of other things that have to be included in this exercise as we think about capital. One is that credit risk for us is defined by the probability of loss and the magnitude of that loss if it occurs. It's not driven by price volatility. We're not in a trading type world where we're focused on price volatility and liquidity. We're in a world where we're focused on making sure we collect the money so we can pay the claim. It's a very different picture for us, and we need to think about the capital requirements and standards as they relate to asset risk, not in the context of price volatility, but in the context of the risk of default and the loss given default. Finally, we have a market risk concept that's centered around asset and liability matching or not.
Meaning the real market risk to us occurs when we don't properly line up the cash flows on the asset side with the cash flows on the liability side. It's not a trading type risk that you see in banks. It's real. Being too short or too long on assets versus liabilities does have an economic consequence, and it needs to be considered. That's the last element of kind of the big picture. The point to circle back to is this. As we work through capital standards that meet this test of being appropriate for the insurance business model, these are the things that are out there. They're big, they're real, they matter. Actually, this is how we work. These are the things that we live with.
It's what we do every day to make sure that we do pay the claims when they come due and to make sure that we do have far more loss absorption capacity than we think we're ever going to need. In a sense, the capital account is a pure residual buffer against being so wrong on everything else that it's almost unimaginable. By the way, we replenish all these buffers. Those margins and reserves are restored. They're not booked once and then used up. This is an ongoing dynamic process for us. You hear us do it when we talk about assumption changes, for example, and what that means for reserves. That thing goes on all the time. It's a dynamic process that preserves the integrity and the colossal loss absorption capacity of our balance sheet. I really wanted to make two points here.
One is that the Collins Amendment is form over substance, that in real life, we are not more levered or even close to levered the way some of the large banks are. If you really understand the economics of the picture, you would be very comfortable with capital ratios. The second point I want to make is that there is something out there that can effectively and properly map the insurance business model concepts to the GAAP balance sheet, and from that mapping process, derive appropriate standards and calibrate those standards right as it relates to insurance capital. What I've just gone through represents the list of the kind of things that have to be considered in that mapping process.
What I wanted to do there was fill in some of the things around what does it mean to have capital standards that are appropriate for insurance business models. Those are the most important items that drive the answer to that question. These are the kind of things that we're discussing all the time on a lot of different fronts with regulators. Before I leave the regulatory topic, let me enhance that last comment a little bit. Just keep in mind that domestic SIFI is not the only thing out there. We are a globally systemically important insurance company, and there will be capital standards coming from the FSB, the Financial Stability Board, which is the international equivalent of the Financial Stability Oversight Council. Those standards are in the works right now.
The FSB has given a mandate to the International Association of Insurance Supervisors to recommend those standards later this fall. That work is happening, and it involves exactly the same kind of questions that we just talked about. We're also involved in a process called ComFrame, which is an insurance regulatory initiative related to the oversight of internationally active insurance groups. The point of that is to try to get something over companies that are regulated in pieces around the world. That process also includes stress testing and risk management exercises. That's going on. We also have our local regulatory environments everywhere around the world. We have the NAIC in the U.S., and for us, more specifically, New Jersey and Connecticut and Arizona as state regulators.
We're regulated in Japan, where, as you've heard, we have a significant and important presence, and a number of other countries around the world. There really are 4 different layers to this, and things come at us from 4 different directions. I just want to remind you, don't get too wrapped up in just domestic SIFI as the only question. Other things are happening and things will be coming at us from other places. Hopefully, there'll be convergence, we'll make sense of it all, and wind up with a good outcome. There are a lot of moving parts in this process.
Next, I want to comment on risk management, and I want to come at it from a Fed perspective in a way, but I want to circle back to a couple of big picture themes that I think you as investors ought to be hearing from us. Let me start bottoms up. There's an awful lot of work going on within Prudential around very specific risks, very specific information requirements, very specific analytical needs, very specific governance and management processes. A lot of this is work that we had otherwise been on track to do and need to do as our business changes. There are pieces of this that reflect meeting the standards that are expected by the Federal Reserve. In this sort of basic micro risk-by-risk context, we're doing a lot.
We've got great teams, we've hired fabulous people, and we have terrific momentum, but there's an awful lot of work at that level. There's work for us to meet what we expect and what we need to do ourselves, and there's work for us to do to meet the standards and expectations of the Fed, where they have views of processes and governance and information and modeling that are generically somewhat more centralized and somewhat more independent than the models that we had pursued within Prudential, where we were more autonomous in our businesses and placed more responsibility on local business executives for just about everything, business results, but also risk and volatility. We've got to pull all of that together. Moving up, though, now I'm getting into things that as investors, I think matter.
Moving up from the risk-by-risk piece and the big and important infrastructure that it takes to do everything that has to be done there, we then get to an optimization level. This is where we bring together everything that we know in risk and the work of the things we do in the finance function under Rob Falzon and the actuarial function, and also the businesses as they understand how they create value. We have to put together at this level some notion of the optimization of risks, taking the most valuable risks the right way, getting paid for them, making sure that we don't get blown up by cheap risks that we shouldn't take.
That leads to the 3rd point, which is the real reason we do risk management is to protect the value that we create and ensure that we can deliver it to our shareholders. Yeah, we do it for other reasons. There's a long agenda out there. At the end of the day, what this is all about is making sure that we understand how we create value and that we don't do the best thing and smartest thing in the world and get paid a zillion dollars for it, then lose it because the yen went the wrong way. Where there's a cheap, easy risk like the yen, we ought to be thinking about it the right way, and we ought to be preserving that really, really important value creation capability because it reflects the commitment of a lot of resources and a lot of time.
Getting to the end of it, the point is, we don't want to lose sight as we dig through process and data and models and information and risk by risk governance issues of the bigger theme that risk management is critical to delivering shareholder value to our shareholders. We ought to be making sure that we do that all the time, that where we build these high value added business models and capabilities, we don't give that away by taking a risk that wasn't worth very much. That's kind of what it boils down to, and that optimization piece in the middle matters a lot. I would tell you that we are learning a lot. We're learning a lot about solvency and capital as we go through those first exercises that I talked about.
We're also sharpening our view of issues around the optimization of risk and capacity and what we really get paid well for and what we don't. That's all going to inure to the benefit of the shareholders of the company. There are things about this that are very positive in terms of building capability and insight and understanding and then managing to it the right way so that we deliver a picture that's got a lot more robust sophistication around the notion of risk and optimization as opposed to setting limits and just saying no. There's a lot in this. It's, for us, important. I think it's for you important. The message here is we're enhancing capabilities in ways that are only going to be good for the shareholders of the company.
Finally, I want to turn to capital management from a cash flow perspective. This is going to give me a chance to put on a slide and talk a little bit more about a question that we often get in investor meetings, and we also get it on the earnings call about cash flows to the parent and sort of the ambiguity around the difference between that and capital deployment. I want to make three sort of short and crisp points about this. The first point I want to make is that the notion of the generation of capital, the expression of that capital as cash, and the subsequent deployment of that capital is a long-term notion for us. If you want to sharpen your pencil and dissect this every quarter, you're going to go nuts.
We're in kind of a long-term world. Quarter to quarter and year to year, things move around and we decide to leave capital somewhere for a reason or not. We take dividends for a reason or not. Remember, there's a statutory foundation out there that doesn't directly align with GAAP. That impacts capital capacity. Keep in mind that when we talk about it quarter to quarter and year to year, it does move around. Over time, there are some consistent things to think about. The first consistent thing to think about is that cash flow to the parent is pretty strong. The first slide here shows cash flows from subsidiaries to the parent over the past seven years. It's averaged about $3 billion a year. This is a disclosure that we make every year. It's averaged about $3 billion a year.
The parent company has about $700 million of expenses between interest and expenses on the books of the parent company itself. There's a lot left over. The first point is that there's a pretty good amount of daylight between the ability that we have demonstrated consistently over time to put cash into the parent company from our subsidiaries and the requirements that the parent company has to spend it. The next point, which is the final and more important point, is that this isn't the capital deployment picture. This is the cash flow to the parent picture. We also deploy capital directly from the books of our subsidiaries.
You're going to hear more from Charlie on what's happened in international, in round numbers, you can add about $1 billion to this slide reflecting kind of the average amount of capital deployed in international without going through this parent company channel. By the way, that's been pretty lumpy. When something comes along like Star and Edison, there's a spike in the amount of capital that we use on those local balance sheets. That point that this is a subset of what we consider to be the capital available for deployment is important. Don't get too hung up on the arithmetic of cash flow to the parent. Think more broadly about the statement that we've made that over time, capital available for deployment is about 50% of after-tax AOI.
Net income drives capital. There's kind of an implicit assumption in there that over time, net income and AOI are roughly equal. We're assuming that the statutory books are reasonably well behaved, again, over time. I'm reinforcing the answer that you've heard, which is that it's about 50% of net income after tax. It's not just this graph of cash flow to the parent. It does include capital deployed directly from the books of our subsidiaries. It's reasonably robust. We generate a lot of capital. You like that ROE because it's attractive as an investor. The mirror image of that ROE is that we generate a lot of capital. That 15%, 16% ROE neighborhood right now is generating a lot of capital. That's good for rating agencies and regulators and good for the opportunities that we have to deploy that capital.
I'll stop there. Thank you very much. I hope that was helpful. I think we have a great program for you today.
I got all tangled up in the forward-looking statement. I neglected to mention that John and Mark will take your questions at the end of the day. Our next speaker is Steve Pelletier. Steve is the Chief Operating Officer of our U.S. businesses. He will now walk you through those businesses. Steve?
Thank you, Eric. Good morning, everyone. I have a few more slides than either John or Mark. I hope we've got the kinks ironed out here. Let's see. Good. So far, so good. I appreciate the opportunity to review the U.S. businesses with you. First, I'm going to make some overall portfolio-type comments about the businesses as a whole. I'll make some brief individual comments about each business in turn. My comments on the asset management business will be particularly brief because I'm going to be followed by the head of that business, my colleague David Hunt, who has much deeper insights into it than me. Following David's remarks, he and I will both take your questions. Let's get underway. As John emphasized, Prudential's business portfolio and our U.S. business portfolio has been purposely designed to represent an attractive mix of businesses and risks.
By virtue of our business mix and the capabilities, solutions, and reach that it generates, we believe we're among the very best positioned in the industry to capitalize on significant growth opportunities that exist in the U.S. marketplace. Our pursuit of these market opportunities is governed by the constant application of the twin disciplines of achieving appropriate returns and maintaining a balance of risk. We view sales as an outcome of our continuous application of these disciplines. This discipline is reflected in our financial performance, in particular, in the quality of our earnings. Prudential's U.S. business portfolio is complementary and diversified, again, in terms of both businesses and risks. We have varying degrees of exposure to capital markets, equity markets, interest rates.
For example, businesses with much lower sensitivity to equity markets, such as our individual and group life insurance businesses, help balance businesses with higher equity market sensitivity, such as our annuities and to a lesser extent, our asset management business. We also have varying and complementary degrees of exposure to mortality risk and longevity risk. The mortality risk inherent in our individual and group insurance businesses acts as something of a natural hedge to the longevity risk that we have purposefully assumed in our annuities and our pension risk transfer business. We like this mix. We continue to actively manage it. We selectively add to our scale and capabilities, as seen most recently in The Hartford individual life insurance acquisition and the outsized organic growth from pension risk transfer transactions. We're willing to exit non-strategic businesses or underperforming businesses.
Prudential has demonstrated this discipline over a number of years, as witnessed most recently in our disposition of the wealth management business. We carefully govern activities within businesses to achieve appropriate returns and maintain that balanced risk profile. We see this in particular today, as I'll cover with you in a bit, in the annuities and individual life insurance businesses. There we go. At Prudential, we firmly believe that long-term demographic trends continue to be the force shaping the U.S. financial services landscape. There's nothing particularly new about that insight. You've heard it before from us and others. A couple of key points. First, just because that insight has been around for a while does not make it at all passe. We are still on the very front end of these trends having an impact in the U.S. financial services markets.
That age wave that we talk about so much will still be breaking on the shore for another 15 years as the oldest baby boomers have just been starting to retire in the past couple of years. Second, here at Prudential, we've made those trends the basis of our business strategy and our business choices, as John remarked, for the past 10 years. That puts us in an exceptionally strong position to capitalize on those trends. Corporate plan sponsors in large defined benefit markets have a keen and growing interest in de-risking. This has several drivers, including sharpened awareness of longevity risk. Prudential is recognized as a market leader in pension risk transfer, including with solutions that range from buyout transactions to pure longevity reinsurance to liability-driven investing. Individuals now shoulder greater responsibility for their own retirement security.
For decades now, corporate pension plans have been shifting from a defined benefit framework to a defined contribution framework. This changing U.S. retirement system creates greater need for products such as stable value and in-plan income producing solutions. It also drives a particular need for DC plans to contain features that produce more defined benefit-like outcomes, including such things as automatic enrollment, automatic contribution escalation, and default investment options. Target date funds represent a significant and growing share of contributions to 401(k) plans. Our retirement and asset management businesses collaborated in 2013 to launch the Day One target date funds, a suite of funds for use in plans on our own platform and that of others. Individuals are not only shouldering greater responsibility for their retirement security, they are also bearing more responsibility for out-of-pocket healthcare costs.
