All right, let's get started. Glad to see all of you. Glad you survived whatever darings do you dared to do yesterday. To those of you who were unable to make it to Tokyo, welcome to our webcast. To those of you who will see the webcast subsequent to real time, by the way, it'll be available till the 26th of September. We hope that you also find today's presentations helpful. The other thing I would mention is that even though the webcast itself sunsets on the 26th, the slides will be available, I don't think I want to say in perpetuity, but certainly for a long time. Probably longer than any of you will want to refer back to them. In the binders in front of you will see a lot of good stuff. You will see the usual legal disclosures and boilerplate.
You will see an agenda for today's meeting, you will see the actual slides that we will be presenting. From the agenda, you'll note that Ed Baird, the head of International Insurance, will set the stage. He will be followed by each of our business heads in Japan. First up will be Kurashigi-san, who is our senior executive in Japan. He will be followed by John Hanrahan, formerly the Chief Financial Officer of International Insurance. I know many of you know John. John is now the head of Prudential of Japan, or POJ. John will be followed by Sato-san, who is his counterpart as the head of Gibraltar. After Sato-san, Tanigawa-san, who is the head of our bank channel operation, also part of Gibraltar, will present. There are some numbers in the presentations of the business heads.
After all, both Kuroshigi-san and John Hanrahan are actuaries. They can't help themselves. Their presentations are a little bit higher level, more strategic than financial. To pull it all together financially, the last presentation will be that of Ken Tanji, who is the Chief Financial Officer of the International Insurance division, Ken will be the one who will address most of your questions on our financial performance. You can see that we plan three Q&As. We also plan a couple of breaks. There are facilities here. There are little stick figures on the doors. I'll give you a hint. One is for the boys and one is for the girls. It'll be a little bit of a test, perhaps, to tell which is which. If you make a mistake, you'll know the moment you open the door.
We expect a break around noon. We are offering lunch, a buffet lunch. I can tell you that the amount of time it'll take to get from here back to the Grand Hyatt, where Matt will be presenting, shouldn't be more than about 15 minutes. If you'd like to stay for lunch, I think you would have time. We would certainly enjoy seeing as many of you there as are able to make it. That's my nickel. I'm delighted to hand the baton to Ed Baird.
Thank you, Eric. Good morning and welcome. This is an interesting year for Prudential Financial. It's our 25th year here in Japan. As Eric has outlined, you will hear from the heads of all three of the businesses, as well as our country leader, Kurashige-san. When Prudential Financial started here 25 years ago, it had a single business and a single business model, POJ, with the LifePlanner model, which you will hear an updated description of by John Hanrahan. Since then, obviously, Prudential Financial's presence here has grown tremendously and the models have evolved substantially, and you'll hear a lot of the details on that. I'm not going to talk about that.
I'm going to talk about what might be less obvious, but I think what is critical to understanding the one thing in common that these businesses have that is visible, and that is the extraordinary success that they all share. I think the reason, among others, that they share that success is that, surprisingly, the strategic fundamentals upon which POJ was based and upon which it still operates today are the same strategic principles that we have used in founding and operating these other companies and businesses, in spite of what appear to be substantially different features.
What I hope to do in the next few minutes is just give you an inside look at what those strategic principles are, so that as you hear each of the business models described to you and their performances, you might recognize some of the underlying strategic similarities that cause us to be different, and I believe better, than many of the competitors here in this country. Let me start by taking you back, if you will, 25 years ago, to understand exactly what the strategic thinking was in creating the POJ LifePlanner model. At that time, 14 people, led by Kiyo Sakaguchi, met here to start this business.
They saw an opportunity, which I think was not at all obvious. That opportunity was to come to a country which was already the most heavily insured country in the world on a per capita basis, and start an insurance company, in spite of the fact that it had some of the largest insurance companies with some of the largest sales forces in the world. That took a certain degree of strategic insight and courage. It leads to one of the first principles upon which POJ was founded and which we have carried into all of our subsequent businesses, and that was a recognition that to even get started, let alone survive and succeed, they would have to create a business model that was fundamentally different and better.
In order to translate that, he had to come up with a value proposition that would make that a reality, he built it around three concepts: quality products, quality people, quality service. Those are very simple concepts. Indeed, many do say it, but he actually made it happen in ways that many of you are familiar with. The particular features he focused on in terms of the quality people was he looked at the nature of the market here and determined, well, what would he need to do to be meaningfully different and better around people? He hired people who had never been in the business, who were exclusively college graduates, only males, to differentiate from the marketplace, which was largely part-time females selling to friends and neighbors.
