Ladies and gentlemen, thank you for standing by. Welcome to the first quarter 2014 earnings teleconference. At this time, all lines are in a listen-only mode. Later, we'll conduct a question and answer session. Instructions will be given to you at that time. If you need assistance during the call today, you may press star and then zero, and an operator will assist you offline. As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Mr. Eric Durant. Please go ahead.
Thank you, Cynthia. Good morning. Thank you for joining us. Representing Prudential on today's call are John Strangfeld, CEO; Mark Grier, Vice Chairman; Charlie Lowrey, Head of International Businesses; Steve Pelletier, Head of Domestic Businesses; Robert Falzon, Chief Financial Officer; Rob Axel, Controller and Principal Accounting Officer. In order to help you to understand Prudential Financial, we will make some forward-looking statements in the following presentation. It is possible that actual results may differ materially from the predictions we make today. Additional information regarding factors that could cause such a difference appears in the section titled "Forward-Looking Statements and Non-GAAP Measures" of our earnings press release for the first quarter of 2014, which can be found on our website at www.investor.prudential.com.
In addition, this presentation may include references to Adjusted operating income or to earnings per share or EPS or return on equity or ROE, which are determined based on Adjusted operating income. Adjusted operating income is a non-GAAP measure of performance of our financial services businesses that excludes certain items. Adjusted operating income is not a substitute for income determined in accordance with generally accepted accounting principles, GAAP, and the excluded items are important to an understanding of our overall results of operations. For a reconciliation of Adjusted operating income to the comparable GAAP measure, please see our earnings press release on our website. Additional historical information relating to the company's financial performance is also located on our website. I'll forego the repeat. On to John.
Thank you, Eric. Good morning, everyone. Thanks for joining us. I would like to acknowledge also today we have Charlie Lowrey in a different role as head of international, and we welcome Steve Pelletier in his new role as head of the U.S. Before I hand it over to Mark and Rob for more specifics, I'd like to kick things off with some macro comments. We are very pleased with the results for the first quarter. We believe we're off to a good start to achieve our goals for 2014. Our annuities, retirement, and asset management businesses have benefited from sustained growth in account values and asset under management. Returns and risk profile in our annuities operation continue to migrate towards our objectives for this business as a sustained period of favorable equity markets and a gradual shift in the composition of our block have driven improvement.
We're very comfortable with the risk profile as it stands today, and we're also comfortable with the expected profitability of the products that we are selling. Our retirement business had its best ever quarter. Outstanding results were driven by improved investment spreads in both institutional investment products and full-service retirement, even excluding a higher than expected contribution from non-coupon investments. Higher fees also contributed to earnings growth this quarter. Although we recorded no pension risk transfer transactions this quarter, we continue to believe that PRT is an attractive opportunity that'll develop further over time. Asset management achieved its growth in earnings entirely on the strength of growth in asset management fees, reflecting growth in assets under management. Other related revenue was down slightly from a year ago and contributed less than 20% of adjusted operating income for the quarter.
As asset management earnings have increased, we believe its quality of earnings have improved as well. In our domestic insurance operations, we see underlying improvement even though adjusted operating income is lower than a year ago. After six consecutive quarters of mortality more favorable than expected, individual insurance had less favorable experience this quarter. Our integration of Hartford continues to progress well, and our distribution capabilities are broader and deeper than before as a result. We believe our product portfolio, now fully integrated, is well-diversified and priced to achieve appropriate returns. Lower earnings in group insurance reflected a less favorable result in disability attributable to an adverse fluctuation in claims. Disability remains a work in progress, and while the business has improved, its improvement will not be linear. Getting this business right will take more time, but we are confident we will get there.
Finally, international insurance, excluding the few significant items Mark will review with you, reported modestly higher earnings with headwinds from currency translation. The LifePlanner earnings continue to benefit from business growth, but the benefit of that growth was partially offset by less favorable mortality and foreign currency translation. The business itself is still humming along, producing very attractive returns. Gibraltar's results reflected lower expenses as well as modest business growth. Gibraltar has now completed the integration of Star and Edison, and the expense savings we planned for are now in the till. Within Gibraltar's captive agency system, we've raised performance standards, and the sales productivity of our life consultants is now in line with that of Gibraltar's agents prior to the acquisition of Star and Edison. Over time, the number of life consultants will stabilize and then grow, and that will give the business a boost.
Overall, we feel very good about our quarter and where we're going. With that, I'll turn it over to Mark. Mark, over to you.
Thanks, John. Thanks, John. Good morning, good afternoon, or good evening. Thank you for joining us on the call today. I'll take you through our results for the quarter. Then I'll turn it over to Rob Falzon, who will cover our capital and liquidity picture. Starting with slide two, I'll begin with an overview of our financial results for the quarter. On a reported basis, common stock earnings per share amounted to $2.40 for the first quarter, based on after-tax adjusted operating income of the financial services businesses. This compares to EPS of $2.27 a year ago. After adjusting for market-driven and discrete items in both the current quarter and the year-ago quarter, EPS was up 16%, amounting to $2.46 this quarter, compared to $2.12. On that basis, pre-tax earnings for our operating divisions increased by 17% for the quarter. This is largely the result of three things.