Both in the workplace and in the retail marketplace, we offer solutions to help individuals manage those out-of-pocket costs. The solutions that we present to the marketplace stem from our superior and highly relevant set of capabilities, driven by the talent emphasis that John emphasized in his comments. We leverage those capabilities both within businesses and increasingly across businesses to help clients fulfill their needs. These capabilities include strength in product innovation and solution development, investment management expertise and strong investment performance, actuarial insights that help us formulate and keep long-dated promises, risk management expertise, particularly in asset liability management, as Mark was emphasizing, and strong capabilities in client service and operations. These skills are embedded in businesses that are performing at a high level, operating at scale, and that are continuously validated by flows from institutional and retail clients.
Our ability to reach those clients in both institutional and retail markets greatly contributes to our ability to capitalize on opportunities. We have over 25,000 institutional client relationships. We do business with over half of the Fortune 500. We are also very proud to serve over 30 million individual customers, including over nine million retirees and near retirees. We are a distribution powerhouse. Over 125,000 financial professionals, including our own in our agency distribution channel, sell our products and solutions to help meet their client needs. As you can see in the bottom half of this chart, the mix of distribution between proprietary and third party has shifted dramatically over the past 10 years in both our life and annuities business. Our retail and institutional businesses, particularly annuities and retirement, are sources of opportunities for our asset management business, which is able to compete successfully for mandates on those platforms.
2013 represented an all-time high in the earnings of our U.S. businesses. As striking as that milestone is, I actually think the more compelling part of the story is in the quality of our earnings, and that is the part of the story that bodes very well for the sustainability of our performance. 2013 was obviously a very strong year for the equity markets, and our business mix put us in a position to benefit from that overall market lift. These middle boxes here are not drawn to any sort of scale, but they were meant to illustrate a point. The point being that even in a year of very strong equity market performance, the majority of our earnings growth came from how we conduct the business. Net flows, improved margins from both pricing discipline and cost effectiveness, and as John mentioned, outsized organic growth from pension risk transfer.
This is not just a 2013 phenomenon. These same business-driven factors have led our earnings growth and our increased earnings quality since 2009. For some comments on the businesses one by one. First, Annuities. The goal of our Annuities business is to help clients achieve secure retirement income. We don't mean to be too clever about the wording here, but that word secure is specifically chosen. It's meant to include guaranteed income, but by no means be limited to it. Within the past year, Annuities has implemented a product diversification strategy to improve our risk profile while meeting a wider range of client needs. I'm not going to update all the cash flow analysis that Bob O'Donnell provided last year, not because the data isn't very attractive from our standpoint.
In fact, the long-term cash flow expectations for the total book of business are even stronger than what Bob showed you last year, both in the base case and under a range of stress scenarios. Annuities product diversification strategy and product designs significantly improve our ability to adjust to changing market conditions. In 2013, we began our diversification effort with the launch of Prudential Defined Income, or PDI. Since then, as you can see in the chart, we've also introduced a single premium immediate annuity and an investment-only VA product, and we've modified our existing HDI product offering. I do want to point out that our two leading products in terms of sales, PDI and HDI, contain some significant distinctions from the rest of the VA marketplace.
We are now able to reset key product features, such as roll-up rates and payout rates, for new business as often as monthly without going through any type of refiling process. The fire sale phenomenon, for example, that's been so much a part of the industry story over the past several years, is now significantly reduced for us from this point forward. We're offering retirement income solutions that are relevant to the marketplace, achieve targeted returns, and help us to diversify our risk profile. I know that some companies like to give indications about the direction and level of their VA sales. For us, I encourage you to look going forward at the composition of our sales. That's the metric that will tell us about our success in diversifying our risk profile while helping clients, through a variety of means, achieve their secure retirement income needs.
The economic exposure created by our living benefit guarantees is materially lower than the notional exposure. It's been reduced in the past year due to market appreciation. These charts are for 2012 and then on the right, 2013. In each, the traditional measure of in-the-moneyness is shown in red. The difference between account values, shown in green, and the protected withdrawal value, shown in lighter blue. Remember two points that we've discussed many times before. First, that the protected withdrawal is a notional amount. It cannot be accessed as a lump sum by the policyholder. Remember also that the account value is the first source of funding for policyholders' lifetime income payments. Prudential is only responsible for payments once those account values have been completely exhausted. Our true economic exposure in each of these charts is best measured in the navy blue bar.
The cost to defease it, if you will, by purchasing an immediate annuity that replicates the cash flows paid under the guarantee but not funded by the account values. Last year, as Bob showed you on the left, that cost was $2 billion. This year, rising markets have lowered that cost to $1 billion, and that cost is hedged and supported by assets on our balance sheet. Let's back up a bit and take a look at the longer-term trajectory of our annuities business over the past several years, showing how we consistently take a disciplined approach to achieving appropriate returns and a balanced risk profile. In the early stages of the market crisis, we saw a critical need that was going largely unmet in the marketplace, and we sought to fulfill that need.
We had an edge in doing so due to our, at that time, recently introduced product design, which contained the significant differentiation of automatic rebalancing and how much that mitigates risk in our product design. We saw our sales increase due to rising demand for that solution, even as from the very beginning of the market crisis, we continually raised prices on that solution and reduced the benefit levels associated with it in order to ensure appropriate returns. Our risk in doing this was further mitigated by the reversion to the mean that was clearly going on in equity markets at the time. During the period between 2008 and 2013, we were able to increase the auto rebalancing coverage of our total book of VA business from under 30% to over 70%.
Most recently, we've seen our VA sales moderate as we focused on putting in place the elements of our diversification strategy that I just addressed. The multi-year trajectory that I just showed you has been a rewarding one. Rising markets and operating leverage that's inherent in the business have driven an impressive expansion of our return on assets in the business, more than doubling from 2009 to 2013. Let's turn now to our Retirement business. Within Retirement, we have the Institutional Investment Product segment and the Full Service segment. IIP includes our pension risk transfer business and our stable value businesses. We are the clear market leader in pension risk transfer. As we know, the pace of transactions will be episodic. We are participating in dialogues that cover the full range of that market, whether you segment it by size or by type of business.
That is to say, funded business versus pure longevity reinsurance. Having said that, we fully recognize that the larger case market plays more to our distinctive capabilities and our ability to create customized solutions. Stable value is another example, like annuities, of our being able to step into a market vacuum during the financial crisis. The capacity that we were providing to the market at that time was sorely needed. We were able to provide it on terms highly favorable to us. That means that the $70 billion in investment-only stable value that we've put on the books over the past five years has a very attractive risk profile. We're now seeing an increase in competition in that marketplace, as you'd expect. While we continue to pursue opportunities, we don't expect to see growth at the same pace as the past several years.
In the full service business, we continue to take a selective approach to what we view as a highly competitive market. Having said that, our investments in the business are paying off in terms of an improved pipeline and improved cost efficiency. Persistency in the full service market remains very strong. Here we see the forces at work in the pension risk transfer market. Improved pension plan fund status, heightened awareness of pension plan risk, in particular longevity risk, and greater comprehension of risk transfer solutions. These drivers exist today in the U.K. and the U.S., and they're developing in Canada. In a recent study by Mercer and CFO Research, over three-quarters of corporate plan sponsors, 77% to be exact, in the U.S., said they're likely to employ liability-driven investing over the next two years.
Almost half, 48%, said they're likely to employ some form of pension risk transfer over the next two years. This confirms trends that we find in our own proprietary research. We continue to feel very positive about the development of this market and our participation in it. The pending adoption of new mortality tables, in particular, is, as I said, sharpening that focus on longevity risk and heightening the propensity of clients to transact. These things do take time to work their way through the system, we continue to expect pace of transactions to be lumpy. Taking a look at sales and account values. As compared with 2012, in 2013, our full service sales increased somewhat, while our investment-only stable value sales declined somewhat. Our very strong position in the IOSV market naturally means that some counterparties are approaching concentration limits on our name.
In the full service business, our focus on profitability and pricing discipline has not waned at all. Net flows remained positive in 2013, albeit considerably lower, of course, than in 2012, when we booked the GM and Verizon transactions. Account values in both full service and IIP have increased. Let's turn to individual life, a business that's a strong and steady contributor to earnings and that helps counterbalance the market sensitivity in other parts of our business portfolio. Within individual life, we're shifting our product emphasis in order to maintain an attractive risk profile. More on that in just a moment. The Hartford integration is on track and fully delivering on the expectations we had at the outset, expectations around financial outcomes, product outcomes, and distribution outcomes. In financial terms, we stipulated at the outset of the transaction $120 million in integration costs.
We're about halfway through that, we stipulated an expectation that we would eventually achieve $90 million in annual run rate cost savings. We're about two-thirds of the way along that path. We expect to substantially complete both these paths towards the end of this year. Our unified and Prudential branded product portfolio reflects innovation, that innovation enhances our ability to shift product focus, as I'll touch on in a minute. On the distribution front, The Hartford acquisition has dramatically increased our footprint in the bank and wirehouse channels. Chart on the left shows growth in sales in 2013 due to organic growth and the acquisition of The Hartford business. The chart on the right shows the composition of the in-force book by product. Going from the bottom of each of these bars up, you see term, guaranteed universal life, other universal life, and variable life.
The second bar for 2013, the one on the far right, shows how much of the growth in the in-force book in 2013 is attributable to The Hartford acquisition. The acquired block of business from The Hartford did contain a meaningful portion of guaranteed universal life. However, as you can see in the second bar from the right, guaranteed universal life still represents only a relatively small portion of our overall in-force book. Our sales diversification strategy is intended to mitigate any concentration of sales in GUL. Expanding on that, our goal is to have a diversified mix of products that delivers profitable and predictable sales growth across all products. Our intent is to have a sales mix that is, roughly speaking, a third, a third, a third among guaranteed universal life, other universal and variable life, and term life. Here you see our progress against that goal.
GUL represented almost 60% of sales in the first half of 2013. In the most recent quarter, the same product drove less than 40% of sales. All of that is by design, reflecting actions that we've taken to achieve this outcome, including a series of price increases. In our group insurance business, reduced sales reflects a focus on restoring appropriate returns in this business. We're investing in underwriting and technology, and we're seeing already in our results the fundamental shift toward voluntary products. We're investing further to make sure that we build out that suite of products. Group life is the dominant source of profitability for group insurance. Our life benefit ratios over the past several years have been within the target range, and we're benefiting, as I mentioned, from strong demand for our voluntary products, which accounted for over three-quarters of group life sales in 2013.
In group disability, progress is evident but will not always be linear. Over the past two years, 60% of the book has been repriced or lapsed. We've made significant investments in claims management, increasing the number of claims managers, decreasing the case loads per manager, and improving the quality and pace of our claims resolution. These efforts helped Group Insurance improve its results from 2012 to 2013. The recent reversal in the first quarter of this year purely reflects severity, a handful of large claims in the disability business. Despite that, we continue to feel that our efforts are the right ones by all the metrics we track, that they continue to place this business on the path to recovery, a path that will admittedly have its ups and downs.
Here, we clearly see that in Group Insurance, sales are indeed an outcome of our focus on achieving appropriate returns, pricing discipline, and selectivity regarding underwriting risks. While overall sales have declined, the percentage of total sales related to the higher margin voluntary life product have been increasing. On the right, you see that even over the past two years, even as we've reduced sales, our net in-force premiums during this period have increased, with new sales and price increases somewhat offset by the lapsation of business that was, in almost all cases, highly unprofitable. David will speak about our asset management business, so I'll just make a few comments here. We are a top 10 global asset manager. We have a unique multi-manager model. We serve many of the world's most demanding and sophisticated institutional investors. We enjoy robust underlying fundamentals, including strong and consistent financial performance.
In particular, this business is a prime example of improvement in quality of earnings, with almost all of the recent earnings growth driven by asset management fees. Our asset management is a bona fide asset management business, highly competitive one in its own right, but it's also vital to the success of our overall business. It delivers improved margins to the general account, and the investment capabilities in the business are an essential ingredient in the solutions that we provide across many of our businesses, as John highlighted, the pension risk transfer business being a primary example. We're investing in the asset management business to drive further growth. Let me wrap up with the same thoughts I started with. We like our business mix very much, as well we should. It's been purposefully designed to look the way that it does.
We're among the best positioned in the industry to capture money in motion by virtue of our superior set of capabilities, the solutions those capabilities generate, and our distribution strength. Our focus is on pursuing market opportunities, achieving appropriate returns, and maintaining a balance of risks. Following through on that focus keeps our financial performance strong and sustainable. Thanks for your attention. Eric, back to you.
Thank you, Steve. Let's take a 10-minute break. We'll come back for David Hunt.
[Break]
Let's reconvene, please. There can't be that many of you who are out in the hall calling your brokers now. Hello, Ian. How are you? Okay. As promised, our next speaker is David Hunt. David's official handle is President and CEO of Prudential Investment Management. He will be speaking to you about our asset management business. David?
Eric, thank you. Good morning to everyone. I must say, looking through the attendance list this morning, I was struck at how many of the world's leading asset managers are here in the audience. I have a feeling this may be a little bit of the proverbial coals to Newcastle. I thought I would take advantage of the fact that this is a sophisticated audience on the topic to go a bit deeper into how we organize and prosecute our asset management business and the success that we've had over the last couple of years. It's probably worth just a moment of history. By definition, Prudential as an insurer began actually investing money 135 years ago. The current asset management business, which as I'll show you, is a big third-party independent asset manager, was formed about 15 years ago.