He focused on needs-based analysis because he recognized that in this country, while it clearly wasn't under-insured, it was under-serviced. If he was going to deliver superior service, he would need superior people to do that. It was quality people delivering quality service and with a quality product. I'll draw your attention to what is not in that statement, and that is the word price. At no point did he view price as a basis for competition. Quite the contrary. His vision was that he would achieve a premium price by offering a premium offer, a premium value proposition to the customer. That principle applies to all of our businesses. He was an actuary, and that wasn't an accident. In fact, coincidentally, I'm told that he was the first Japanese national to earn an FSA in America.
From day one, he was very focused on profitability and expense management. Those qualities are embedded and encoded in the DNA of that organization, and like all of these principles that I'm briefly summarizing, they have been transferred to the DNA and to the strategic underpinnings of all of these other companies, which on the surface can look so different. That was and remains the core fundamental business for POJ. It evolved over time. After all, these life planners are 20, 25 years older. They have focused initially on death protection. As John will make clear, they have subsequently evolved the needs they address in their customers to include retirement and accident health. Indeed, he will show you some details to show that it is a build-on, not a substitution.
I'll make the point about death protection particularly strong because that is, as anyone in the business will tell you, the toughest sale to make, death protection. In contrast to a savings-oriented product where the focus can be more on the crediting rate, the price, and the beneficiary is the purchaser. Particularly if it's going to be held only until that individual needs the savings, not for the true death protection. What makes pure death protection so hard to sell is because the only benefit that goes to the purchaser is the peace of mind that goes with the purchase, but the economic benefit obviously goes to the beneficiary. That's a very difficult sale to make. You will notice that new entrants to the business and companies that don't have strong sales organizations tend to lean to the savings end of the spectrum, not to the pure death protection.
What our organizations have evolved to do is the full spectrum. Go after that savings side of it, but always focus on the tough part, the part that others cannot do, will not do. That is the foundation. That is the death protection part of the business. That was and remains the foundation for POJ. The first major visible step in the evolution, of course, came 10 years ago. This is an interesting year because this is the 10th year anniversary for the acquisition of Kyoei, now known as Gibraltar. On the surface, you could scarcely find a more different organization. Kyoei was everything POJ prided itself on not being. It was a classic middle-market, traditional Japanese domestic sales organization with one big problem: it was bankrupt.
When we acquired it would seem that there was no way to leverage what we had in terms of strategic principles or anything else. But what was recognized from the beginning was the opportunity to make this meaningfully different and better, and to leverage the skills inside POJ. They already had one thing that was meaningfully different, and that was the Teachers Association, which at the time represented about half the business. It was a unique and exclusive right to have access on campus to roughly 1 million school teachers. But clearly, the bankruptcy indicated that that had not been fully leveraged, and the challenge was how do we make this better? Some of the same competencies, the strategic principles around quality people, which is the foundation, were brought over. In fact, the leadership came from POJ.
The first challenge was how do you take 7,000 people in this bankrupt company, not try to make them clones of Life Planners, but to instill them with that same kind of focus around death protection and the skills and the competencies needed to have a value proposition, not based on a low price or a high crediting rate, but with the focus rather around the quality of the advice and the service and a competitive offering. Indeed, they did that. That is a slow and difficult task. It took several years. In spite of a lot of recruiting, that 7,000-person sales force shrank over the next 2 years to about 4,500, and it slowly grew its way back to a little over 6,000 just prior to the recent acquisition.
Even though it never grew back to the size of the sales force it had been, even over 10 years, its productivity, not to mention its profitability, grew enormously. An extremely successful organization by any measure. If you then look further, as recently as last year, that organization, within 10 years, went from a position of being bankrupt to the position where it could acquire 2 more companies, very similar to what they had been before. Very similar to what Kyoei was. Interestingly and coincidentally, they had about 7,000 salespeople. That company today is going through that same transformation process that was done with Kyoei. We have the confidence that we can do that. Part of it goes back to people and leadership. The leader of that, whom you will hear from, is Sato-san.
Sato-san was one of the executives from Kyoei who partnered with the leaders who came from POJ to bring about that transformation in the sales organization. He then led the merger over the last year and became the president of the new organization, the new, as we call it, Big Gibraltar. He has experienced from all ends that kind of transformation. The focus there has been on taking these same strategic fundamentals of focusing on building the quality, delivering the quality service in such a way that that value proposition to the customer is one that can demand that kind of pricing, and in turn, when combined with the productivity, delivers the profitability that today characterizes that organization. The next step in the evolution came about five years ago, and that was the development of the bank business. It's now legally a separate company.