First, a greater contribution from investment results reflecting exceptionally strong current quarter returns from non-coupon investments, including our Fosun venture, as well as actions we've taken to reposition the portfolios for our pension risk transfer business in Prudential Retirement. Secondly, higher fees driven by growth in account values and assets under management in our annuities, retirement, and asset management businesses. Third, continued growth of our international insurance business, which also benefited from lower expenses. On a GAAP basis, we reported net income of $1.2 billion for the current quarter, compared to a loss of $735 million a year ago. The loss in the year-ago quarter reflected the accounting impact of foreign currency remeasurement of non-yen liabilities on the books of our Japanese insurance companies, driven by a weakening yen.
In the current quarter, the impact from this remeasurement was less significant because the yen was relatively stable in relation to the U.S. dollar and to other non-yen currencies in which we offer insurance products in Japan. The comparison of book value per share, excluding accumulated other comprehensive income, or AOCI, is affected by the accounting presentation mismatch from asset and liability changes driven by foreign currency exchange rate fluctuations. The impact of these fluctuations on non-yen liabilities of our Japanese insurance companies runs through the income statement, while the offsetting impact on the corresponding assets, which are currency matched with the liabilities, is included in AOCI rather than in net income.
After adjusting the numbers to remove the impact of this mismatch, book value per share is $61.74 at the end of the first quarter, up $1.75 from year-end, after payment of a quarterly dividend of $0.53 per share. As we've told you, we also evaluate our ROE performance after adjusting for this accounting presentation mismatch, which benefited our reported ROE by reducing the denominator. After removing this benefit, along with the impact on results from market-driven and discrete items, our annualized ROE for the first quarter would be about 16%, reflecting continued solid business performance with a tailwind from non-coupon investment results. Slide three presents a rundown of market-driven and discrete items included in our results for the quarter.
In the annuities business, we strengthened our reserves for guaranteed minimum death and income benefits and adjusted DAC, mainly due to a decline in interest rates from year-end and resulting in a charge of $0.03 per share. In individual life, we absorbed integration costs of about $0.01 per share related to the Hartford Life acquisition. In our international insurance LifePlanner business, we recorded refinements to reserves and related items, mainly in Korea, amounting to a charge of $0.02 per share. In total, the items I just mentioned had a net unfavorable impact of $0.06 per share on first-quarter results.
During the year-ago quarter, market-driven and discrete items produced a net benefit of $0.15 per share, mainly driven by a favorable reserve and DAC update in the annuities business and a gain in Gibraltar Life from the sale of our remaining indirect investment in China Pacific Group. Slide four shows net realized gains and losses. On a GAAP basis, our net income of $1.2 billion includes the items you see here, which were essentially offsetting in the current quarter. Product-related embedded derivatives and hedging activities had a negative impact of $657 million, driven by mark-to-market on our GAAP liabilities for variable annuity living benefits, reflecting the decline in interest rates in the quarter. Going the other way, mark-to-market on derivatives, mainly related to asset and liability duration management, resulted in a $275 million pre-tax gain, also largely driven by the decline in interest rates.
General portfolio activities resulted in net pre-tax gains of $180 million, and impairments and credit losses on investments were $37 million for the quarter. As I mentioned earlier, foreign currency remeasurement had a relatively modest impact for the quarter, resulting in a pre-tax gain of $231 million. Moving now to our business results, I'll start with our U.S. retirement solutions and investment management businesses, shown on slide five. Here's a view of the results of these businesses and the adjustments we would make for market-driven and discrete items to get a view of underlying performance relative to a year ago. Slide six highlights individual annuities.
After adjusting for reserve and DAC updates, which were mainly driven by a decline in interest rates in the current quarter and favorable equity market performance relative to our assumptions a year ago, annuities results were $409 million for the quarter, an increase of $99 million from a year ago. Slide seven presents a view of the earnings trend for the annuities business, where the results reflected in the gold bars exclude the impact of market-driven and discrete items. Most of our earnings in the annuities business come from base contract charges linked to daily account values. On a point-to-point basis, as you see here, account values of $155 billion at the end of the first quarter are up 9% from a year ago, mainly driven by market appreciation.
However, the increase in average account values compared to the year ago quarter was 11%, outstripping the point-to-point increase and driving growth of $71 million or 12% in policy charges and fee income. Our results have also benefited from a reduced drag from charges for benefit costs and base amortization as the rising account values have lowered the prospective costs of guaranteed death and income benefits associated with our contracts, and the improvements to our gross profits have contributed to a more favorable DAC amortization rate. Slide eight shows annuity sales. Our gross annuity sales for the quarter were $2.3 billion, in line with the past few quarters, but down from $4.2 billion a year ago.
In late February of last year, we implemented a number of changes to our highest daily income products, including reduction of income payout rates at various age bands and elimination of the guaranteed doubling of protected withdrawal value after 12 years, while leaving the rider charges unchanged. Nearly all of the sales in the year ago quarter were of the earlier version of the product, including some level of accelerated purchases in advance of the product change. We've continued to take actions to adapt our products in order to maintain appropriate return prospects and improve our risk profile. As part of this process, we've taken steps to enhance our product portfolio, allowing us to broaden the choices we can offer to retirement-focused clients and their advisors while diversifying our risk exposure.
Sales of our Prudential Defined Income, or PDI product, shown in the light blue bars, have begun to meaningfully contribute to our sales mix, accounting for about $460 million or roughly 20% of gross sales for the quarter, bringing cumulative PDI sales to over $1.2 billion. PDI directs a client's entire investment to a separate account fixed income portfolio, which we manage and which provides a guaranteed lifetime income amount. This income level is scaled relative to the premium paid based on the client's age at purchase. The payout percentage grows at a contractual roll-up rate until lifetime withdrawals begin.