John Strangfeld was the CEO of the business at that time, and that really dates the kind of current construct of the business. I'm going to focus much of my comments on the last four or five years, but a lot of the core decisions and the construct of the business were actually made back those 15 years ago, and I'll point those out as we go. I really want to talk about four major themes this morning. First, I want to give you a little bit of a sense for the outline of the business, who our clients are, how we think about our organizational model. Second, I will take you through the fundamentals, and talk a little bit about how we view the really important drivers of success in the business. Third, I want to talk about how asset management fits in with the rest of Prudential's businesses.
Steve referred to that in his remarks, and I'll take my cue from that and talk a little bit more about the ways in which asset management capabilities are used broadly across Prudential. Last, I do want to talk about the investments that we're making. We do believe that this can be an important growth business for us, and I want to talk about why we believe that and where we're putting some of our money to work in that. Let's just start with a bit of a description of the business. First of all, we are one of the largest asset management businesses in the world. We do enjoy the privilege of serving many of the world's most sophisticated clients. We have a diversified product suite. We do have a global business model. Many of the other Prudential businesses are organized around regions.
This business is run and operated on a global basis, and I'll talk a little bit about that in a moment. We do have what we call a multi-manager model, which we believe in fundamentally as a better way of generating investment returns for our clients, and I'll talk about why we believe that to be the case. Here's just a little bit of data from P&I. This shows us to be the tenth largest asset manager as they measure it in the world. We would measure it a little bit differently in that we would probably strip out a lot of the passive business from some of the players that are up here, and we'd probably focus more on the institutional market.
If you do that, you take again the P&I data, you would see that in the tax-exempt institutional market, we are actually the fifth largest asset manager of active public securities. We are a very large, very relevant player in the competitive landscape in asset management. I think sometimes people are surprised at the mix of our fees, I do like to use fees rather than assets when I talk about the size and balance of our business, I'll show you why as we go through. Fees, I think, on revenues are a better measure of the real economic exposure that we have to the different asset classes. When you do that, what you see is a very nice balance. You see that the general account of Prudential is about 22% of all the assets or the fees that we generate.
Third party institutional is more than 40%. We have about 25% of our fees are generated by third party retail. In total 78% of our fees are generated away from the general account. I point that out because I think sometimes people are surprised by that, maybe it's the history of insurance companies in the asset management business where those businesses have been dominated by proprietary assets. That's not the case here. It's a very important part of our business, but this is predominantly a large third-party asset management business. Let me talk a moment about our clients. We're very, very proud and privileged to serve many of the world's most sophisticated investors. We have about 1,100 third-party clients around the world. We have more than 60 that have more than $1 billion with us.
In fact, on average, those 60 have almost $3 billion each with us. We have very large individual clients. We're also privileged when we look at just kind of who those clients are from both a size and a sophistication point of view. We see that they are the leaders within the Fortune 500. We serve 24 out of the top 25 corporate and public pension plans and 116 of the top 300 global pension funds. We really are very proud of the robust client base that we have, we're pleased that this has been growing very rapidly over the last couple of years. We also have a very diversified offering. Again, I think sometimes people are surprised by the breadth and the range of the asset classes that we offer. We have a full range of public fixed income and private fixed income businesses.
We have a full range of equity businesses, which include both traditional fundamental as well as indexed and asset allocation businesses. We have a very robust real estate business, which includes both traditional equity investing as well as commercial mortgage. Then we have a very robust alternatives offerings, which are, other than real estate, largely baked into our other asset managers. Sometimes we're asked about the proportion of alternatives in our mix, roughly speaking, that's about 19% of our revenues at the moment. The rest of it splits out a bit this way, again, I do this on a fee basis rather than on an asset basis, with public fixed income being slightly more than a third, public equity being a little bit less than a third, real estate being about 17% of our fees, the two private businesses being the remaining.
The main point here is that we are very pleased with the balance that we have across asset class. We do believe it gives us a really nicely balanced through the economic cycle set of asset classes, some of which will grow well in some economic forms and some of which will grow better in others. We have a truly global business model, and I'm going to talk more about this when I talk about where we're investing. We have currently 30 offices on five different continents. We have been growing this in a disciplined, steady fashion over the last couple of years. We've also found that we have a set of products and capabilities that non-U.S. clients find very appealing. We have started a much more disciplined calling effort on the large sovereign wealth funds, other big pools of pension plans around the world.
Currently, we manage $26 billion in assets with the large sovereign wealth funds. That number has been growing. If you look at our flows more broadly, we've had more than half our flows over the last year came from large non-U.S. institutions that wanted to invest back in our U.S. dollar-denominated product. Let me talk a little bit about the model that we use for asset management because it has some unique properties and characteristics. These are by design. They're not simply a matter of history. There are eight different businesses that report up to me. They are largely organized by asset class. These are run as autonomous units. Not only does each of them control their own investment process, but each of them has a CEO that makes most of their own business decisions.
The key control functions of legal, compliance, risk management, the CFO function, report up either to me or up into the Prudential functions directly. The business decisions themselves reside within each of the units. Now, why do we think this is important? We believe that in many ways, size can be the enemy of performance. We believe that it's very important in order to attract and retain the very best investors in the world that we need to operate like a small investment partnership. Indeed, that's what each one of these feels like.
If you were to go to a Jennison management meeting, if you were to go to one of the fixed income desk meetings to talk about the markets, you would feel that you were part of an investment partnership of senior people who are debating each other with a lot of respect, but a lot of passion around what they believe is happening in the market. This would not feel to you like employees or being part of a large corporation. We treasure the fact that our people feel as if they are the owners and they're fully accountable of these different asset managers, although that's not in a legal sense true. It's that sense of partnership rather than employee that makes this model work and means that we keep our really great talent and investors, which I'll show you is true in a moment.
That is a very important mantra for us, is that if you're going to design an asset management business to meet investment performance, then you want to stay small, and you want to stay deeply focused around your asset class. The three major themes that I would use to describe this model is that it does give a real power of focus. That is that each one of these businesses, as I said, develops its own culture around the asset class that it's responsible for. Not surprisingly, the real estate guys are quite a bit different than the equity guys, who are very different from the fixed income guys. That comes through in the culture and the kinds of people that they work with as well. It's also very powerful that we are very focused on that particular asset class.
I love the fact that the people here in Jennison do not worry about what's happening in the real estate business. I like the fact that the QMA folks are not concerned with what's happening to our joint venture in China. I want people deeply focused on what they're doing. Importantly, I want them to feel that they are completely responsible for their own results, which gets to this second point of clarity of accountability. In our model, investors will control how they run their business and also how they get paid. Each one of these businesses has their own bonus pool, which fills as to how they do, both as a business and as they do for their investment performance. It doesn't depend on how Prudential overall does, and it doesn't depend on how other asset management does. Our clients really value this.
When I go out and I talk to CIOs across the United States and around the globe, they do want to know how our compensation structure works. They want to know how we think about rewarding people, and they love the fact that there's direct line of sight from our investors into how their individual business is doing. They like the fact that not one of these businesses is larger than 600 people. This is a group that has deep accountability for their own results. The last point I would make is that this really does have strength of diversification. In almost any economic climate, many of these businesses will be doing well, a few of them will be puttering along, and a couple of them will probably be struggling.
I'm happy to say that actually in 2013, as I'll show you in a moment, every one of these businesses actually had an extremely good year and was up on the year before. I don't expect that to be true. I think that was a bit of an aberration. In most environments, I would expect there to be a balance of these. We do a lot of scenario planning, as you can imagine, using different market shocks, and we can show you that in a whole variety of different economic climates, we have different pieces of this that do well. Overall, at a PIM level, we have remarkable stability of earnings right across the board. The secret sauce of the model is this power that we get from the focus.
It's the clarity of accountability and the sense of partnership that we have in the businesses, and the strength of diversification that we get by having this whole range of asset classes. Let me talk a little bit about the fundamentals and how the business has actually performed really right through the financial crisis. Every business has its own virtuous cycle. As we know, virtuous cycles can also go in the other way if you're not careful. This is our virtuous cycle. I tell this story with a lot of purpose because I think a lot of people in asset management get it wrong. That is that we start with a complete focus on investment performance. That's our entry into our virtuous cycle. If we do that well, we will earn the trust of our clients, and we will gain flows.
As we gain flows, that will feed an attractive financial picture, which we believe is an outcome, which will allow us to invest in our people and our processes, which leads back into investment performance. That may seem obvious to many of you, but I can tell you that many people in the industry have got this wrong. They enter this at the wrong place. They enter it in client flows and become asset gatherers. They enter it in earnings by setting themselves financial goals to meet up front. We don't do that. We don't have an AUM target. We have an investment performance set of measures that we care about.
Because we are, and Prudential is a major, obviously, investor in PIM, all of the management team across Prudential, when they see me in the hallway and say, "How is it going?" what they mean is, How's your investment performance? How are you doing for our clients? I think that's a really important foundational point for how we get into this virtuous cycle. Let me tell you a little bit about how the virtuous cycle has been working. First of all, we have had excellent investment performance. I give you here the breaks for all of our fixed income products and all of our equity products. These are net of fees, so if you were an investor with us, you would find that in the low 80% of our assets would outperform their benchmarks. We are achieving what we told our clients we would do.
We are providing alpha for them over what they could do in a passive index. I've given you on the right-hand side just some of our more important products, whether or not it's Core Plus or our emerging market funds. I've given you the U.S. small cap. You could look at large cap. When you go across the major asset classes that we have, we believe that we have performance that ranks right up there with the very, very best in the industry. We also believe that we spend more time on investment performance than almost anyone else. We have very good attribution analysis.
I spend a lot of time figuring out whether we were lucky or good, we think we have very sophisticated analytics, which help us tell when we were simply, on occasion, right about the market and when we made really good fundamental calls about a security. Attribution analysis is a core skill for us, and we spend a lot of time on it. At the end of the day, though, investment management is about people. We think that our major competitive strength is our people. We have a very deep and experienced team of folks who actually manage the money. Their average tenure is about 16 years with us, 22 years in the industry. These are folks who've gotten to know each other extremely well. We have very established track records.
We have, for many of these businesses, 10 years, and in some cases, 20 years of investment history that we have, and teams that have worked together that long. I'm very pleased to say that our regretted turnover, that is the people who've left us that we didn't want to lose, was close to zero last year. We find that when people come, they like the model that we have, they want to stay, and they want to be part of the team. We think that we are very rigorous when it comes to fundamental analysis. When you look at what we do in credit or you look at what we do in some of our quantitative strategies, we think we're right at the cutting edge of the investment industry on that. We are a very team-based model.
If you were to look right across the different businesses, you would find that the way we manage money is a very institutional one, and it's based on a team approach to investing. We do not have individual stars. We don't believe in that as a model of investment management. We want something that not only produces alpha, but produces repeatable alpha in a way that clients can understand and believe in going forward. The way we do that is by having a very defined investment process, by having, I think, world-class risk management that is deeply embedded into all of our teams, by having very good attribution analysis, and by having that all driven in a team-based environment where people stay and work together over a long period of time. That we think is the secret sauce of the very strong investment performance that I described.
Let's move across then the virtuous cycle. If we have good investment performance, that leads to very strong flows. Here are third-party institutional net flows. You can see coming right up out of the crisis, they have been extremely strong. I spared you the slide that has this on a quarterly basis because it does give vertigo. If we were to do it there, you would see we have had 26 consecutive quarters of net inflows. We believe that that's a record. We can't find another large asset manager that's had that kind of consistency. We think that consistency speaks to the fact that our investment performance quarter and quarter, year in, year out, has been extremely strong. We're very proud of both the magnitude of this, but also the consistency of it right as we've come out of the financial crisis.
Our total AUM through this has grown at a very nice and disciplined pace at 14% right through the five-year period. We've, during that time, again, to use the Pensions & Investments numbers, moved from being the 13th largest global asset manager to this last year, the 10th. If you look just at our asset management fees, these are the fees that we're being paid just simply as an independent asset manager, you would see that from 2009, there is a very steady, consistent uptick in those. It tracks, again, very consistently with our AUM growth. In this case, actually almost exactly where we have 14% compound annual growth rate right through the cycle. Let's talk for a minute about earnings.
Our AOI on a normalized basis, if you just focus on the blue for a moment, if you look back in 2009 when things were looking very grim, we have more than doubled our core asset management earnings over the course of that time, from $279 now up to almost $600 million. If you look at the light blue, that is the so-called ORR, or what used to be called Itpicum or Itsicum. I first thought that was some kind of skin disease when I came. I gather that it does have some of the same attributes. It is something we've spent a lot of time focused on. I do want to address it directly.
For those of you who are new and following our financials, these are the incentive fees, transaction fees, and some of the other more unpredictable and more lumpy kinds of fees that go with the asset management business. It is absolutely our intention to have those be a smaller proportion of the total as we go forward. We've done two things to try to minimize the variability of that. One has been obviously the strategic investments and the balance sheet that sits behind the business. We've brought that down considerably. I'll show you the facts on that in a moment. The second one is that incentive fees have driven some of this variability. We've changed our accounting policy on incentive fees, which will now be recognized as they occur. You may still get some volatility, but it should be all good news.