We call it Prudential Gibraltar Financial. It is operated as part of, from a reporting perspective, as part of Gibraltar, but it's operated as a separate company run by Tanigawa-san, who will speak to you this morning. Tanigawa-san came from POJ. He was a Life Planner, a very successful one who became a sales manager, an agency manager, and then a regional sales vice president. All of those principles of quality, of differentiation by being focused on having the best people, of delivering service, not being dependent on price, he carried that over into the bank channel. His very first challenge there was how to catch up with companies that had been spending the last five years building banking relationships, selling variable annuities, which we had abstained from doing because of their focus on profitability.
What he was able to do was to craft a value proposition that said, "We won't then send you just a product. We'll send you a product, and we'll send you a person, and that person will actually be a former POJ Life Planner," among the very best in the industry. As a result of that, was able to create a relationship with the number one mega bank in Japan, the Bank of Tokyo-Mitsubishi, which at that point was representing virtually 100% else. Even today, it has grown to the point where it's still 50% of the sales. One of the principles that that emphasizes is we focus more on the quality and getting the penetration, so we get the profitability as opposed to having large numbers. Yes, do we want more banks? Sure, and that's growing.
Having the quality relationship as a foundation to build upon profitably, then the numbers will follow. Some of those same principles of how do we design a value proposition that's truly different and better, that's based not on price leadership, even in third sector, where price or commissions or interest rates frequently drive the discussion and are the foundation of the value proposition. Do we have to pay attention to that? Absolutely. We have to be in the game. You will see in here, as you have already, details that show that's not the basis on which we compete. The fact that our original founder was an actuary is not lost on the organization. The focus has always been to not be distracted or seduced by growth in the top line, but see it rather more as a driver to get to growth in the bottom line.
In a captive agency system, that can be controlled. In a third-party system, that can be tougher to accomplish, but with the proper focus, with the right value proposition, very doable. Even more recently, this has come about with an independent agent channel. Some of you will have noticed that we had started that just before we did the acquisition, which was ironic timing. We had just started a small independent agency channel. There again, the value proposition was quite different. In an industry known for competing based on paying a higher commission, we stayed away from that. The initial contact and conversation was focused around what is the vision that this independent agency has, and does it line up with what we have in mind?
To the extent that they want to focus on training and educating so that they can deal with the more complex products and a more challenging marketplace, then we have a basis for working. You will notice that we inherited 4,000 or 5,000 of these relationships. Today, that number is smaller. The number of bank relationships we inherited is smaller. The number of Life Consultants we acquired is smaller. That's because, just as with POJ, our initial focus is always going to be on quality. If we can get that foundation correct, then we're confident that over time, the numbers will come, but with a foundation that's based on profitability and a value proposition that's sustainable. Let me focus on that word for just a minute, sustainable.
One of the most valuable but the most elusive goals in any financial service industry is to come up with a sustainable competitive advantage. Hell, if you can come up with a temporary competitive advantage, you're doing well. To come up with a sustainable one, board is on the impossible. Our belief is that for that to happen, you have to focus on distribution. Products can be pretty well copied. They can be advantageous. We have had our innovations. We look forward to doing more of them. It's seldom the basis for a sustainable advantage. Prices we know are easily cut and not the basis for the kind of profitable growth that we look for. While we focus on those two as part of the equation, we really focus on the toughest part, which is distribution. In this industry, distribution is the key.
It is the most difficult part. We believe that the most valuable distribution is captive agency, but it's also the most difficult. It takes the longest to do, and it's the hardest to achieve. Even we have failed in producing life plan organizations in some of the countries that we have entered. We have learned here, and we have acquired that skill. If there is one core competency that I would claim we have superior to any organization, it is the ability to recruit, develop, and retain successful agents. The reason we like that distribution, in spite of the fact that it is the most difficult and it takes the longest, is because it gives you access to and control of a customer that no third-party distribution arrangement can match. He who owns the customer is king. That's our primary focus.
That's the foundation upon which we build these businesses. POJ gave us a quality of that no one else could match. Others have attempted to duplicate it once they realized this boutique was not just an admirable small, little business, but today it's a billion-dollar boutique. Those challenges, the skills it requires, the time and patience it takes, because it takes a minimum seven, eight years just to break even, and that can easily translate to a decade or longer. That's a formidable obstacle when you are looking at it. It's a magnificent barrier to entry when you have it behind you, and that's precisely where we are today. We've been able to leverage that in taking over first Kyoei, and now Star and Edison.
While this industry, as Kurashige-san will outline to you in a few moments, has been characterized by a steady reduction in the number of captive agents, we have been steadily growing against that. It gives us a stability of earnings, a control over the value proposition, so we are not as dependent on some of those more variable items, such as the pricing or the constant innovation in product. Those are some of the fundamental principles, strategically, that we built POJ on. We continue to carry those forward. We've carried it forward successfully for the last decade inside Gibraltar. We are in the early stages of carrying that forward into the acquisitions of Star and Edison, and now we've been moving into the third party. What the third-party channels can give is explosive growth, and you see that.