One of the key features of PDI from a risk management and return perspective is our ability, built into the product design, to change both the income payout rate and the roll-up rate for new business on a monthly basis, enabling us to keep pricing in sync with changing market conditions. We've also built this pricing flexibility into the current generation of our highest daily living benefit feature called HDI 3.0, which we introduced in February of this year. HDI 3.0 allows us to change the roll-up rate for the protected value that determines the basis for lifetime income and to change the withdrawal percentages for various age bands as often as monthly for new business. The new product also requires allocation of 10% of each purchase payment to a general account fixed bucket called a Secure Value Account that helps provide account value stability through changing market conditions.
Shown on slide nine, the retirement business reported record high adjusted operating income of $364 million for the current quarter, an increase of $136 million from a year ago. Current quarter results benefited by $123 million from a greater contribution from net investment results. This includes about $80 million of returns that we would consider above our average expectations on non-coupon asset classes. The exceptionally high returns on these asset classes in the current quarter, which also benefited the results of several other businesses, were largely driven by strong performance from private equity investment funds. Net investment results in retirement also benefited by approximately $30 million from actions we've taken to reposition the portfolios supporting our pension risk transfer business. The remainder of the increase in retirement results came mainly from higher fees driven by account value growth.
Turning to slide 10, total retirement gross deposits and sales were $10.3 billion for the current quarter compared to $9.5 billion a year ago. Full-service gross deposits and sales were $8.6 billion for the quarter, with five case sales of over $100 million, including a major case win of $2.6 billion. This compares to a total of $5.7 billion a year ago. We are not seeing major changes in the full-service market and attractive large case opportunities are lumpy. Full-service net flows amounted to $2.6 billion for the quarter. Standalone institutional gross sales were $1.7 billion in the current quarter compared to $3.8 billion a year ago. Current quarter sales included $1.4 billion of stable value wrap products, while the year ago quarter included $3.7 billion of those product sales.
Greater competition is emerging in the market for these products with an an increase in the number of wrap providers. Our standalone institutional business had net outflows of $1.3 billion for the quarter, including benefit payments on pension risk transfer cases and withdrawals by stable value wrap clients seeking provider diversification. Total retirement net flows for the current quarter amounted to $1.3 billion, and account values stood at a record high $327.8 billion at the end of the quarter, up $28 billion from a year ago. Slide 11 highlights the asset management business. The asset management business reported adjusted operating income of $193 million for the current quarter, compared to $169 million a year ago. The $24 million increase in earnings was mainly driven by higher asset management fees, reflecting growth in assets under management.
The segment's assets under management amounted to $891 billion at the end of the first quarter, up 6% from a year ago, reflecting market appreciation together with about $17 billion of institutional and retail net flows over the past year. On slide 12, you see the results of our U.S. individual life and group insurance businesses, showing the adjustments to individual life results for integration costs related to The Hartford acquisition. Slide 13 highlights individual life. After adjusting for integration costs, individual life reported earnings of $133 million for the current quarter, compared to $145 million a year ago. The decrease in earnings was driven by less favorable claims experience in the current quarter. The contribution to current quarter results from mortality experience, together with reserve updates, was about $20 million less favorable than our average expectations.
This compares to a mortality contribution about $15 million more favorable than our average expectations in the year-ago quarter. The impact of less favorable claims experience in the current quarter was partly offset by a greater contribution from net investment results, including about $15 million of returns that we would consider above our average expectation on non-coupon asset classes. Turning to slide 14, individual life sales based on annualized new business premiums amounted to $122 million for the current quarter. This compares to total sales of $216 million a year ago. The decrease was mainly driven by an $88 million decline in sales of guaranteed universal life insurance products, shown in the dark blue bars. We've taken actions over the past year to limit concentration in these products and to maintain appropriate returns, including a series of price increases.
In addition, we discontinued substantially all sales of the legacy The Hartford products at the beginning of this year as we introduced our integrated individual life product portfolios, representing a major milestone in the business integration, which remains well on track. As we expected, these changes caused some acceleration of sales of the legacy products in the second half of last year. Term insurance sales in the light blue bars were down $8 million from a year ago, reflecting price reductions by several competitors. Sales of universal life without secondary guarantees, shown in the gold bars, contributed $25 million, or about 20% of our overall sales for the current quarter. These products, which offer relatively low protection costs and are more investment growth oriented than secondary guarantee universal life, have been popular among clients of the distributors who came to us with The Hartford acquisition.
We've incorporated the best features of The Hartford product in the PruLife Founders Plus product included in our integrated product portfolio, allowing us to broaden the choices we can offer to life insurance customers while diversifying our risks. Shown on slide 15, group insurance earnings amounted to $6 million in the current quarter, compared to $9 million a year ago. The unfavorable impact on results of an adverse fluctuation in group disability claims experience and higher expenses than a year ago was largely offset by a greater contribution from net investment results, including about $15 million of current quarter returns that we would consider above our average expectations on non-coupon asset classes. Slide 16 shows group insurance sales trends. Most of our group insurance sales are recorded in the first quarter, based on calendar year effective dates.