You won't get any of the clawbacks that you've seen in the past. You can see since 2011, we have had as a proportion of the total that Itpicum, Itsicum, ORR line has become a smaller and smaller proportion. That would be our intention going forward. I mentioned the balance sheet. I think this is a very important piece to understand. We do actively manage a balance sheet behind our asset management business. That is, by the way, somewhat different than many others in the industry. We have taken our balance sheet down quite considerably since the crisis in the end of 2008. We have completely, or pretty much completely eliminated the interim loan portfolio that we had at that point. The strategic investment levels we've taken from about $1.5 billion down now to the $911.
I do think, as we think about the importance of this, we do want to continue to invest. We do want to continue to make the strategic investments, which are largely made up of seed investments that we put into new funds, and also our important co-investments or some of our real estate funds. We will continue to do these. As we continue to grow, we will continue to have those. I think we're getting smarter at bringing the absolute level that we need to do down, and we're doing it in smaller pieces. Importantly, that should mean that not only do the quality of our earnings, because that ORR line becomes less significant, we believe the quality of our earnings will grow, and obviously our ROE also comes up considerably.
We're now running the business in about the high 20s in terms of ROE, which is a big change, as you can see, as we brought this balance sheet down. Just to give you a couple of then the financial metrics. If you go the whole way across this virtuous cycle, we've had the flows, it's grown the assets, and what has that done then to the actual financials? You can see that our asset management fees were a record level in 2013, pre-tax AOI at $723, our operating margin at 27%, and we finished the year at $870 billion in assets under management. We really do believe in this virtuous cycle.
We do think that if we focus on investment performance and we focus on what our clients need, that will lead then to flows and to financial importance, and that is the order in which we actually run and manage the business. Let me turn for a moment from that story to just talking about how asset management fits in more broadly at Prudential. I think it's a very important story and context for the business. The first place to look for the connections is that clearly our two private businesses, that's the private placement business, PCG, as well as our commercial mortgage business, are originating a large portion of what they do for the general accounts. Our general account enjoys then a margin level that is considerably above what they would get if they were in publics in both of those.
If you were to look over the last 15 years, that number has been quite substantial. We believe that because we have very high quality originations that come from both of those, both in terms of the financial point of view, but our credit, even through the crisis, was extremely good in those two businesses, that that then comes through our general account margins. One of the biggest benefits from the asset management business to the enterprise can actually be seen in that improved net interest margin that comes through the general account. The second thing I would say is that asset management is very much part of the collaboration with our other businesses, most particularly the annuities business and the retirement business.
Many products that are going to be needed for the wave of retirees that we see are going to come from the conversion of insurance capabilities, risk management capabilities, and asset management. If you look at many of the new products that we've launched and that Steve talked about in the annuities business, those have come with very close collaboration with the asset management business, particularly our fixed income capabilities, which are extremely deep in the kinds of corporates and structured products that go into a lot of those products. In addition, Steve mentioned some of the retirement pieces of this. Pension risk transfer is probably the best example where we've worked very closely with Chris Marks' team in making sure that the underlying investments that sit behind those group annuities are done exactly as we need to make those businesses work.
We've obviously been a lot of the engine that's been behind the stable value product as well, as we manage at least a portion of those assets behind it. The intellectual capital that we have as one of the world's leading asset manager is clearly used in many of the other parts of Prudential, and I think that's a very important part of how we see adding value up to the enterprise. I would also highlight, as Steve mentioned, that as an independent asset manager, we have the opportunity to compete for business on our annuities and retirement platforms. We compete with other large global players as well. I am pleased to say that we certainly win our reasonable share of those assets. It's an important part of being part of the family, is that ability to compete. Let me talk then a bit about the future.
I've spent a lot of time on the last five years. Over the last couple of years, we have invested quite considerably in asset management. I just highlight a couple of fun facts for you on that. We have launched about 50 new investment products and strategies over the last two years. Many of these are of the type that we believe will be important to either corporations or individuals who are looking for non-traditional investment capabilities and strategies. We have over $400 million that's gone into focused seed capital just over the last 18 months. We have actually been expanding our headcount, in particular, even at the senior level, reasonably aggressively as we continue to build out and expand, particularly around the globe.
That 40 new middle and senior hires would probably be around a 10% increase in headcount for those levels of seniority over the last two years. The investment dollars, both in capital and in expense dollars, are absolutely going into the business. What then gives us the confidence to put those kinds of dollars into the business? It's really three things that we see happening out there. I want to start at the top with the globalization theme. As I go around and I talk to the CIOs of many of the large leading pension funds, the story that they tell is remarkably similar. They say, "We want to deal with fewer partners. We have," pick your number, "230 investment managers that we use.
It is enormously time-consuming for us to manage all of these, and we're not sure we're getting the most out of them. We would like to reduce the number of people that we do business with. Oh, by the way, we expect more from the people that are going to be left. We want more capabilities, and in particular, we want more global capabilities." Clients today don't want to talk about what's the best idea in the U.S. or what's your best idea for China. They, for the most part, want to talk about the best relative idea that we have around the world. They want us to be able to look at their portfolio and give them our advice on their risk on a global basis. They want us to have an investment perspective on what do we think are the implications from what's happening in Ukraine.
What do we think of the global economic projections that the World Bank has just come out? They expect those from us. Increasingly, that is changing the entire industry dynamic. We are seeing a group of global players gradually pulling away from people who are more regional. That doesn't mean that there won't always be room in investment management for more specialized strategies or regional strategies. In the main, there's going to be a smaller group of truly global players that will increasingly garner these large institutions' assets and attention. We are in that group now, and we are investing heavily to make sure that we stay in that group. We believe that general trend toward fewer global managers plays to our strength because of our global presence and because of the range of asset classes that we offer.
The second thing that we see, just on the lower left, is a real change in how money is being managed. All of us probably went through school, and we learned about correlation matrices and efficient frontiers, and this guy named Markowitz, who was designing portfolios. Then the economic crisis came. All of a sudden, dynamic correlations all went to one, and people began to really question whether that was a good way to manage money. We have clients now who are much more sophisticated about how they're thinking around risk budgets, risk parities. We have many clients who are moving toward more outcome-oriented investing, where they say, "I don't care whether I've outperformed or underperformed the S&P.
Will we have enough money to meet the funding requirements that we have?" On an individual basis, "Can my child go to college?" That's what they want to know. If you're meeting that need, they're happy. We've got many more examples of clients that are moving to liability-driven investing, de-risking or LDI, to outcome and solutions capabilities. That plays to our strength because we have all the different pieces together through our asset classes, and we're able to design products that meet a lot of those long-term outcome-oriented needs and solution needs. You'll see a lot of the investment that we've been making has been in those solutions. The last is that we really do see a shift in what is often thought of as proper investments.
You don't have to go back very long in the history of investment management that there was stocks and bonds. In truth, we're seeing an awful lot more sophistication through the use of hedge fund techniques to create real non-correlation portfolios, whether it's been real assets, whether it's been infrastructure, whether it's been agriculture or timber, whether or not it's been more sophisticated approaches to manage volatility. Most of our clients are moving away from simple stocks and bonds to a more sophisticated view of portfolio management. That, again, we believe is a very good thing for us because we have the capability to begin to hit that. These three trends, which we see as speeded up by the financial crisis, but fundamentally were going along anyway, we think all play to the success.
These three areas, globalization, a shift into more solutions orientation, and a shift into other types of investment categories, make up a good portion of the investment that we're making and what we will see as the future growth of the business. If I were going to just try to point to the major themes behind both the dollars and the capital that I showed you in the business, I think I would summarize that in these five themes. We will continue to build out this more resilient and diversified business model, particularly with many of these new non-correlated asset classes. We will continue to invest to build out our global footprint, both in products and in distribution. We will continue to be investing behind our solutions capabilities, both within our different businesses, but also at the PIM overall level.
We continue to want to expand through the acquisition of talent. We are always on the lookout for talented investors who have the same culture and mindset and want to join. Our preferred mode of growth absolutely is either individuals or, on occasion, team lift-out. We find that that is a much lower risk and much higher probability chance of success than a full acquisition. We like the ability that we have in those cases to really carefully culturally assimilate people who've come on. There's quite a number of good success stories across our platform of both individuals and teams who've come in and been successful. That's not to say that we wouldn't, on occasion, consider a bolt-on acquisition to this.
I think, in general, these would be relatively small, and they would probably target a particular area where we feel like we need our capabilities to be maintained. All of these will be small relative to the regular organic growth that we believe we have in our businesses. The last point is just that we have had great success partnering with other parts of Prudential. We talked about PRT. Steve mentioned target date funds as a new product that we launched last year. We believe that the integration of insurance, risk management, and asset management will create a lot more products that this aging population and the pension plans that sit behind them will need. We will continue to invest with our colleagues in developing those capabilities. Let me just conclude then with where I started.
We do have a global leading asset manager that uses a very distinct multi-manager model that we believe in. We believe in it because we believe that it creates better investment performance. We've had very robust fundamentals. That virtuous cycle between investment performance leading to flows, leading to financials is working extremely effectively and has over the last five years. Asset management remains a core part of intellectual sharing across the Prudential enterprise and adds real value through that and through the provision of unique assets to the general account through the entire enterprise. Last, we do see this as a growth business. We have both expense and capital dollars that we have been putting into the business, and we will continue to along the three major themes that I outlined. With that, I will conclude. Eric, are we taking questions?
We will take questions. Let me very quickly review the Q&A rules of the road for you. I think you'll be familiar with these. First, wait for me to call on you. If I don't recognize you, forgive me. I'm functionally blind in the room. The lighting is quite challenging. Please wait for the mic. Remember, we're being webcast. Please state your name and firm. Please respect your colleagues. Don't hog the mic. Try to keep your questions concise and to the point. I am everybody's worst dream as an editor. If you keep them short, I won't edit your questions. Okay. Let's begin. Let's start over here with Erik Bass, the gentleman. Keep your hand up, please, Eric. Even though I mentioned your name, please do it again for the record.
Hi, Erik Bass with Citigroup. I just had two questions for David. I guess first, can you just talk about how much of the institutional flows the past couple of years have come from the investment-only stable value? Then I guess on the LDI side, can you talk a little bit more about your capabilities there and how much have you seen in terms of inflows to that product as interest rates have started to move a little bit higher?
In terms of the stable value, in the early days when that product was launched, the flows were quite substantial. Obviously, a lot of the banks had pulled out of that. This was a place where we believed we could step in with our balance sheet. In those early days, we also were able to maintain a real discipline around having a lot of those assets be managed within PIM. That's changed over the last couple of years as the market has come back a little bit. We've had more competition as other people are making that available. The flows there have been somewhat less in the last year or two. I would expect that trend to continue.
Is there a second part to your question, Eric?
Sorry, was there a second?
The second was on LDI.
LDI is maybe not surprisingly, been a long-standing strength of Prudential fixed income. The core way that we manage a lot of the general account assets and others is through a matched book, and so we are, I think, very good at thinking about the liability side of what we're trying to achieve and then coming back and looking at portfolio construction and what we need to do to get there. Our LDI capabilities we put up as second to none in that, and indeed has been a very important and large part of the flows if you were to look out over the last five years as our corporate pension plans have wanted to take risk off the table.
Can you quantify the flows at all?
I can't off the top of my head. I'd have to look.
Okay. Who is next? Steven Schwartz, the gentleman on the aisle further up, red tie, blue shirt.
Thank you, Eric. Steven Schwartz, Raymond James. Just on the same topic. There's been some question with regards to pension risk transfer, I think mostly on the insurance side, of whether or not there's enough capacity in the industry to handle these trillions of dollars. I'd be interested in your view. From a whole holistic perspective, I'm wondering if you're agnostic between the various products, whether it be buy-ins, buyouts or LDI. Is there a preference for the company as things develop?
Sure. I'll address that, Steven. We think that the market is developing. It will continue to develop over time. I think that industry will have the capacity to address these needs overall. Having said that, if that capacity in the industry is not necessarily unlimited, that's a good thing in terms of the margins that we'll be able to continue to command, especially as we, as I said, play more to the larger size cases where we have the ability to really add value and charge accordingly. In regard to the type of solutions that clients seek, we really do play across the board. Let's take a look, for example, at both funded buyouts, where we're actually assuming the assets vis-a-vis longevity reinsurance.
That is actually highly complementary for us, both in terms of providing a range of solutions to client needs, but also in terms of the way those businesses emerge for us financially. Funded business is essentially run off over time. Our earnings from a given transaction decline marginally over time, whereas in longevity reinsurance, earnings emerge in just the opposite fashion. They escalate over time. We actually embrace the idea that clients look for a range of solutions and seek to position ourselves accordingly.
Okay, who's next? Sorry, I don't know your name. The lady in the back of the room. Is that Joanne? I really am blind, Joanne. I'm sorry.
Joanne Smith, Scotia Capital. This question is for Steve Pelletier. I was wondering if you could talk about the ultimate business mix of the U.S. business and right now, annuities is about 38% of AOI. Where do you want that to be and what is going to get bigger? What is going to get smaller over time? Thanks.