You get the kind of growth from a bank channel or an independent agency that you cannot get through a captive agency system. With that comes a volatility. Because we seek not to be a price leader, it can take longer. It means we have to respond to the marketplace because sometimes we might, as in the past quarter, find ourselves inadvertently at the front of the parade, and that's not where we intended to be. Others who have built a value proposition around being a price leader find that that isn't always sustainable and will retreat. At which point we will then retreat because that's not the key to what is driving our strategy in those channels, either the bank channel or in the independent agent channel.
What it has allowed us to do is to leverage our infrastructure to get us economies of scale, which is a key issue. Expense margins is one of the better ways to achieve stable earnings. It allows us to leverage that infrastructure with supplemental distribution. What evidence has proven, and this was, I think, a real gamble on the part of local leadership, those sales have been supplemental, not substitutions to the sales inside of the captive agency systems. One only needs to look at the growth of POJ or Gibraltar. Take a look at POJ sales.
Over the last three years, they've had some of their strongest sales quarters, quarter after quarter for the last several years coming out of the crisis, in spite of this explosive growth that has been taking place in the bank channel, and more recently, just starting in the independent agent channel. What I'm attempting to do here is to highlight to you and to sensitize you, not to the changes, which are obvious to all, but to some of the underlying strategic fundamentals that we utilize in entering these businesses and in running these businesses.
They focus around making sure that different and better is not just a marketing slogan, that we really have built the core competency to do that the people really are superior, really can deliver a superior service, whether it's at the front end for advice or the back end on service, and to continue to focus around that quality. If we focus on being the best, size will come over time. We focus on profitability rather than focusing on the top line, and always stay rooted in the fundamentals of death protection, even while reaching to address retirement needs, and accident and health needs to the extent we can keep it rooted in death protection as a foundation, either as the first sale or linking it to these additional products.
These are a couple of the themes that I hope you can keep in mind as you listen to what will be detailed, factual explanations of these businesses, which operate in very different market segments, and therefore, at times, using very different distribution techniques and with a different emphasis on product. Underneath it is a commonality that I think is worth keeping in mind because I think it's a key to understanding why there is this common success across seemingly quite different kinds of business models. Okay. Thanks for your attention on this. The first person I would like to introduce now is Kuroshige-san. Kuroshige-san, again, evidences this evolution of the organization. He was the chief actuary inside POJ, lived through that experience for 15 years, then the president of Gibraltar for about a five-year period, during which, by the way, the bank channel was really getting started.
Continued in this position, with a dual hat over the year 2011. Maeda-san retired. He took on the leadership as the country manager but retained the leadership at Gibraltar until handing that over at the end of the year, at the beginning of this year, to Sato-san. Japan has such a key part of our strategic approach. It makes sense to keep today focused on Japan. Happy at the end to answer questions that you might have about some of the other countries. Let us begin by having Kuroshige-san talk you through what it is about this particular marketplace that gives us the ability to achieve what has been achieved, and gives us the confidence to be able to continue this going forward. Thank you.
Thank you very much, Edward. Good morning. Today, I would like to give you a high-level overview of Prudential's competitive advantages and where we are positioned in the Japanese life insurance industry. I hope you will be able to see how we are leveraging our superior sales expertise and multiple distribution capabilities in order to take full advantage of opportunities in this country and achieve solid business growth. First, let me remind you about the Japanese market. It is the world's second-largest life insurance market with tremendous household wealth and investable assets. The retirement market is expanding due to the aging population, coupled by the increasing responsibility of individuals to save and invest for retirement. Japanese customers have traditionally preferred insurance products over equities for saving and investment. This presents an opportunity for life insurers. While the traditional captive agent channel remains the largest in Japan, distribution channels are diversifying.
These are a breakdown of household financial assets of Japan and the U.S. It is worth pointing out that nearly $11 trillion of currency and deposits are held by Japanese households, which is far greater than the U.S. and in fact, the largest pool of currency and deposits in the world. This means there remains tremendous opportunities for life insurers in Japan to uncover, serve, and fulfill the customers' needs for protection, saving, and retirement. Japan continues to be a very attractive market with significant opportunities for Prudential. Prudential has been in the life insurance businesses in Japan for over 25 years. We have an excellent track record of delivering solid business growth through organic growth, supplemented by opportunistic acquisitions.
Disciplined execution of the business model and our ability to attract, select, and train quality sales professionals are the biggest reason why we have maintained steady organic growth in our captive distribution channels. In addition, our investment portfolio is managed conservatively based on sound asset liability management, and this contributes significantly to our solid financial strengths. The trust we have built in the Prudential brand and the breadth of quality resources developed over the years have allowed us to expand into the bank and the independent agency distribution channels, offering unique value that differentiates us from the competition. Meanwhile, we have proven our ability to successfully merge, integrate, and turn around the acquired businesses, including the rehabilitation and subsequent business expansion for the former Kyoei Life, the foundation of today's Gibraltar Life.