Group insurance sales, based on annualized new business premiums, amounted to $170 million in the current quarter, down from $193 million a year ago. The sales decline reflects our focus on restoring appropriate returns in this business. Turning to the international insurance division on slide 17. Here are the results of our international insurance business, adjusting for the current quarter refinements of reserves and related items in the LifePlanner business, and for the China Pacific gain and Star and Edison integration costs in Gibraltar Life a year ago. Slide 18 highlights the LifePlanner operations. After adjusting for the charges I mentioned, our LifePlanner business reported earnings of $435 million for the quarter, up $13 million from a year ago. Results continued to benefit from sustained business growth. On a constant dollar basis, insurance revenues, including premiums, policy charges, and fees, were up 6% from a year ago.
The benefit from business growth was partly offset by less favorable claims experience, including reserve updates in comparison to a strong year-ago quarter. We estimate that the negative impact on the comparison of results was about $15 million. In addition, foreign currency exchange rates, which reflect our hedging of JPY income at 82 this year versus 80 last year, had a negative impact of $6 million on earnings in comparison to a year ago. Slide 19 highlights Gibraltar Life. Gibraltar Life reported earnings of $418 million for the current quarter, up $26 million from a year ago after adjusting for the items I mentioned. The current quarter benefited from business growth and from lower expenses than a year ago, including some nonlinear items such as employee benefit costs.
Both the current quarter and the year-ago quarter benefited from strong investment results, with income from non-coupon asset classes contributing about $50 million to results in each period. Foreign currency exchange rates had a negative impact of $9 million in the comparison of Gibraltar's results to a year ago. Slide 20 shows the international insurance sales trend. International insurance sales on a constant dollar basis were $772 million for the current quarter, compared to $841 million a year ago. Market developments, along with repricings and other actions taken by us and by our competitors, have produced volatility in our quarterly sales results. The impact of these factors over the past two years has been especially dramatic and distorts quarter-over-quarter comparison.
Over that period, our international sales pattern has been affected by changes in the Japanese tax code, resulting in a surge of business market sales for our cancer whole life product in early 2012. By repricing of our U.S. dollar products in mid-2012, along with weakening of the JPY in relation to the U.S. dollar since then, which made our U.S. dollar products more expensive in JPY terms to Japanese consumers. By product repricings by us and our competitors in reaction to changes in Japanese statutory reserve interest rates effective in April of 2013, which accelerated sales of some of our products into the early part of last year. Also by opportunistic sales of over JPY 1 billion of a JPY-based single premium bank channel product at Gibraltar, followed by the discontinuation of that product late last year as we increased emphasis on recurring premium death protection products.
The comparison of overall first quarter international sales to a year ago is most significantly affected by the discontinued single premium bank channel products, and going back two years ago, by that product along with cancer whole life. If you adjust first quarter sales to exclude cancer whole life, shown in the light blue bars, and the discontinued product, shown in the brown bars, current quarter sales are up 5% from a year ago and increased at a compound growth rate of 6% from two years ago. Slide 21 shows LifePlanner sales. LifePlanner sales were $369 million in the current quarter compared to $365 million a year ago.
LifePlanner sales are typically strongest in the first quarter, which is the end of the Japanese fiscal year, driving sales of some products that are popular in the business market. March is the close of the sales conference qualification period at Prudential of Japan. Sales in Japan for the current quarter amounted to $270 million, down slightly from a year ago. The comparison of current quarter sales to a year ago is affected by purchases in advance of a repricing of a number of our Japanese yen-based products in April of last year, and by the weakening of the Japanese yen over the past year, which makes our U.S. dollar products more expensive in yen terms to Japanese consumers. Sales up 9% from a year ago.
Looking back over two years, the comparison of first quarter sales is most significantly affected by sales of our cancer whole life product in advance of a 2012 tax law change in Japan that made the product less attractive in the business market, and by accelerated purchases of our U.S. dollar products in advance of a June 2012 repricing at Prudential of Japan. Slide 22 presents the Gibraltar Life sales trend. Sales from Gibraltar Life were $403 million in the current quarter, compared to $476 million a year ago. Taking a look at Gibraltar's sales by distribution channel, you can see a $63 million decline in first quarter sales through the bank channel, shown in the gold bars, compared to a year ago, with the discontinued single premium product that I mentioned contributed sales of $107 million.
Sales of other products through the bank channel increased by $44 million from a year ago, driven by the recurring premium death protection products that we are emphasizing. Sales through independent agents, shown in the light blue bars, are up by $20 million from a year ago, mainly driven by retirement and investment-focused products in the business market. Sales by life consultants, in the dark blue bars, are down $30 million from the year-ago quarter. Similar to Japanese LifePlanner sales, the comparison is affected by accelerated purchases of a number of our Japanese yen-based products in advance of our repricing in April of last year.
In addition, our life consultant count has declined by about 1,450 or 14% from a year ago as we implemented minimum production requirements and other Prudential standards for the sales force that came to us with the Star and Edison acquisition. Looking back two years, the comparison of first quarter sales is most significantly affected by the discontinued single premium bank channel product and by our active management of the sales force. Current quarter life consultant sales are at roughly the same level as two years ago, but with about 30% fewer agents now on board as we've taken steps to build a more cost-effective and productive proprietary distribution channel. On slide 23, corporate and other operations reported a loss of $342 million for the current quarter. This compares to a $303 million loss a year ago after adjusting for a write-off of bond issue costs.
The increase in the loss reflects higher expenses in the current quarter, including nonlinear items such as corporate advertising and a lower pension credit. The benefit of lower interest expense reflecting our refinancing of high coupon debt last year was a partial offset. Now I'll turn it over to Rob Falzon.