I think, Joanne, our business mix is well-positioned. I think the existing picture represents, as I said, an attractive mix both from the terms of capturing opportunities and being positioned to capture opportunities and also a balanced risk profile. We really seek to make sure that it stays that way. I will point out that you mentioned the annuities business. I think if we have further growth in that business, it would be much more oriented towards an entirely different risk profile in that business. The PDI product, for example, has no equity market exposure, and the investment-only variable annuity business has no living benefit guarantee whatsoever. Looking at a business and just saying a given percentage isn't necessarily how we look at it.
We tend to go deeper than that and look at the type of risks that we're underwriting, we will seek to keep that risk profile balanced in the way it is today.
Sorry. Again, is that Jimmy? I'm sorry, Jimmy.
Hi, Jimmy Bhullar, J.P. Morgan. Question first on your disability margins. They've lagged over the last several years versus where peers have been. Wondering if you could talk about, is that more pricing deficiencies in claims management or other things in what you're doing to improve those? Secondly, on individual life, first quarter you had bad mortality. As you've looked more at the data, have you discovered anything in terms of what the causes were of the weak mortality results in the first quarter?
Jimmy, I'll take those questions in reverse order. The second one is much simpler. In individual life, absolutely not. We view that as a random fluctuation following several quarters of above expectation mortality, better than expected mortality. We simply view that as a random fluctuation. When you look at our long-term experience here, it's been very much within expected ranges. In disability, I acknowledge your point about margins having been worse than others in the industry. That is a function both of pricing and of claims management, that is why in my remarks, I focused on those two areas as being the primary areas that we're focusing on in terms of putting the business in a better path. We are seeing the impact of that. Disability claims incidence is down. Our actual claims under administration are down, our pace of resolution has been improving.
Pace and quality of resolution. In terms of pricing, as I said, we've been able to reprice or lapse a significant part of the book, 60% over the past two years, that which we lapsed we wanted to lapse. Obviously, always better if we can get the increased pricing that we seek, we have been able to do that to a significant extent over the past two years. When that's not possible, we believe a case isn't going to generate reasonable returns for us, we're willing to lapse it as a second alternative.
Thanks.
Okay, let's stay on this side of the room. Chris Giovanni. Hand up, please.
Thank you. Chris Giovanni, Goldman Sachs. I guess, Steve, question for you. You and John have both talked a lot about being sort of the solutions provider to the customer. You've also made comments around the shift in product that you're making on the VA side or the annuity side to the PDI or the VA without living benefit guarantees. Can you talk about what that customer solution shift has been or why there is that shift? Is that purely just a risk management exercise that you guys are doing?
No, I think, Chris, that it has the benefits of being a risk management exercise, but it also helps us appeal to a wider range of client needs. In the investment-only VA space, that has, as we've seen just in the past couple of years in the marketplace, there is meaningful appetite there. By virtue of our product design and our distribution strength, we believe that we're very well-positioned to capitalize on that opportunity. In regard to PDI, yes, that is risk management, but it's also innovation. It is designed to really appeal to clients who have that need for guaranteed retirement income but don't feel that much of an appetite for equity market participation. It has the twin virtues of innovation, or I should say three virtues of innovation, risk management, and meeting client needs.
Okay, next up, Eric Berg, the distinguished gentleman who's a ringer in a Prudential row.
I don't know what that's all about. Eric Berg from RBC Capital Markets. My question is for Steve, and it has to do with the pension risk transfer business. It's my sense, and tell me if I don't have this right, that in contrast to life insurance, where you're asking a lot of medical questions, there's much less medical underwriting in the case of a pension risk transfer deal, there may even be none. You'll tell me. My question is, since you don't really know the health of all these hundreds of thousands of people, how do you estimate how long they're going to live?
Eric, I would say that it's not as if we have medical underwriting. That's not the basis of the pension risk transfer business. We do, in the PRT business get, especially in the larger case market in which we play, and this is another advantage of concentrating on that market. We get very detailed census information. That is a very attractive part of our ability to pool risk and price it accordingly. Remember also who we're talking about in, for example, the GM and Verizon transaction, that we're talking about retirees who are further along in life and therefore, where the ability to do that kind of risk pooling, to do that kind of actuarial analysis, and price accordingly, is relatively higher. Again, I would emphasize that quality of information that we receive in these cases. That's really key to our ability to underwrite and price it accordingly.
Okay. Do I see any other hands? I do see a hand. Is that hand attached to you, Ian? Okay.
Thank you. Ian Gutterman, Balyasny. I guess one for Steve and one for David. Back to PRT. Just what has the decline in interest rates year to date done to demand? I guess on one hand, I could see it's more expensive to the plan sponsor, maybe they're less interested. On the other hand, maybe this reinforces the need to act because of the risk on the balance sheet if rates do keep going down. I guess that's for Steve. Then for David, you cited, I think, a 27% operating margin. Is there potential for that to improve over time? I guess what would be the drivers, whether it be mix or flows or whatever it might be? If Eric will let you and is generous, are there any mid or long-term margin targets you can share with us?
Well, the latter I will disallow, I thought the first part of your second question was excellent.
Thank you.
David would be delighted to address it.
I'll take all the parts of your first question. I think we are in a very good position right now regarding a range of factors that increase both ability and propensity of clients to transact. It is true that the recent downtick in rates have put something of a dent in that plan funding status, but that's a minor dent in what has been a significant improvement over the past couple of years. In regard to lower rates, they also have the benefit of that propensity, as you mentioned. It does increase focus on the liability and propensity to do something about it.
Just maybe to stay with PRT for one second. Then I'll come back to operating margins. I think that while rates are one portion of that equation, as I've been out talking to CIOs, what you really are getting, though, is the impact of the new actuarial tables that have come in. Many of them really didn't have a sense for what this was going to do to the actual recognized liabilities that they needed to do. That, plus the PBGC fees, which they now see increasing, is giving them a much clearer idea into actually what their cost was all along. It's just that they didn't really recognize it. Now when they run the numbers at whatever interest rate you want to assume, these kinds of solutions are looking more attractive than ever. I'd also point out that the interest rate piece cuts two ways.
It is also cheaper to borrow if you decide that you want to top up one of these at lower interest rates than it was before. It's a more complicated story than simply looking at taking out the funded piece of this. Secondly, on the operating margins, I would say overall, in asset management, the thing that most determines operating margins is not overall scale, which is actually completely unrelated, but is the scale that you have in particular investment strategies. We spend a lot of time thinking about what is the right level of scale that we need for a strategy, and almost no time worrying about what the total scale piece is. We do believe that we are at a point here where we are hitting more than minimum scales in more and more strategies.
We can see our way to an increasing set of scale economies in particularly the new strategies that we've launched over the last couple of years.
Okay. If there's one more, we have time for it. Going once, going twice. Let's take a 10-minute break and we'll come back for international. We can stay on schedule if we reconvene shortly, very shortly. We are now on what I would call the backstretch. If any of you ever ran on a quarter-mile track. We're not yet to the final turn, but we're on the backstretch. Our next speaker is Charlie Lowrey. Charlie is the Chief Operating Officer of International Insurance, and here he is.
Thank you, Eric. I'm not sure I like being called the backstretch. Besides that, I'm delighted to be here today, and we'll talk to you for the next about 40 minutes about the international business and then be happy to answer questions. Before we get to the agenda, I'd like to start out with four key messages that we hope to get across today. The first is that we have a proven business model. That we think has a sustainable competitive advantage that's really based upon a proprietary distribution structure, and that's about selling death protection. That will be one of my themes throughout the presentation, is our concentration on death protection. Because what that provides are stable M&E margins that in turn provide a high ROE and low volatility in terms of earnings. Now we've broken the presentation down into three real parts.
The first is a discussion of the business model, which incorporates the first five bullet points of the agenda. The second is a discussion of the market in Japan. The third is really the risk management and capital generation. What I'd like to do is really talk about the genesis of the market. I'm still in the U.S. business mode. To talk about the genesis of the market. We entered the market in 1981 through a joint venture, but really started Prudential of Japan in 1988 with a gentleman named Kiyo Sakaguchi, who had a different view about the Japanese market. Before him, life insurance was sold by part-time agents, mainly housewives, pushing products, if you think about Tupperware or Avon. Those are mainly sales products.
What he did is come along and say, "We want to change the way life insurance is sold in Japan." What he did is he hired mainly men with college degrees who had never been in the insurance market before. He hired about two out of every 100, so he focused on quality. He focused on death protection as the product to sell. Not savings product, not other things, but death protection. He focused on creating a needs-based analysis that the life planners would go out and talk to their clients and find out their needs before suggesting any product whatsoever. Finally, he targeted the affluent and mass affluent market. If you had high retention, the life planners would stay with their clients for a long period of time.
As a result, as their clients grew older and prospered and started their own businesses and became professionals, the life planners would then enter into the small business and professional market. In addition, over time, we expanded through diversification, we diversified in four ways. The first way was through customer segments, we created the life consultants. The second was through other distribution channels, namely the independent advisor channel and the bank channel. The third was through product diversification. As we increased customer segments, we began to find other needs stated by customers for different kinds of products. Finally, we pursued a limited number of geographic expansion opportunities. As we've said before, we're not into flag planting. What we are into is going into a limited number of countries and going deep into those countries.
What this next series of slides shows is a framework by which to think about our business. What you see on the left are a series of categories. Because as we think about the business, we think about four questions. Who's our customer? What are their needs? What products do we have that could fulfill those needs or that we could create to fulfill those needs? What are the distribution channels that we have? What you see here are the broad strokes of those categories. For instance, the life planner, we target the affluent market, we target death protection, we target insurance, whole life and term. Now we fill that out with the characteristics and the capabilities that we have according to those categories. I won't go through all of these for you. This is really for your own reference going forward.
As we build out the model and you look at the second part, the life consultant model, you see we hit a different demographic. We hit the middle market and affinity groups and add different products, such as multi-currency fixed annuities. Finally, when you look at the third-party channels, namely the banks and the independent agencies, what you see is that we hit an even higher net worth geographic, or rather demographic, than we do with the life planners, and we add savings products to this. In each of those categories that we just saw, you see death protection, death protection, and death protection. It shouldn't come as a surprise that over half of our annualized new business premiums or our premiums in force are in fact death protection. That is the core of our business.
In fact, this is understated to a certain extent because if you look at the retirement part of the pie, our biggest selling retirement product is U.S. dollar-denominated retirement. We sell that to a young demographic in Japan, and there's a strong death protection component to that. Part of our growth has been organic, and part of it has been through acquisition, and this shows a history of the acquisitions. We started with Kyoei, which in fact was the genesis of Gibraltar. We then acquired Aoba, Yamato, and finally Star and Edison. The result of which has been an increase of 11 times in the number of in-force policies and a quadrupling of our annualized new business premium. Speaking of our Star and Edison, let me just put an exclamation point around or at the end of this acquisition.
This is really the last time we'll talk about these five criteria. In terms of integration costs, we originally said that it would cost about $500 million. We lowered that to $450 million. We then again lowered it to $400 million. We've actually spent $340 million. The last $60 million will be capitalized and bled in over time, we're done. In terms of cost savings, we said we would generate about $250 million of cost savings. I think in the fourth quarter of last year, we had $62 million of cost savings. If you annualize that, you're at $248 million. We're done. We wanted a more productive sales force. What you'll see later on in the presentation is we have brought the productivity level of the entire sales force back up to the pre-acquisition productivity level. We're done. We integrated the product portfolio and de-risked the investment portfolio.
In each of these categories, you can put a check mark next to them. Let's talk for a minute about high ROE and low volatility earnings, and we'll start with the earnings picture first. What you see here is steady growth in terms of earnings. This is for both the Life Planner operations and Gibraltar Life and the other operations. There are a variety of reasons for this. The first reason is, of course, organic growth, and there's been substantial organic growth. There's also been a series of other reasons. Let me just articulate what those are. Obviously, in 2011, there was Star and Edison. In 2012, we had a sales surge, and we had actually two sales surges. One was from the tax change on cancer whole life, and the other was from our repricing of the dollar-denominated product.
In 2013, we had other tailwinds, such as the increased investment income from our non-coupon investments. Overlaid on top of all that is you can see the hedged FX rate at the bottom as the yen was strengthening during this time. What we don't want you to do is take out your rulers and draw a line from 2009 to 2013 to predict the future because there are headwinds going forward. The most obvious headwind going forward will be the change in the FX rate as the yen weakens. Secondly, the non-coupon investments and the outsized non-coupon investments we have received in 2013, at some point, will revert back to the norm, if not the mean. Finally, there is a bit of a consumption tax issue. It's not very large for us. Only about a third of our sales go through third parties.
That's a bit of a headwind too. You can't draw a line straight up. That's not happening. What is happening is an increase in our ROE, almost back to pre-acquisition levels. What you see here is we were in the low 20s before we acquired Star Edison. It dropped when we acquired Star Edison, and it has gone back up, partly because of the synergies we've enjoyed and partly because of the foreign exchange. Let's now talk about the constituent parts of the business model. We'll start with the Life Planner operation, which is really the core. We'll talk about Life Consultants and then the supplemental distribution channels. In terms of the Life Planner, again, we're talking about the affluent and the mass affluent market, as well as the business and professional market.