With our experience, I am confident that we can successfully integrate our most recent additions to Prudential family, Star and Edison, in the same way. We currently have four distribution channels in Japan. First, our flagship LifePlanner channel serves mid-affluent to affluent customers as well as small to mid-size business owners and the professional market. LifePlanners demonstrate a missionary zeal in fulfilling their missions of delivering financial security and peace of mind to as many people as possible. They are highly skilled and amazingly productive. Second, our Life Consultant channel serves a broad middle market and our important affinity group relationships, including the Teachers Association. We have built on our success in captive agent distribution to expand into complementary distribution channels. As you know, the bank channels is growing rapidly.
I believe the large part of the success is driven by the quality of our people and the service they provide. The recent acquisition of Star and Edison has expanded our captive agent force and has also broadened our market coverage through the independent agent channels. We are selectively retaining productive independent agencies with which we would like to do business. As I mentioned earlier, we continue to achieve business growth through organic growth and opportunistic acquisitions. Prudential's market share, measured by new business face amount, improved by over 3% point compared to four years ago. About two-thirds of the share improvement was attributed to the addition of Star and Edison. Today, Prudential ranks third among all insurers and number one among foreign players measured by new business face amount. This slide compares industry versus Prudential new business face amount over the last 10 years.
As you can see, we have been enjoying steady growth while the industry has been struggling. The big jump in fiscal year 2011 obviously includes Star and Edison but also reflects strong organic business growth. Here is some more information that shows Prudential's strong presence in Japan. We are enjoying strong new business results and rank third in the industry with about 10% market share. Our ranking and the market share of other metrics are lower in the comparison because many domestic players have a much longer history, and therefore larger business in force. Even so, we still rank fifth or sixth. Now, allow me to give you some more perspectives on the life insurance industry. Customers are increasingly selective the life insurers.
There has been a greater emphasis on quality and financial soundness ever since the financial crisis and after the few players exited the market and suspended selling new business primarily because they took on more risk than they should have. As you know, high quality and financial soundness are area in which we have built tremendous confidence. This trend is favorable to Prudential. While our key focus will remain on the protection life insurance, because this is where we believe we can best leverage our sales expertise to grow earnings based on stable drivers, we will continue to implement initiatives to cater to growing demand for retirement-oriented product and continued demand for A&H product. The Japanese people feel they cannot completely rely on the national pension program, there is a growing need for retirement and saving solutions.
However, yen interest rates have remained low for a long time, it is difficult to design a yen product that satisfies the interests of both customers and the insurers in that area. The strong yen make foreign currency-denominated product, such as those denominated in US dollars, which we offer, appealing. While US dollar interest rates are lower than in the past, they remain much higher than yen interest rates. We believe customers will continue to find these products attractive for the foreseeable future. Here are some developments in the industry. The life insurance industry made tremendous effort to reach out to the victim or the potential beneficiaries after the earthquake and tsunami in 2011. Sales of death protection product increased in our agencies near Sendai, which suggests that many people learned the importance of death protection insurance after the tragedy.
Insurance regulators are considering reducing the assumed interest rate for the standard valuation reserves on new yen-based business from 1.5% to 1.0% in April 2013. We expect that virtually all insurers in Japan will review their pricing strategies upon this revision, and that we may see a shift in emphasis from saving-type to protection-based product since saving-type products would require relatively greater reserves. How will Prudential remain its competitive advantage? As we have already done, we will continue to focus on need-based selling and sales of protection product because this is our greatest strength and it offers great value to customers. It is the foundation of Prudential businesses in Japan and the basis for sustainable growth. Meanwhile, an extremely large population will be retiring and facing need unique to this generation, such as longevity, inheritance, and business succession.
We will continue to train and educate our agents and distributors to cater their complex needs. In addition, we understand that the younger generation thinks and acts very differently than older generations. We will adapt our distribution channels to evolving customer demographic and lifestyles. Let me briefly touch on each of the four distribution channels in the next few slides. You have heard us explain this many times. The Life Plan operation is our flagship. We go through rigorous selections and training processes in order to maintain a high-quality sales force that is customer-focused and truly believe in the value of life insurance. Our Life Planners serve the mid-affluent to affluent market through need-based selling, offering protection product and retirement solutions. Life Planner are filled with missionary zeal in delivering financial security and peace of mind to customers.