Thanks, Mark. I'll provide an update on some key items under the heading of financial strength and flexibility with just a few slides. Starting on slide 24, we continue to manage our insurance companies to levels of capital that we believe are consistent with AA standards. As of year-end, Prudential Insurance reported an RBC ratio of 456% with total adjusted capital or TAC of $13.9 billion. While we don't perform a quarterly bottoms-up RBC calculation, we estimate that our RBC ratio as of the end of the first quarter has not changed materially since year-end and is above our 400% target, which we believe gives us a cushion against our AA objective. In Japan, Prudential of Japan and Gibraltar Life reported strong solvency margins of 772% and 937%, respectively, as of their most recent reporting date, which is December 31st, 2013.
These are comfortably above their 600%-700% targets. Our Japanese insurance companies will soon report solvency margins as of their March 31st fiscal year-end. While the calculations are not yet final, we expect them to continue to be in a strong position relative to their targets. Looking now at the overall capital position for the financial services businesses on slide 25. We calculate our on-balance sheet capital capacity by comparing the statutory capital position of Prudential Insurance to our 400% RBC ratio target, then add capital capacity held at the parent company and at other subsidiaries. As of year-end, we estimated that our on-balance sheet capital capacity was about $3.5 billion, including about a billion and a half that we considered readily deployable.
Taking into account our results for the quarter, our quarterly common stock dividend of $0.53 a share or about $250 million, and share repurchases also of about $250 million, we estimate our on-balance sheet capital capacity was over $4 billion at the end of the first quarter. The portion of that we consider to be readily deployable has not changed materially since year-end. Turning to the cash position of the parent company. Cash and short-term investments net of outstanding commercial paper amounted to $3.2 billion as of the end of the first quarter. The cash in excess of our targeted $1.3 billion liquidity cushion is available to repay maturing debt, fund operating needs, and to redeploy over time. Now I'll turn it back over to John.
Great. Thank you, Rob. Thank you, Mark. With that, we'd like to open it up to questions.
Thank you. Ladies and gentlemen, if you wish to ask a question, please press star followed by one on your touch tone phone. You will hear a tone indicating that you have been placed in queue. You may remove yourself from queue by pressing the pound key. If you're using a speakerphone, please pick up your handset before pressing the numbers. Once again, for questions or comments, press star and then one. Our first question will come from the line of Chris Giovanni with Goldman Sachs. Your line is open.
Thanks so much. Good morning. Question for Mark. MetLife on our call last week talked about regulators getting a better understanding of separate accounts and that, really regardless of what happens with the Collins Amendment, it's possible for them to either not assess capital charges or at least not assess significant capital charges for the non-guaranteed portion of separate accounts. Wondering if that's the message or sense that you guys are getting as well.
Yeah, it is, and I think I'd make an even broader statement about the insight that regulators are gaining into the whole solvency model and capital world of insurance. The issue around non-guaranteed separate accounts is specific and relates to the line of sight to the capital of the company, and I think that point as well as others are being discussed constructively and often.
Okay. A question for John. You've talked about the 13%-14% ROE target as sort of a, I believe, sort of a through the cycle return. There'll be periods where you're clearly above that as we've seen more recently in periods that are below. How should we think about what's a reasonable sort of standard deviation from this average?
Well, I guess the way I look at it, Chris, is it's less about an average and more about something that we think we can achieve through the cycle absent a tail event. Maybe just to put it in a little more context, we've talked about this 13.0, 14.0 aspiration since 2010. Obviously, it's no longer a goal, it's a reality. In fact, our run rate in 2013, again in Q1 of 2014, is better than that. We think this is something, we don't think of as an average. We'd rather think of this as something we think we can achieve through the cycle, absent, as I say, tail-type events. By maintaining that through the cycle, it'll represent superior performance relative to peers and relative, I think, to most balance sheet-oriented financial institutions. We're sticking with the 13.0 to 14.0.
We think it's superior. It's not a once-and-done phenomenon. It's a focus on sustainability over time, that's how we're thinking about it.
Okay, you had some leadership changes take place post Ed's departure earlier in April. Just wondering if there's anything we should take from that in terms of potential changes in strategy or if Charlie or Steve, as they kind of assess their businesses, if there's any incremental changes.
I'd just offer one or two macro comments on this. This is very classic Pru of carefully thought through, orderly change planned over a long period of time. You're seeing nothing in this transition that's reflective of anything other than the intense focus that we always apply to talent management and to succession planning. We're feeling very good about these transitions. Clearly, any new leader in a new role takes a fresh look at things, and that's the way they think about it. We're feeling very good about where we are and where we're headed and the quality, continuity, stability of the leadership team.
Great. Thanks for the thoughts.
Thank you. Our next question comes from the line of Nigel Dally with Morgan Stanley. Your line is open.
Great, thanks. Good morning. First question on Gibraltar. You've done a great job of improving the consultant productivity, but we're still seeing those relatively large declines in the number of consultants down another 5%-6% on a sequential basis. You mentioned in your comments that you expect that number to eventually stabilize and then grow. If we can get some color on when that's likely to happen.
Sure, Nigel. This is Charlie. Let's just take that in a couple of different ways. The life consultant count was down about 14% year-over-year, and that really does reflect, as you said, a continuation of the active management of the Star and Edison sales force. Enforcing validation requirements and doing a variety of other things. A couple of comments on that. The second derivative of the decrease is derivating. In other words, is decreasing. In other words, the rate of decrease is decreasing. This quarter, we went down by 14%. Last quarter, we went down by 18%, and the quarter before that, we went down by 20%. It is coming down. In terms of productivity, we're back up to where we were before we acquired Star and Edison.