When we talk about this business model, we often refer to it as the three Q's. The three Q's are quality people, quality process or products, and quality service. The Life Planner model is a very difficult model to create. It's certainly a difficult model to replicate. It takes a long time to break even, and it takes a lot of work to manage. It's also a relatively costly model. We'll talk about that a little bit later. If you do it right, what you find is you get a virtuous circle, and that circle is comprised of three parts: high productivity, high retention, and high persistency. As you go through this, let's evaluate what the numbers are. In terms of productivity, you have over seven policies per month that's sold by a Life Planner.
In terms of retention, on a 12-month basis, you're at about 90%, and in terms of persistency, you're over 95% on a 13-month basis. If you have these kind of numbers, how does the virtuous circle work? It works in the following way. First, if you have high productivity, you have Life Planners making money. If they make money, they stick around. If they stick around, they develop very strong relationships with their clients over a long period of time. You have high client satisfaction. If you have high client satisfaction, you have two things happen. You have higher second sales, and you have referrals. We do not advertise at all in Japan. It is all by word of mouth. It's all by referrals. If you have higher second sales and higher referrals, it goes back to higher productivity.
The circle goes round and round, and what you find is you get superior returns, and you get steady growth. Don't take our word for it. Let's analyze each of the three Qs in an objective way, and let's start with quality people. With quality people, we'll look to the MDRT, the Million Dollar Round Table. For 17 consecutive years, POJ has had the highest number of MDRT members of any Japanese firm. 24% of all life planners are MDRT members. That compares to about 1.1% as an industry average. Remember, most insurance companies still rely on the part-time agent basis. Another factoid that's kind of interesting is if you take Gibraltar's MDRT members and add them to POJ's, over about one-third of all MDRT members are from Prudential within Japan. That's quality people. Let's go to quality products.
Here what you see is if we have good retention of life planners over the course of their lives and they stay with their clients, we need to develop a series of products that will in fact solve or serve client needs. We have death protection products when they're young. We have retirement income products when they're a bit older. We have savings products, and finally, we have inheritance products. The proof point here, though, is that we are number 3 in terms of annualized new business premium sales in Japan. If we didn't have good product, we wouldn't be selling as much as we are in Japan, and we sell a lot. That brings us to service. If you have good retention and you have good persistency, then hopefully you have good service. Here we look to J.D. Power. J.D.
Power has rated us number 1 for the past four years in a row for client service and client satisfaction when it comes to death protection. That has led to very strong persistency. If you have strong persistency, again, you'll have high second sales, and that's what you see here, growing second sales. In 2012, obviously, you had the surge of the two products we talked about. You average those two years, you get to about $170 million for those two years. But you see consistent growth over a five-year period. The second point I'd like to make is look at the dark blue part of those bars. That's death protection. Again, that is the core of our business going forward. With second sales, look at the yellow part. We begin to sell more A&H riders. We don't sell A&H separately.
We don't sell third sector products separately. We sell them as riders. In second sales, you sell more riders. We've talked about the fact that the life planner model is a complicated model, and it's a relatively expensive model to run. We expect life planners to produce more over their lifetime. Let's compare this productivity or production that a life planner has to a traditional agent. What you see at the bottom is what we believe to be a traditional agent's trajectory. Where over their lifetime, they will sell about $200,000 worth. That's in terms of annualized new business premium. The reason the line goes flat is because the retention of a traditional agent is relatively low.
If we say that the productivity of a life planner is the same for a moment as a traditional agent, and the only difference is retention, and we have higher retention, what you see is that our lifetime sales are two and a half times as great for a life planner as they are for a traditional agent. A life planner is far more productive than a traditional agent. When you couple the retention with the productivity, what you see is that the life planner over their lifetime with Prudential is about 10 times as productive as a traditional agent. At the end of the day, the life planner operations, and this is both Japan in the blue and other countries in the yellow, have increased significantly over time. It's sort of a steady state increase over time. Obviously, again, 2012 was the surge.
If you take that out and you just look point to point, 2011 to 2013, that's a 10% increase. You also see the life planner count at the bottom, and that has been growing steadily over time as well. Let's turn to the life consultant model for a moment. Here what you see is it's a different demographic. It's a mass middle market, and we have strong relationships with affinity groups, which we'll talk about. Finally, we have very broad geographic coverage. In fact, we're in almost every single prefecture in Japan. We go back to the roots of the life planner operation, which is needs-based selling and its death protection. We also sell some retirement products for specific reasons, and that really has to do with the Teachers Association and some of the affinity groups we have relationships with.
Let's talk about the Teachers Association. This is an association with whom we've had a relationship for over 60 years. There are about 950,000 teachers, and this association represents about 25% of the life consultant business. Of that 25%, about 12% go to retiring teachers. The reason for that is that this is a factory. Last year, we had 33,000 new hires come in, and there were 36,000 retirees. For the new hires that come in, you sell them death protection. You might sell them retirement income. You'll sell them a series of protection products. For the retirees that exit the system, they get a lump sum in the spring in the hundreds of thousands of dollars. They'll buy other products. They may buy some death protection. They may buy fixed annuities. They may buy some savings products.
So a variety of different products relating to their retirement. Let me talk then for a moment about the Star Edison acquisition once more in terms of productivity and where we are. We talked about it on the first quarter call, but it's sometimes good to see it in pictures. In order to do that, we use the playbook we did with Kyoei when we first acquired them. Let's go back in time and look at what happened with Kyoei and compare that to the Star Edison acquisition. We acquired Kyoei in 2001, and we did a lot of things to change the agent population into life consultants. We changed their compensation from fixed compensation to variable. We increased their validation requirements. We did a whole series of things such that over time, we did increase their productivity. But the life consultant count came down accordingly.
There were some people that either didn't like the new requirements or couldn't make the new requirements. So life consultant count came down as productivity went up, and we see that over that two-year period. Now you look in the intervening 7 years at what happened. Productivity stayed relatively flat. It increased slightly to $7,400. But life consultant count began to increase over time. Now you look at the figures of 2010. You have about 6,000 life consultants and productivity of $7,400 per month. That's what you see on the left-hand side of this slide. Okay? It's a different scale, but those are the same numbers. In 2011, we hire Star and Edison. Excuse me. We buy Star and Edison. So the life consultant count goes back up, but productivity comes down because their agents weren't life consultants yet.
They were agents, and their productivity was lower. We did exactly the same thing. We changed their fixed compensation to variable. We increased validation requirements. We increased a whole variety of things. We introduced training. What happens? Within two years, we have productivity back up to the pre-acquisition levels, but life consultant count decreased. As we said on the first quarter call, it has decreased and probably will bottom out sometime end of this year, beginning of next year, and then hopefully will increase after that. We've gotten productivity back up to where we want it. Looking at it in a slightly different way but to achieve the same results, if you look at annualized new business premium, it has decreased by 10% over the past two years. Look at the life consultant count. It has decreased by 27%.
That difference, the difference between those two percentages, is the increase in productivity. Let's talk for a couple of slides about the supplemental distribution channels. There are some advantages to being in the bank channel and the independent agency channel, and these are the fact that you access either a different geographic region or a different demographic. There are challenges. This can be a very volatile part of the business, and we've seen that, and I'll show you that on the next page. What we do is we manage the bottom line, not the top line, and we balance business profitability and business mix. You may remember last year, we had concentric circles, and there were three intersecting circles. One was client need, one was product profitability, and the third was business mix. Any one of which can be a governor at a certain time.
What you see here are the annualized new business premiums for all of Prudential International Insurance. You see LifePlanner at the bottom. You see life consultants. Both of those are going up. You see the variability that occurred in the third-party channel. That was really due to the single premium, the yen-denominated whole life product, which we started selling in 2010. It began to increase in 2011, certainly in 2012. We increased pricing and finally shut off the product in September of 2013. You can see the volatility and the variability that can occur. We will accept that. We will be opportunistic about the products we sell as long as we can achieve the profitability we want within the business mix that we want.
Interestingly, in 2013, as we shut off the single premium whole life, we began to sell more recurring premium whole life. I'll come back to that in a moment. Let's talk a bit about the Japanese market and why we're optimistic about, as well as well positioned in the market. First of all, the market is large. You've probably seen this slide before, but it's the second largest market in the world. If you think about that for a moment and you take every single other market in Asia, it doesn't equal Japan. If you take China, Korea, Taiwan, India, the Philippines, Indonesia, Hong Kong, Malaysia, Singapore, Vietnam, and probably some other countries I'm not remembering That doesn't equal Japan. Let's be wild and crazy for a minute. Let's throw Latin America on top of all of that.
All of Latin America on top of the entire rest of Asia. It doesn't equal Japan. Japan's a very large market. It's also a market that has a tremendous amount of household wealth, and not only household wealth, but an investable asset pool. Its investable asset pool, in other words, liquid assets, are larger than that in the U.S. We think there's a very strong retirement market. Steve talked about the retirement market in the U.S. We think there's an equivalent market in Japan that we're actually quite excited about, and there are product trends and distribution trends that we believe we can capitalize on. Now you might say, "Well, gosh, life insurance sales have been coming down in Japan." In fact, you'd be right. They have come down.
This is probably the least flattering picture we can present of life insurance sales in terms of new business face amount. There was actually a bubble that occurred. If you go back to 1990, you will see the amount of life insurance went up that was sold, then it's come back down. It went up because the Nikkei went up, and the standard rate went up, then the Nikkei crashed, and the standard rate came down. So life insurance sales have come down. Two points to make on this page. The first is we sold straight through that. If you look at the gold line, that's Prudential, the Japanese insurance operations, both Gibraltar and POJ, as well as the independent agency channels. What you see is that we sold straight through that. It went up at the end dramatically for two years.
In 2011 because of Star Edison. In 2012 because of the surge on the two products. We sold straight through that. The second point to make is the market's actually increased by 20%. It's gone from 61 to 73 trillion JPY. Part of that's a single premium whole life. Part of that, in fact, is that there is an increased consumer confidence, and it's growing. Another interesting fact is the number of insurance captive agents has been decreasing. In fact, it's decreased by 45%. Part of that is because life insurance is just hard to sell, and when the life insurance sales are coming down, people exit the market. Part of it is that some of these insurance agents may have gone over to independent agencies. A lot of it is that the market's come down, and people have left the market.
You might say, "Yeah, but the population's coming down somewhat too," right? The population is not coming down as much as the agents, such that the population per agent has actually increased by 88%. There are more prospects per agent now, significantly more than there were 10 years ago. Then the other argument we hear is, "Yeah, that may be true, but the population's getting older, and therefore, are there as many opportunities?" To which we would respond, "Yes, you're right. The population is getting older." This shows you seven cohorts spanning 60 years of the population. The dark blue at the bottom is 0 to 14. Then you have 15 to 64 and 65 and older.
What we would argue is that in the amount in the 65 and older, which is actually quadrupled or will quadruple over this 60-year period, there is tremendous opportunity for retirement needs, healthcare needs, and inheritance needs. There should be a tax law change, at least it's predicted to happen in January of next year for the inheritance tax. It's both going to expand the number of people to which the tax will apply and the fact that the tax is going to increase significantly. People are much more concerned about wealth transfer and inheritance taxes. Let me get back to a comment I made earlier about the recurring premium whole life that we're selling, particularly through the bank channel and the independent agency channel. That is one way to mitigate inheritance tax. It's back to the future.
We're going to be selling death protection products for mitigation of inheritance tax amongst other different kinds of products. That 36% in 2040 does not mean the older people will be buying less. They may actually be buying more product. That's the first point. The second point is, let's just do a bit of math. If you take for a minute our stipulation that both the yellow part and the light blue part of these bar charts are in fact our target market. Let's look when we first entered the market in 1981, call it 1980, we'll use that first cohort. 76% of the population of Japan was our target market. You multiply that by 118 million people, and you get 90 million people were our target market. Now let's look at 2040.
The population has decreased slightly, our target market is now 90% of the population. You take 90% times 107, you get 96 million people. Over the course of that 60 years, which is 25 years from now, out to 2040, our target market will have actually increased in Japan. That's one reason why we're optimistic. If you look at the rankings of where we stand We're number 3 in terms of new business face amount, the amount we actually write. We're number 5 behind the big four in a number of other categories, and then in assets, we're number 6, we are well-positioned, and we're big in this market. What does big in this market actually mean? How can we look at that on a relative basis?
What we thought we'd do is look at it relative to the U.S. and how much life insurance is sold in the U.S. If you take the top four U.S. companies, not mutuals or public companies, but just the top four companies in general, and add them up, how much we sell in Japan is almost equal to, not quite, but almost equal to the top four companies in the U.S. We sell a lot of life insurance in Japan. We also sell life insurance around the world in other countries. We sell in Korea. We've been in Korea for a long time. We have a well-established business. Korea is an incredibly competitive market. We have what we'd call a niche business there. We're not competing with the really big domestic players. They compete for market share and pricing. We don't.
We maintain our level of profitability. We make about $250 million a year, and that's what we made last year there. We've begun to talk about Brazil. Brazil's a really interesting market. It takes a long time, as Mark said in the first quarter call, to break even. It can take 7-10 years or even longer, and last year we broke even in Brazil. We made a whopping $6 million in Brazil. We increased life planners by about 40%. All the metrics are going in the right direction. This is a small business. In the first quarter, we made $7 million. If you were just to annualize that as an example, it would be less than 1% of the AOI made in PII. I just want to put this into perspective. We are optimistic about Brazil.