This is difficult to quantify, but one of the reason why they are so productive and successful. This chart shows you how successful POJ Lifeplanners are in the industry. POJ has had the highest number of MDRT members in Japan for 15 consecutive years. 811 or over 25% of POJ Lifeplanners are MDRT members. When we add Gibraltar's MDRT members, Prudential represents 32% of all MDRT member in Japan, which is incredible. We are very proud of this. The Lifeplan consultant channel serves the mass middle market. We have branch offices in nearly all prefectures. We have Prudentialized the sales force through training in Prudential value and need-based selling. The strong affiliate group relationship, including Japan Teachers Union, with which we have partners for 60 years, are relatively unaffected by economic trends and provide a recurring source of new business.
We offer a broad product portfolio, including death protection, retirement solution, and medical insurance product. The strong yen and low interest rate environment in Japan has bolstered sales of our U.S. dollar and other non-yen-denominated products. Our bancassurance business has been enjoying a rapid growth. Our business model, which includes seconding former Life planners to the selective distributors, has distinguished Prudential from the competition and proved successful. We now have a distribution relationship with over 100 distributors, including mega bank, regional banks, bank-affiliated insurance agencies. Customers trust in bank coupled with their trust in POJ and Gibraltar's sound financial position contributes significantly to attracting security-focused customers, especially large-ticket customers. Independent agencies are our newest complementary distribution channel. We started out slowly in 2010, the acquisition of Star and Edison quickly expanded our geographic reach and the number of distributors.
We have been selectively retaining productive independent agencies with which we want to do business. We had about 3,400 independent agency relationships as of end of June. You'll hear more about each distribution channel from my colleagues later today. Please take a look at annual new business premiums of all Japan insurance operations combined. This reinforces the message. We have expertise and the resources to sustain organic growth, which is most convincing by looking at our new business growth. I hope this gives you confidence in our ability to achieve sustainable growth. Japan has demonstrated a track record of success in delivering results. Please take a look at our pre-tax AOI. 2011 and the 2012 numbers include Star and Edison.
I'd like to think that this reflects our ability to achieve organic growth through disciplined execution of our business models, sticking to the core principles, but making slight modifications to adapt to the changing environment, and our ability to successfully acquire and integrate the business to achieve cost saving and business synergies. Thank you very much for your kind attention.
Thank you, Kurashige-san. Am I on? I think I'm on. Q&A protocols. Please wait for me to call upon you. If I don't manage to identify you by name, please forgive me. I plead temporary insanity, jet lag, incipient blindness. Just bear with, please. Please wait for the mic. Remember, this is being webcast, so we want people who are not in the room to have the benefit of your astute questions. Please give us your name, rank, and serial number, your name and your firm affiliation. Please keep your questions simple. Remember that we're dealing with translation here, and you also have to deal with me because I will paraphrase your questions for our translators and our executives. I can do terrible things to questions that are complex, so please try to keep them simple. Finally, please be considerate of your colleagues. Don't hog the mic.
The floor is open. Okay, there's only one hand up. That's Mr. Gallagher in the middle of
Thanks. Tom Gallagher, Credit Suisse. Just a question on Star and Edison integration with Gibraltar. I believe when AIG owned those businesses, they had difficulty integrating them, certainly with each other and probably with Alico as well. Just curious if you have some perspective on why do you think it was difficult for AIG to integrate them? How has that gone for you so far?
Okay, let me take a stab at paraphrasing that. Why do we think AIG had a difficult time integrating Star and Edison? How has the integration gone for us? Presumably, how have we overcome whatever it was that AIG found difficult?
Tom, I can give you an initial response, and when Sato-san is up in the next segment, he obviously as the head of the merger and as the head of Gibraltar, can give you a more detailed. I asked during the acquisition process that same question because we had heard about that effort, which had taken 2 years and had not been completed. Obviously, there are different interpretations, I'm sure, as to why that was not successful or completed. One of the theories that I heard was that it was approached as sort of a merger of equals. On that basis, it did and understandably could take quite a bit of time to resolve the inevitable trade-offs and tough decisions that have to be made.
We were quite aware of the rather time-consuming and delicate process that they had engaged to try to make that work out. In this case, obviously, it was quite different. Gibraltar was the acquirer. The products, for example, have all become Gibraltar products. While there may previously have been debates between those 2 companies as to which products should survive in an integrated portfolio, that debate was a brief one under our circumstances. The policies, practices of Gibraltar were largely the ones that were adopted. There was a fairly fast process for vetting through the various policies, procedures, products, et cetera, to see are there some that we really want to retain, either during a transition or long term. I think, bottom line, the decision-making process under the circumstances we were in were very different than under the prior situation.
As far as where the process is today, as you can imagine, we would not have reduced our estimated expense by $50 million if we were not confident that we were quite far along in that process. I'm sure Sato-san, when he speaks, can give you more color to that, Tom.