We're back up at the sort of three and a half policies per month level. Productivity is where it was, I think what you'll see going forward, what you'd expect is the percent change in sales will reflect now the percent change in the life consultants count going forward. That's exactly what we see is happening, that's exactly what happened with Kyoei. If we go back about a decade to Kyoei took four years to actively manage the sales force to where we wanted it to be. The sales force was reduced over that period of time by roughly 40%, rough justice. We're three years into the Star Edison process, and we're down, rough justice, about 30%. We have a way to go.
We're entering into the bottoming out phase, I think you'll probably see that later this year or the beginning of next year, somewhere in that timeframe as we finalize the process. This is sort of textbook, sort of what we did with Kyoei, we're doing exactly the same thing here.
Great. Thanks. That's helpful. Second question on group insurance. Been at the repricing for several years, results don't seem to be getting better. Is it perhaps the price increases that you've been pushing through have been insufficient and that you need another round of rate hikes beyond your original expectations? Is it more just a matter of timing that the actions that you've taken are just going to take more time to be evident in the results?
Nigel, this is Steve Pelletier. The results in group insurance this quarter are driven purely in the disability business and purely through claims severity in the disability business. When we look at what we've done over the past couple of years and are continuing to do in the business in terms of repricing, in terms of lapsation of unprofitable business, in terms of claims incidents, and in terms of effectiveness of managing claims, we don't see any reason to lack confidence in the path of recovery that the business is on. Having said that, as Charlie has emphasized in the past, that path is not going to be a linear one. It can have ups and downs as we saw this quarter in relation to claims severity.
We think that the price increases we've engineered in the past couple of years and that we continue to increase are at the appropriate level.
Great. Thanks a lot.
Thank you. Our next question comes from the line of Jimmy Bhullar with J.P. Morgan. Your line is open.
Hi. First a question on the stable value business. Your sales flow slowed down there, and you mentioned a little bit you're seeing a little bit more competition. Just if you could elaborate on that and whether you're seeing competition from public companies, mutuals. Secondly, on Full-Service, very strong close. There was a large case, I think about $2.6 billion in there. Maybe talk about competitive trends in that market as well and what your view is in terms of pricing conditions in the Full-Service market.
Jimmy, Steve again, I will take your questions in kind of reverse order or the points you mentioned. First of all, on Full-Service, no. We don't see any change in our view of competitive dynamics in the marketplace or in our business strategy in relation to those dynamics. We're obviously pleased by the first quarter sales and flows. However, I'd emphasize that contained one very large case, a $2.6 billion case, a public entity on the West Coast. We've said before that we're selective in relation to these large cases. Selective does not mean we can't compete though, when we like the characteristics of the case, as we did in this instance. I don't think that's anything that we can count on going forward. As Mark said, they are inherently lumpy. In IOSV, you are seeing a slowing of sales, and that's fully expected on our part.
Our sales performance the last few years in this business reflected our stepping into a void in the marketplace. Now the competitive circumstances are changing. Having grown the book the way we did, we are now facing concentration limits at some counterparties as we would expect to. Also, as you mentioned, new competition. That is coming, Jimmy, both from banks and insurance companies. I'd emphasize that there's a range of new competitors in that market. As of right now, we have not seen the entrance of that new competition and new capacity depress margins in the market. Obviously, we've got our eyes closely on that. It would stand to reason that increased competition could do that. It hasn't done so to date, but we've got our eyes on it.
Maybe one more on the individual life business. Hartford had sold a decent amount of universal life with secondary guarantees. You obviously pulled their product off the shelf, and you've incorporated some of the features of their product into yours. As you've looked at the Hartford block more, how comfortable are you with the pricing in that block that you acquired?
We feel solid about the block of business in terms of its profitability, in terms of its risk profile. The pulling of The Hartford product from the shelf is simply reflective of our integrated product design strategy. It just reflects further integration progress following the acquisition.
Okay, thank you.
Thank you. Our next question comes from the line of Tom Gallagher with Credit Suisse. Your line is open.
Good morning. one quick follow-up on the group business. Just looking at the earnings trajectory and civil loss ratio and group disability, do you need to take another round of rate and repricing for that group disability block?
We continue to reprice the business as it comes up for repricing, Tom. That's not a course of activity that ends. We are about 60% of the way through repricing the block of business that was on the books a few years ago. We expect to make significant further progress regarding the remainder at the beginning of next year. Most of this business reprices at January 1st of the year. The remainder would occur during the course of 2015. This is not a process we're done with. But it's a process that has been progressing as expected.
Okay. One for Mark. Any thoughts on the dual bills that are running through the House and the Senate focused on the Collins Amendment and whether that's significant from your end?
There's certainly a qualitative significance in the broad-based support for clarifying the original Collins Amendment as it relates to capital standards for non-bank SIFIs. I think there's a compelling message in the fact that a number of legislators on both sides of the aisle and in both houses of Congress have stepped up to endorse or co-sponsor these bills. I'm not going to comment on the prospects for passing the bills because that's deeper water than I'm willing to swim in. I'm not quite sure how all that stuff's going to work. I think there's a very clear message in the formulation and the positioning of these bills in both parties and in both houses.
Mark, just to follow up on that, is it important from your end that this does get passed and clarified in terms of the ultimate rule setting? Or do you believe that even without these getting passed, that ultimately it's going to get to a place that you all would be comfortable with?