We think Brazil's going to be a great market going forward, it's in the kind of middle term range before it becomes material. Over the longer term, we have our joint venture in Malaysia, which we formed at the beginning of this year, and we have nascent operations in India and China, which we think over the long term will become material. Let's talk about risk management and solvency margin ratios for a minute and capital deployment. First, let's talk about risk management, and we'll talk about foreign currency. I'm not going to talk about accounting remeasurement. Rob has certainly and Mark have talked about that on the quarterly calls. We think that's non-economic noise. What is economic is asset liability management. We don't fool around with FX in any way. We don't play games. We are well matched in terms of foreign exchange.
We also have a comprehensive hedging program, which hedges income and cash flow as well as the equity value of the building. In terms of income, especially in the Japanese yen, roughly 50% or about half of our AOI is yen based. We hedge that on a rolling three-year basis. Mark talked about this in the first quarter call, we hedge it on a three-year basis such that at the end of any given year, we're 100% hedged for the following year. We're about two-thirds hedged for the year after that, and we're about one-third hedged for the third year. We can't prevent FX from affecting our AOI, what we can do and what the hedges do is really smooth it over time.
In terms of the interest rate environment, people say, "Well, gosh, you're operating in a low interest rate environment," we've been operating in that environment for well over 15 years. In fact, most of the business VOJ has written has been in a low interest rate environment. Also, when we've acquired companies like Kyoei, we've been able to reset the crediting rate such that we have a positive spread on the existing book. In terms of duration, we also don't play games. We have a very high quality portfolio, and it's long duration. We also reprice our products on a very regular basis. In fact, our fixed annuity product in Japan, we reprice every two weeks. We also have an MVA or a market value adjustment on it such that if there's a spike in interest rates, we are not exposed to that.
Finally, again, the focus is on death protection so that we have very stable margins. In terms of solvency margin ratios, we think that between 600 and 700 is the equivalent of a AA standard, and we're well above that. If we stress it and we put sort of a draconian stress on this, as an example, the Japanese equity market, we had down 55% because that was the worst case that occurred in any single year in Japan. When you stress it, what you see is we're still not only well within but at the top end of the range of what we think are AA standards. Part of the reason for that is our conservative investment portfolio. Over 80% of our portfolio are either government bonds or investment grade corporate bonds.
If you add on top of that structured securities and commercial mortgages, the vast majority of which are investment grade, you have about 90% of our portfolio is investment grade fixed income, with only about 5% being in risk assets. Finally, as Mark talked about before, we have the ability to redeploy a significant amount of capital. In fact, over 60% of our after-tax AOI through a whole variety of means that you've seen here. For the last five years, we've redeployed just over 60% of our after-tax AOI. Let me go back to the key points that I'd like to emphasize once again. We think we have a proven business model, which does in fact have a sustainable competitive advantage based upon proprietary distribution focusing on death protection. That gives you stable M&E margins, that gives you high ROE and low volatility earnings.
Secondly, we are optimistic about and well-positioned in the Japanese market. Third, we think we have very solid risk management. Finally, we have the ability to generate and redeploy a significant amount of our capital. With that, I'll thank you and answer questions.
Fire away. The gentleman in the blue shirt on the aisle with striped tie.
Thank you. Sean Dargan from Macquarie. Charles, last night, a domestic Japanese insurer announced an acquisition for a U.S. life insurer. I think the motivation was their outlook for not so strong growth in Japan. You presented some pretty convincing evidence of why you have a better growth trajectory. I'm wondering how long you think you can outrun demographics. In the recent past, you talked about a 20-year window. Is that still how you're thinking about things in Japan?
I'd answer that in a number of ways. The first is, I think we have a very different business model than many of the Japanese companies. That has served us well over time. When you think about our ability to grow in Japan, for instance, I think there are a number of reasons for which we're optimistic. The first would be over time, we will be able to grow the life consultant count. If you looked at what we did with Kyoei, I think you'll hopefully see us do the same thing with Star Edison. That once we bottom out, we'll be able to grow that again. Even with no increase in productivity, we'll be in reasonably good shape. The second is the third-party channels. We have reasonable penetration into those now, into banks and agencies.
We're selling through about 70% of the relationships we have. We can go far deeper into those. I think there's more we can do with third-party channels, albeit we'll do it on an opportunistic basis. Finally, I think the inheritance market is going to be a very interesting market for us going forward. I think that is underestimated. I think we have a variety of ways in which we can grow. Now, in terms of your question, is it a 20-year run? If you look at the charts we showed, that's out through 2040, so that's 25 years from now. I think there are still legs in this market. Again, I think we have a differentiated strategy. I think we have a sustainable competitive advantage because the existing companies cannot change their workforce.
They can't take part-time agents and turn them into life planners. The whole basis of our business is on needs-based selling of death protection. Life insurance is hard to sell. A lot of these folks sell savings products. They sell other things, our competitors do, because they're easier. We focus on death protection and needs-based selling. That's a differentiated strategy for us. I think that'll serve us well going forward.
Three, two rows up. The gentleman on the aisle with his hand up, Suneet.
Thanks, Eric. Suneet Kamath from UBS. First question is just on the products and the channels. In the past, you said you're somewhat agnostic in terms of the different products that you sell, that they all kind of have the same profitability. How should we think about the different channels that you're talking about, like consultants, third party, from a return perspective, would we look at it through that same lens?
I think we would say the same thing. In other words, that we are going to be opportunistic about that which we sell through the third parties, if it doesn't meet our profitability standards, we won't sell it. We'll turn it off, we'll reprice it until it does. Profitability will always come first. Whether it is the life planner, the life consultant or the third parties, products will have to meet profitability standards if we're going to sell them. Otherwise, we won't sell them.
Okay. My second question is just on the inheritance tax that you mentioned. Can you just give us a sense of where it is today, where you think it might go in January, I think you said, I think there was also a comment about who it applies to today, and that may change as well. Just some additional color so we can think about the opportunity there.
Sure. It's all what we read. We'll wait and see what's actually approved. Right now, about 5% of the population is affected by the inheritance tax. If it goes through as planned, that would increase to about 20% of the population, and the actual rate would increase significantly. Not just a small amount, but by a factor. These are very large changes that could take place, which could have a far greater percentage of the population thinking about wealth transfer mechanisms that exist. If you think about one of the slides in there in the investable wealth, there's $8 trillion of investable wealth. Some of that will be spent by the older generation, but a lot of it could be transferred to a younger generation. We think there's a significant opportunity, and in some ways, it is back to the future, right?
If we're selling recurring premium whole life, that's great product for us to sell, and what we're selling is not 3 to 5 pay, it's 10 pay recurring premium whole life. This is very good product for us to sell with, again, stable M&E margins, but that serves a completely different function than that which it would to a younger family.
If I could just elaborate a little bit on Charlie's response to your first question. Whole life sold through the Life Planner channel or the Gibraltar captive agency channel, life consultant channel, or through the bank channel would be expected to have similar profitabilities. Product with a larger savings element than a relatively large savings element would be expected to be less profitable. That's why we discontinued the single premium yen-denominated whole life product, which is basically a savings product in the bank channel, and why we think it is so significant that in recent quarters we've been able to increase the proportion of sales and the absolute dollar amount of sales in the bank channel of the recurring premium whole life product.
Okay, thanks. Just if I could sneak one quick numbers one in. If we look at your Japan life planners, what would you say the average age is of that system?
Average age?
I'd say in the 40s.
39.
Is it? Okay. Thanks.
Next question for Charlie. Steven Schwartz, the gentleman right across from you.
Thank you, Eric. Steven Schwartz, Raymond James. Tax treatment for estate taxes, is that similar to in the U.S.?
The tax treatment. Can you expand on that a little bit?
Well, I guess my question is, does life insurance work in a manner in Japan similar to how it would work in the U.S.?
Yes. As an example, there's a certain deduction you can take every year, and what some people are doing is taking that deduction, giving it to their children, having their children buy recurring premium whole life, and then on their parents, such that when their parents die, they get that money. Many of the same tax planning strategies that occur in the U.S. can work in Japan.
Okay.
The benefit is tax-free.
The benefit is tax-free.
I'm sorry, what did you say, Eric?
The death benefit is tax-free. I think that's where you were heading.
Okay. Yes. I had to laugh because there is a slide that says, earnings are stable. I got to admit, on a quarterly basis, I never come close to earnings. I never come close. Could you possibly go over maybe some of the seasonal factors, not the non-coupon investment stuff, but some of the seasonal factors that maybe affect that number on a quarterly basis?
You know what? That is a great question, I think it is a question that IR is better suited to address offline. If we could.
Okay. All right. Fair enough.
There is seasonality that occur in the fourth quarter and also for the trophy conferences. In the first quarter for POJ and in the second quarter for Gibraltar, because they are a month behind. There is seasonality.
Anybody else?
There are a couple over there, I think. Hard to see.
I don't see any hands up.
There are two of you.
Oh, I'm sorry. Well, I really am blind.
No, it's right in the light.
Yeah. The gentleman in front with his hand up who's reaching for the mic.
I'm glad you couldn't see me. I'd be afraid you'd describe me by the color of my hair, Eric. Larry Greenberg from Janney. I'm looking at slide 21. You show the total growth in life planner count. Can you break that down between Japan and non-Japan and just talk about how challenging it is to grow in Japan today, the life planner count?
I can't break it down precisely.
We can.
Eric can. What I can do is tell you that the life planner growth in Japan is slower than, say, it is in Brazil or other areas. Life planner growth in Japan over the past five years has been about one and a half %. Don't forget, we hire maybe two out of every 100 applicants. This is a very selective model, and we want to get it right. I think there would be relatively steady growth. It will vacillate. This past year was about half a %. The year before was about 3%. It'll vacillate. Over the past five years, it's been about one and a half %. If you look at life planner count growth over the past five years in total, it's been two and a half %.
Much of that's come from countries like Brazil, where you've had a 40% growth in life planner count over the past year. The differential between the one and a half and the two and a half % is countries like Brazil where we've been growing quickly.
Thank you. Second question, is it possible to give some $ parameters around how much the consumption tax might cost you?
I'm okay if you want to do that.
Can we?
Sure.
Yes. The consumption tax won't affect us that much because it affects commissions, but when we look at the life consultants, there is a minimum amount, and so the life consultants really aren't affected by that. It will affect some life planners, but not a lot. It will affect what we pay to third parties. Again, about a third of our business is third parties. If we look at it, I think for this year, it was $20 million, $25 million, something like that. I'm going to round numbers a little bit. That would be feathered in over the year. If consumption tax goes from 8% to 10%. Can I talk about that?
Go ahead.
Over the course of three years, it would be about $70 million. The numbers aren't huge.
Okay, is that Mr. Gallagher lurking there behind Larry in the shadows?
Thanks. Tom Gallagher, Credit Suisse. If I go back to Mark Grier's slide, and it shows that focused on the dividends coming out of the different businesses. The biggest increase in 2013 was international. Can you talk about what drove this? Were JGAAP earnings strong in 2013? I know they were fairly depressed in 2012. Did those move a lot? Was that primarily internal leverage? Can you give a little color for what drove the big increase in the dividend out of international in 2013?
That is a great question. I'd like to save it for our next Q&A and have either Mark or Robert Falzon address it.
Okay. The other question I had is, if your core business here is death protection and the prospects for growth there from a demographic standpoint are low other than the wealth transfer or rather the change in estate tax is essentially opportunity. The one area that it seems like you're under-penetrated in is A&H. Is that a business that you're planning on growing, becoming a more meaningful player in?
I think I would say we would like to grow that, but we will only grow it as riders onto our existing product. The A&H market itself is an extraordinarily competitive market if you sell A&H policies separately. Because our core business is death protection, we don't want to sell A&H separately. We sell them as riders, and therefore, you can mitigate some of the price competition by virtue of layering it into an existing policy in some ways, or a new policy in some ways. You won't see us begin to sell those individually. You will see us continue to sell those. In fact, in the fourth quarter of last year, we started, for instance, a nursing home rider, and that's been feathered in over the fourth quarter and the first quarter, and that's actually quite successful. This is also very much of a demand product.
As a result, we consider that in how we want to sell the product.
You see the retirement and asset accumulation products as being more attractive, all things equal, or is that more a function of you have a better distribution set up to grow those businesses versus A&H, that is?
Well, I think it's also our philosophy about A&H, right? In other words, A&H is a very competitive and price competitive product. In some ways, it's a commoditized product if you sell it individually. We don't want to do that. We want to sell it as part of a death protection product, and that's the way we're going to continue to sell it.
Okay, just one more if I could sneak it in. Korea has been, I'd say, a fairly challenging market over the last several years. Can you just give an update for how competition, the environment stands today for profit margins and things like that?
Two different questions. First of all, I'd take out the word fairly. Korea is an extraordinarily challenging market. You have the big domestic players competing for market share without necessarily having a lot of regard for profitability in the short term. We've taken a very different view there, and that's why I want to separate the competition from profitability. We're not anywhere near the top 10, but we are in the top 10 in terms of profitability. That's because we've taken a niche position where we will protect our profit margins and we won't sell as much product. We're not going to compete with the big players in terms of playing the market share game or any other kind of a game. What we want to do is sell product that our customers need at an appropriate return for us, and that's what we're doing.