Okay, let's move on to the next one. Staying in the middle, Steven Schwartz in the middle of the fourth row. Steve, Thank you.
Hi, good morning. Steven Schwartz, Raymond James. I'm interested in a statement that you made that you saw the standard valuation rate, when it goes down from 1.5%-1%, that you think you'll likely see a move from savings products to death protection products. I realize there are aspects of both in every product, but they seem to meet different needs. I'm kind of interested in why that shift, and this may be for later, but how that might affect profitability.
Okay. The question is how the expected reduction in the standard valuation rate would favor protection products relative to savings products.
I'd like to use the translator. The change in the rate. The savings products require greater policy reserves after the rate change. That is going to have a significant impact on J-GAAP results in Japan, statutory results. I think insurers will make a decision or are likely to make decisions to shift some of their products to term and non-saving products which require less policy reserves, statutory reserves. Let me give you an example in products. There's a product called 10-year endowment. Customers pay premiums for 10 years and receive the maturity proceeds. If the assumed interest rates on the standard reserves are reduced, then after 10 years, there will be cases where the premiums paid over a 10-year period is less than the maturity proceeds.
Sorry, more than the maturity proceeds. Sorry. In case of endowments, the premiums paid and the death benefit is usually equal. If the maturity proceeds end up less than the premiums paid, that becomes an unattractive product to the customer. I hope that answers your question.
Yeah. Eric, the question about how this might affect profitability, should that wait for later?
Yes.
Okay.
Let's stay in the middle. The gentleman on the aisle dressed in business casual.
Thank you. Ed Spehar-
You're welcome
from B of A Merrill. Ed, I guess the question I had was on your reference to one relationship in the bank channel accounting for half of sales. What is the risk that that bank partner starts to pressure you for higher commissions considering the leverage that they have?
Okay, that is a simple question. What do we perceive the concentration risk of the Bank of Tokyo's very large share of our sales through the bank channel?
Ed, I think that's an interesting question from two perspectives. One, specific to that bank, two, I think you raise a broader issue that goes beyond that specific bank. Let me address both of those. The first one, that specific bank. That risk is there, but it gets smaller every day. What I mean by that is when we started out, that relationship was over 90% of our sales. That risk was obviously very substantial. It's about half that today, and as we grow these new relationships, it gets steadily smaller. I think you raise, nonetheless, a second broader issue, which is about banks just in general as an industry. There are marketplaces where that scenario has played out. There are marketplaces where, from the very beginning, the banks have negotiated extremely onerous terms relative to what the product provider is delivering.
Consequently, in some of those markets which we are now exploring, we would likely not enter that marketplace. The nice thing about Japan, in many respects, is that there's much more focus on things being quite prudent. Things move slowly and in a cautious way. If trends like that were to develop, we would have an opportunity to see it coming. What I have been encouraged by, as you can tell in particular with this bank, their focus has been heavily towards treating the customer right and making sure that they're getting proper suitability, proper training, et cetera. They're putting a higher priority on making sure that their core client relationship is not being jeopardized by simply a product push approach. All of that redounds to our benefit.
I think in any third-party distribution channel, whether it's through a bank or an IA, you have the kind of risk you're describing and therefore a greater risk of volatility. What we attempt to do is simply diversify that risk more broadly.
You don't see trends like that developing in Japan currently?
We have not seen that, no.
Thank you.
Sure.
Okay, let's go to the far side of the room. The next person up is Ryan Krueger. Ryan, please keep your hand up.
Thanks. Ryan Krueger with KBW. I had a question on the standard valuation rate from the FSA. Is there a different rate that is imposed on U.S. dollar-denominated products? If so, is that also expected to change next year?
Is there a different standard valuation rate that applies to U.S.-denominated products? Do we expect that that will also change next year?
There is no such standard valuation reserve assumed interest rate in Japan for U.S. product, dollar-denominated product.
Okay, is it up to the discretion of the insurance company?
That is correct.
Okay, just lastly, do you also expect to make product price increases on the U.S. dollar-denominated products next year as well?
Well, I don't think we're going to talk about what we're going to do next year. We did just make changes in the pricing of U.S. dollar-denominated products in April and in June, in April at Gibraltar and in June at Prudential of Japan. Next year, we'll talk about whatever changes that we intend to make at that time.
Thank you.
Mr. Schumann. The gentleman in the white shirt with his hand up. There we go.
Thanks, Eric. Jeff Schumann from KBW. Eric, I want to come back to this issue of protection sales versus savings sales because I think I'm a little bit confused in terms of how you would characterize your current sales. In other words, there's a lot of talk about Prudential being more protection-oriented, but I thought you had, in fact, been selling a lot of single-pay and limited-pay life insurance. Do you consider those to be protection sales, or are those more savings-oriented sales? If they are more savings-oriented, are those among the sales that would be vulnerable as the valuation rate changes?