I do believe that this will ultimately get to a place that we'll be comfortable with. The Collins Amendment as originally drafted or passed and as interpreted by some is actually an obstacle to implementing Dodd-Frank and achieving the objectives of the bill relative to stability and financial strength. I think that's clear, and I think we will ultimately find a solution either through this kind of legislation or through a more direct administrative solution.
Okay, thanks. Then just one follow-up on retirement. The margins there were quite strong, even after stripping out what you've defined as favorable investment income. Can you describe what's really driving it? I saw crediting rates were down by a fair amount. Is it really just spreads?
Spreads are a contribution to it. Also, I think you're seeing when you take a look at, for example, the full-service part of the business, you look at our ability to generate greater contributions through a lot of the work we've done in that part of the business. The greater implementation of auto-enrollment activities, auto-escalation features in plans. That has helped as well. In the meantime, withdrawals stay at a relatively consistent % of plan balances. That has also been a contributor.
Just operating leverage in the business continues to flow through. Is that a fair description?
I think that'd be a good characterization of it, yes.
Okay, thanks.
Thank you. Our next question comes from the line of Suneet Kamath with UBS. Your line is open.
Thanks. Good morning. Just a question to start on annuities and the ROA. If I look at slide seven of your deck, it looks like the year-over-year improvement in ROAs was pretty significant from 87 basis points to, I guess, 105. I know on the last call, we talked about some of the dynamics or drivers that are causing this to occur, but I just wanted to get a sense order of magnitude. How much of that improvement would you say is related to the whole K-factor adjustments that you make on a quarterly basis?
I'd say a very significant portion of it, Suneet. This is Steve. When you look at the scale economies in the business, those remain in place. The business has effectively managed expenses from a general and administrative standpoint. But the lowering of the K-factor has been significantly driven by outsized equity market performance, certainly in the past year, but over the past few years. As you all know, our projections for equity market growth are more modest. Then it would only stand to reason that if markets perform in line with those expectations any further expansion of the ROA would be at a much more modest rate.
Got it. I guess, I don't know if we could do this externally, but if we wanted to look at this annuity ROA maybe on a statutory basis where I'm guessing that we would eliminate a lot of the noise around DAC and K-factors, what would that improvement sort of look like order of magnitude?
We won't be able to address that today, Suneet. I haven't even looked at that. We report annuity results on a GAAP basis, and we've got multiple legal entities here. It would be difficult to do it in a way that would be very meaningful.
Okay. I guess my second question is on non-bank SIFI. As we think about some of the commentary we've heard from AIG and MetLife, it sounds like both companies are spending a fair amount of time, both in terms of investments of dollars and investments of people, in terms of improving their financial systems to be able to give the Fed what it wants in the manner in which it wants it and the timing at which it wants it. I guess we've not really heard, or at least I've not heard the same sort of commentary from Prudential. I'm just kind of curious how you think your systems and everything are positioned to kind of handle what could be some sort of new stress tests if this whole non-bank SIFI thing goes in a way that's similar to the direction it's been going in.
This is Mark. I will start off, then I will ask Rob to comment as well. I guess the beginning starting point is that we are going through a lot of the same thing. The supervisory environment is evolving with the Federal Reserve, we are working on the same kinds of questions about reporting and interfaces and the capabilities that we need to be effectively supervised by the Fed. It is work in process for us. Let me comment briefly on stress tests. We have shared with you our Capital Protection Framework, we go around the track on stress testing frequently here. There will be challenges to align exactly what we do with exactly what is expected. We feel like that is an area in which we have refined our capabilities going back really to the beginning of the financial crisis in ways that are pretty constructive and helpful.
The point of that is not that we will not have to do some things differently, but that we are coming into this with a lot of work already done around the things that we understand and also around the quality and credibility of the work we do in stress testing. The things that we understand as they affect our capital and solvency issues. Let me ask Rob to comment briefly and maybe a little more specifically on the capability issue and what is going on there.
Suneet, I would make a couple of observations. One, yes, we are going to make similar investments and are making similar investments in both talent and systems. I would observe that we are starting with a very strong foundation in each to lever off of. That is extraordinarily helpful. Second, as Mark mentioned, from a stress testing specifically standpoint, we have done stress testing over a long period of time. We have done that both within a statutory framework, we have done that in the context of our Capital Protection Framework as well. For us, it is a matter of migrating that over to a framework that is more Fed-centric than that which we have used. We expect that that will occur over an extended period of time.
We are confident that we both can execute on this and that we have an ability to meet any reasonable standards that may be put up with respect to both the process of testing and the results of that testing.
Should we think about that migration to Fed standards as sort of from a statutory framework to more of a GAAP framework?
Well, I think that is absolutely one component of it. If we look at how we've historically been regulated, obviously the statutory framework is critical to us, although we have translated that historically into GAAP. Yes, the Fed is a GAAP regulator, not a stat regulator, that will be one component of the migration.
Yeah, just one comment on that. The standard language of the regulation of, internationally, the regulation of large financial institutions is in a consolidated framework. The only place for us that consolidated numbers live is in the GAAP world. We don't have a consolidated statutory view. I would emphasize that we also have to pay a lot of attention to what our specific individual legal entities look like and the bottoms-up issues related to capital and liquidity and stress. We're going to have to bring together both dimensions. As Rob said, the consolidated GAAP world is generally the starting point for looking at large financial institutions in any regulatory setting as it's been historically and as standards have emerged now.