I would characterize us as a niche player in the market, but we're one of the ones with the highest profitability in the market.
Thanks.
Okay. We have time for one more question for Charlie, and I see a hand up in the back of the room, but I have no idea whose hand it is.
Josh Smith, TIAA-CREF. I had a question on the hedging. You've got a large competitor who says they'll only hedge the economics of the money coming out of Japan, meaning they'll look at what they're expecting to take out. How do you contrast that with your strategy?
You want to leave that for Mark or Charlie?
Let's also leave that one for the next session, okay? Let's begin the next session. John and Mark will come up. We'll take the questions we just deferred and whatever additional questions you'd like to ask. Should we start with those or shall we start with something else?
Start by referring it to Rob.
Mr. Falzon, are you ready to go? You want to come up or you want to grab a mic? Why don't you come up?
While he's coming up, Rob will talk about two things. One is the question about the capital flow to the parent from international last year and also hedging.
On hedging, I'm going to ask him to flesh out more than just the income hedge. Charlie mentioned that and the rolling three-year approach that we take. There also is a capital structure related to hedging the value of the franchise in Japan, and I'd like to ask Rob to talk about both, please.
Let me hit the return of capital piece first. The slide that Mark presented to you is what we call the SEC view of a return of capital. It is actually what is formerly dividends and returns of capital in the way in which we put it into our businesses. It does not fully reflect all the ways in which we get capital out of our businesses. There's a slide in Charlie's deck which actually gives, I think, the adjusted view of the return of capital. The anomaly very specifically you get is in 2012 and in 2013, we brought capital out of Japan and back up to the U.S. by repaying debt that we had put into those businesses in order to facilitate the acquisition of Star and Edison.
In 2012, it was actually a repayment of debt securities, and in 2013 it was the repayment of preferred stock. The repayment of preferred stock gets captured in that SEC view as a return of capital. The repayment of debt does not get captured in that SEC view as a return of capital. It's a matter of the form of the presentations. From a substantive standpoint, there was actually substantial returns and reasonably comparable returns of capital coming out of the Japan business. It's just the variety of ways in which we get it out of that business. Is that okay on that question?
Just a follow-up to that, where does the internal leverage stand today that's related to that business, and how much capacity do you have left?
I don't know the exact amount outstanding off the top of my head. There's a couple billion dollars of capital that probably remains in our Japan business to be repaid in that way. Recall, the way in which we get capital out of Japan, we have multiple tools for doing that. We have transactions that we're able to structure through affiliate loan activity. We have dividends that we're able to do on an as-of-right basis. We have reinsurance and other structures that we can use. Incidentally, we can redeploy capital directly out of Japan into things like Star and Edison. We're not concerned about our ability to get at the available earnings and redeployable capital in Japan, either to get it up to the holding company or to get it deployed in a way that can be added to the organization directly out of Japan.
We look at all those levers, and we manage them in order to get the right result, and that result is getting it into the right place on a tax-efficient basis and optimizing that over a series of years. The other point that I think Mark made that's very important is you don't get trapped in any quarter or any given year. There's a lot of noise in those periods of time, and you have to look over a multi-year period of time in order to get the trends.
Okay.
Okay.
If I may, as of the end of last year, we had $2.3 billion of intercompany debt on the books of our Japanese businesses, and coincidentally, using a 4.5% of the general account as a cap, you can actually go to 6%, but the practical limit we view as being 4.5%. We also had $2.3 billion of capacity for the Japanese companies to make loans to affiliates. There's a lot of dry powder there.
I guess that a couple billion dollars. That's close. The FX hedging. We actually look at our FX hedging on a holistic basis, not simply a return of the cash that we're getting out of our Japan business. As it happens, if you look at the earnings that we hedge, there's a reasonable correlation between the actual earnings that we're hedging and the cash that we're getting out of our business in one way or another. That's not really the driver. We do look to reduce the volatility on our reported earnings, so the earnings hedges serve that purpose. Beyond that, they are actually a component of a more holistic view on how we're managing our exposure to the yen. We have a machine in Japan that produces yen.
There is an intrinsic value to that machine, and it's denominated in yen, and we want to protect that. The view that we look at is a view of trying to insulate the return on equity that we're able to provide to our shareholders in the U.S. in dollars. In order to do that, we want to have a hedge program in place that says to the extent that the yen depreciates in value, that we're able to generate from that gains off of our hedges, whether they be income hedges or equity hedges, that allow us to either take those gains and redeploy them either in stock buybacks or by an investment in the business and therefore generating incremental returns that will preserve the ROE on a consolidated basis that we're getting out of our business.
When we gauge the amount of hedging that we're doing within that Japan business, it's taking a view of a preservation of the return on equity, which in our Japan business, as you saw in Charlie's slides, is extraordinarily high. We want to make sure that should the yen depreciate, that very high ROE doesn't get diluted in its blending to the overall company ROE. That's how we think about hedging and the calibration of our hedging, and the income hedge is just one component of it.
Good. Thank you, Rob.
Thanks.
Okay. Jay Gelb, blue shirt, hand up. Second person in.
Thank you. Jay Gelb from Barclays. This question's for Mark. As we have now, hopefully successfully moved through or will move through Congress with regard to the needed shift in the Collins Amendment on non-bank SIFI regulation, when do you think the actual draft rules at least will be in place in terms of how Prudential will need to respond on that? Related to that, what's the outlook
In terms of the pace of share buybacks, which have been running at about $1 billion annually.
I would qualify the conclusion about the change in the Collins Amendment. It did pass the Senate by unanimous consent, which is very good news, but it has to still get through the House. There is still some political uncertainty around where that will go. We're obviously more optimistic than we would have been two days ago. The event in the Senate was pretty compelling, but I would still be careful about the conclusion. Having said that, there's not a lot of transparency into the timing of the process for us, other than seeing things emerging on the international side as it relates to the FSB's thinking about sometime in November having something to say about capital standards for the globally systemically important insurance companies.
Whether that will inform the domestic regulators about their own approach to capital or whether it will be rejected is anybody's guess and depends on how that comes out. I'm afraid I don't have a very good answer around when any of this might actually start to show up in either draft form that we can use or ultimately some sort of final resolution of the capital regime.
The pace of buybacks?
I'm not going to make a forward-looking statement about the pace of buybacks. You've heard discussions around capital management and our approach, I would say that our approach is very much consistent with what it has been, that's going to be up to the board when they meet to consider the renewal of the buyback proposal.
I think that's Erik Bass back there. Blue shirt, red tie.
Thanks. Erik Bass with Citi. Mark, you talked about the different regulatory regimes. What is the risk if there's not convergence between kind of non-bank SIFI, the global SIFI, the ComFrame? Then, kind of what takes precedence if there is a difference in kind of regimes?
In the abstract, there is no statutory authority for either the FSB or the IAIS to impose capital standards on us. It has to be done through the mechanism of the domestic regulator, and in this case, that would be the Federal Reserve. I think while in the abstract, we can say you don't have any authority to do this, there's also a real world out there. I think in the real world, it would come down to a need for the Federal Reserve as our primary regulator to interpret and adapt and consider how they want to address the different kinds of capital standards that they may have been part of developing or not. It would come down to the Fed. That's where the ultimate authority will rest, and so that's where we will answer to whatever we're finally told to do.
Thanks.
There's another. I'm sorry, I can't see the face, but all the way back.
Thank you. David McGowan from Morgan Stanley. Mark, your slide in this discussion of the cash flow to the holding company is helpful, and it's actually one of the factors that Moody's has been focusing on as a potential rating driver, specifically a growing composition of, I think, regular dividends out of the international business. I'm wondering if that is something that is part of the way you think about either perspectively or more increasingly how you take cash out of the international business, and if there's something we should be focusing on against that rating driver.
The broad answer is yes. Again, I would caution you about short-term interpretations of that. We've been pursuing themes around diversified sources of cash flow to the parent for a long time. Part of what we think about as we think about business mix is the ability to generate and repatriate cash to the parent. The emergence of dividend capacity in the international businesses is very important to us. We've also talked about having done cash-friendly deals. As we've discussed with you, the Star and the Edison deals, The Hartford deals, and the PRT deals, we've focused on the fact that those deals generally are capital friendly and cash friendly.
The answer to your question is yes, with respect to both intent and practice. We are building a strong portfolio of cash generation capability that should be friendly from a rating agency standpoint, and it is intentional. It is part of what we think about and how we've made decisions about the deployment of capital into some of the deals that we've pursued recently.
Ryan Krueger, the gentleman there. Okay, thank you. Alright, go.
Thanks. Ryan Krueger with KBW. On the 1Q calls, both you and MetLife expressed more optimism regarding the treatment of separate account assets from the Fed. One of the other key items that you talked about today was adjusting for the PADs in reserves that are above your best estimates. Can you talk a little bit about the reception that that specific argument has gotten with either the U.S. or the international standard setters at this point?
Yeah. Let me first of all refine the terminology a little bit. PAD means a specific thing in GAAP accounting, provision for adverse deviation. Margins and reserves come from other sources. Wherever it comes from, it's loss absorption capacity, but there's a more expansive view of what's on the balance sheet than just the provisions for adverse deviations as they're defined in the GAAP standard. I would say at this point that the discussions around the difference between best estimate liabilities and actual reserves on the books have been very constructive, both internationally and domestically.
Okay, thanks. Just a quick numbers one, the 88% of Japan yen income that's hedged for 2015, can you tell us what rate that's at?
No.
It's worth a shot. Thank you.
Chris Giovanni, the gentleman up a couple rows in the middle. Thank you, Margo.
Thanks. Two questions. One first for Mark, hopefully quick. If this gets through the Senate and the House, would this change your quantification of readily deployable capital and/or your potential mix of capital deployment?
Well, the short answer is no. Our characterization of capital right now reflects our existing regime and the way in which we allocate and attribute capital to our risks and businesses. If this gets through the House and the Senate, all this says is that the Fed is free to take a different approach with insurance companies. It doesn't tell them how to do that or what to do beyond allowing for it. There will still be a development process that will have to sort out exactly how the standards will be defined and calibrated.
Okay, maybe a trickier one for John. If we go back to 2007, Art, I guess, graciously handed over a 16%-18% ROE target for Prudential. If we think about the change in the capital requirements that you guys point to in your businesses today versus then, that's maybe 100 basis points dilutive to that 16%-18% ROE target. I guess, given what you generated last year with the 15+% ROE, I guess why shouldn't we think that that is sustainable and/or even potentially improved?
Okay. A couple of different things to think about in that respect. First, if we go back to that point in time and compare then, made a column of then to today, there's just a lot of things that are very different. Our earnings are about 50% higher than they were at that particular point in time. Our business fundamentals are quite stronger. Our leverage is considerably lower than they were at that time. Frankly, our growth rate was a bit different because at that time, more of the growth was attributable to asset growth or appreciation than to business fundamentals. In a lot of respects, we're a different company today than we were. Now, I can understand the question of, okay, so you had a goal of 13, 14, now you're north of that. Why don't you raise your target or your expectations?
I think it's a little more complex than that because we think we can consistently produce a superior result, absent a tail event. We feel that we've got the business mix that makes that possible. We're also conscious at the same time that a number of things that fluctuate have been fluctuating in a favorable direction in recent times. Not everything, but some things. There'll be phases of this cycle where that won't be the case. Furthermore, as we're in the 13-14+ range, we also think there will be times where we have to look at the utility of incremental ROE versus incremental growth. I don't mean doing something radically different, but I think there's less utility in the ROE progressing further than there is perhaps looking at growth rates.
We would not consider doing things that wouldn't be consistent with our ROE objectives, but not all things we do would be immediately supportive of those ROE objectives. Certainly, that was true with Prudential Japan in the past. It's currently true of Brazil today. So it's one of these things where I think we'd want to recognize that we're very focused on producing a superior ROE. We know there will be some variability of that according to environmental and some market forces. From time to time, there may be some trade-offs we make consciously as we try to balance the ROE performance with growth over time. That's how I'd think about it. I don't know if you'd add anything to that.
No, I agree. Okay. I think I don't see any hands. I can hardly see any.
You've got a lot of questions.
I don't see any. I mean, I don't see any hands either. Oh, there's All right.
He only had two slides. He got a lot of questions for two slides.
Yeah, my questions per slide ratio.
Yeah, We don't usually double dip, but we'll make an exception for you. This will be the last question.
Thanks a lot. In honor of your last investor meeting, Eric. We haven't been able to ask John on your outlook for acquisitions, either bolt-on or transformational. If you can update us on your perspective there, that'd be helpful. Thanks.
Sure. Our view on acquisitions is they're nice to do, not have to do. In fact, our overall preference would be for more organic and outsized organic than they would be for M&A. Having said that, we think we're very well positioned to the extent the opportunities arise to take advantage of them, either in terms of management capacity, experience set, or capital. I think we would just have an opportunistic sentiment. This is a much less distressed environment, so it's much more less likely to generate opportunity sets, and we're not sitting around waiting for something to happen.
Thank you all for coming.
Thank you.
Thank you.