I think I'd add one more comment, Suneet, which is that when I describe that migration, I would say that migration is coming from both sides. The existing stress testing framework that the Fed has used is very bank-centric. It's not only GAAP, it's bank-centric. There's an acknowledgment that we need to move off something that's historically been entity level and statutory, the Fed will need to migrate its own stress testing away from those things that are appropriate to banks, to those that are more appropriate to the insurance industry.
Got it. Okay, thanks very much.
Thank you. Our next question comes from the line of Erik Bass with Citi. Your line is open.
Hi, thank you. Just could you first provide an update on your outlook for pension closeout activity? I know, John, you mentioned that in your opening remarks. I guess, is there a sticking point that's preventing larger deals from getting done right now? Or is it just a function of the long tail transaction process?
Sure. Let me just ask Steve Pelletier to speak to that. Steve?
Thanks, John. Erik, we still feel very positive about the prospects for development of the pension risk transfer market. Funding levels are up. PBGC premiums and revised mortality tables continue to sharpen everyone's attention on longevity risk. We continue to feel that bodes well for both the ability and propensity of plan sponsors to transact. These things take time to work their way through the system, both within plan sponsors and then in discussion with potential counterparties like ourselves. We still feel the basis for development is there. Charlie, last quarter talked about segmentation of the market from a size standpoint. I would add to that segmentation of the market from both a funded basis in which we're actually taking on the assets and on the part of the market where we're talking about pure longevity reinsurance.
Looked at in either way, both by size or by type of business, we are in a number of active discussions. We continue to feel that we will participate in the various segments of that market, in particular in the large segment where that really plays to our strengths and our ability to develop customized solutions. These transactions as well as large full-service cases are inherently lumpy, and we'll see how they emerge. The prospects for development of the market are still solid.
Got it. Thank you. If I could ask just one follow-up on the annuities business where you've highlighted again how the earnings growth has outpaced AUM growth. I'm just wondering how much operating leverage do you have left in this business, and can earnings growth continue to exceed AUM? Again, assuming there that the markets follow your normal assumptions, not the outsized returns we've had over the past couple of years.
I think, Eric, just to echo earlier comments. There can be further progress from the operating leverage that's kind of inherent in the business. That progress is going to be much more moderate if markets perform in line with our more moderate expectations.
Got it. Okay. Thank you.
Thank you. We have time for one final question, that'll be from the line of Yaron Kinar with Deutsche Bank. Your line is open.
Good morning, thanks for taking the question. If we look at the FX drag rate for this quarter, can you help us think about the forward impact of what the rolling Japanese yen hedge program looks like for the next couple of years?
We don't disclose the forward rates beyond the current year. We will talk about next year's translation rate at some point before the end of this year. Just a reminder that the hedging program is rigorous and structured. It's not discretionary. We don't try to anticipate moves in exchange rates. We've put in place a rolling hedge over three years. What that basically means is that at any point in time, the next 12 months are fully hedged. The 12 months after that are about two-thirds of the way hedged, and the 12 months after that are about one-third of the way hedged. The hedging transactions are executed in forward markets. You ought to pay attention to the difference between spot and forward if you really want to try to hone in on this number.
Basically, if rates stabilize where they are after three years, it will have fully worked its way through our translation, and we'll be translating at a JPY rate that's where the current market is. A long way of saying it depends on how the market moves, but we do smooth it out as a result of our hedging translation.
Okay. To follow up on that, since you discontinued the JPY-based bank channel single premium whole life product, is it fair to assume that the overall portion of $ earnings would actually increase in Japan? Could you give us a sense of what the business mix in terms of denomination would look like?
Right. We can't give you a specific mix, but there has been a proportion of, obviously, $ -based sales. That's been the best-selling product in POJ for quite some time. With the diminution in the bank product, the single premium JPY-denominated whole life, the interesting part is that we are beginning to sell other products, as Mark said, in that particular channel. The recurring premium whole life that's come into the, as we are selling more of now. That's right down the center of the fairway of what we want to sell. It's much more mortality-based, and we like that product. In terms of the multi-currency product, we're not selling as much of the $ -based product for a couple of reasons. One, interest rates have come down, and two, JPY has depreciated against the $.
That product has diminished slightly against some of the other currency products that we sell.
Keep in mind that the in-force is large, the impact of any particular product activities in any particular year isn't going to move the needle very much. Those yen-denominated single premium products, which had fairly thin margins anyway, that didn't swing earnings very much in favor of yen, and any particular year's activities will have a modest impact on mix.
Yaron , without addressing what changes might occur in the future, rough justice today, about half of the earnings in Japan are yen-denominated.
Okay. One more question on the annuity space. Clearly, you're successful in growing the PDI product, which is an income-oriented product. I think one of your competitors was talking last week about maybe shifting into more of an investment-oriented product. Do you see a more attractive opportunity in the income protection side, or do you see some opportunities in investment growth as well in the annuities?
First of all, just to address one fact point in your question, we did launch an investment-only product at the end of April. Let me place that in context. Our strategy in the annuities business is based on helping clients achieve secure retirement income, and doing so through a range of products that diversifies and mitigates our risk. We feel very confident about the profitability and risk profile of all the products that currently populate that strategy. HDI, as we redesigned it, as Mark spoke about, PDI, which you mentioned, and now going forward, the investment-only product as well. We think the range of those products is important to fulfilling that strategy of helping achieve secure retirement income.
Great. Thank you very much.
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