Okay, that's a two-part question. Do we consider the single-pay and limited-pay products that we sell protection or savings-oriented products? If the latter, would they be among the products that we think would be vulnerable to the change in the standard valuation rates?
I can respond to that if you'd like. First, this distinction between protection and savings. One way that I personally think about it is sort of a spectrum. At one end, you have the pure debt protection, something like term. At the far end, you have more pure on the savings side. You have something like the endowment product that Kurashige-san referenced. We've been tapping into the retirement market for a number of years. You're right, we've been moving in that direction for a long time. The best example I can give you would be dollar-denominated retirement income. That's a product that we introduced in 2005. POJ has had it as a leading product for a number of those years. It's not single pay, it's recurring premium. I want to make a distinction between the payment period and the category of a savings-oriented product.
It's a very profitable product for us and a very attractive product for the client. The reason is it allows the client to get a higher return than they could get on a yen product. We don't take the risk. The client takes the currency risk. Key point. If there's going to be a higher return, there's going to be a risk. There's a question only of who's going to take that risk. Is it going to be the company or the client? Our philosophy here is very consistent, and that is we don't take that risk, the client takes it. As you can see from POJ's AOI reports for the last seven years, it can be a very profitable line.
More recently, with the emergence of the bank channel, you get savings products that tend to have more limited pay or even a single pay product. You can understand why that's true of that channel, because it's an easier sale. It's a less complex product than something that's a multicurrency retirement income kind of product, which is better sold by someone like a Life Planner. Whereas at the bank, they tend to focus more on something like a single pay or a limited pay product. That kind of product can be profitable, but obviously, you have to be more sensitive to the current marketplace and the current interest rate you're going to be able to earn than you are with a 20-year recurring premium kind of product.
It has a different dynamic, which is why you see in the marketplace more changes either in the pricing, the crediting rates or caps, et cetera, to manage that kind of inherent volatility that you don't get on the retirement recurring pay. I'm sort of separating the savings aspect from the payment period aspect.
Okay, just to be clear then, it sounds like you're fine on the POJ side. You're already selling more recurring type products, but on the bank side, you are participating in this sort of monetization of the bank deposits, it would seem like you have more of a challenge there as we migrate to a different environment to sell different products in that channel. Is that correct?
I think that's a fair articulation, which is why, again, we take a conservative approach to both the design and the pricing in order to mitigate that risk. You're absolutely right. It's one of the reasons you see that conservativism reflected in our investment portfolio. Because if you're going to try to chase that marketplace for market share by putting out higher guarantees or other more marketplace aggressive features, then you're going to have to take either a reduced return or you're going to have to go after a higher yield, i.e., a higher risk on the investment side of the portfolio. As you can see, this is another area where we have been consistent in our strategy across businesses. That same general account strategy that has always characterized our Life Planner model, which is heavily weighted towards JGBs or now U.S. Treasuries, because we always match.
We don't take a currency risk there. If it's a yen-based product, we invest in yen. If it's a dollar-based product, we invest in dollars. We take that same conservative approach over into the bank channel.
Thanks, Ed.
Sure.
Sorry to do this. We need to take a break. Let's take a break and come back in 15 minutes, please.
Do this. One second.
Yeah.
Hello, Mr. Spehar.
For all these years, the gentleman
Hello again. Let's resume. Our next presenter is someone who will be familiar to many of you, although he was wearing a different hat probably when most of you last met with him, and that's John Hanrahan, who is the CEO of Prudential of Japan. John?
[Foreign language] Minasan, ohayou gozaimasu.
Ohayou.
Yoku so. Obviously, I've been in Japan now for almost three years. I've tried to learn some Japanese.
Is that it?
That's it. [Foreign language] Muzukashi desu. It's very difficult. I was trying to say good morning and welcome. Really, when I came to Japan, what I've concentrated on learning is about the POJ Life Planner model. As Ed described, it's really the core, it's the foundation of our international business. In my prior role as the CFO, I had looked at it, I reported on it, I heard, I visited. To really get to know it and to understand the missionary zeal, which is very real, to be here, I could actually experience it and see it. You heard it from Kurashige-san; you heard it from Ed. This is the secret sauce. It's the foundation. People believing. Of course, every business you have to continuously evaluate. Is the current model still viable? Are the conditions that made it successful still present?
Are there additional opportunities that we can take advantage of? For POJ, the answers are yes, and yes. This is an overview of what I was going to cover today. I want to start by reminding you of the fundamentals of the Life Planner model. Life Planners are the core. Life Planner is not just a fancy title that we give to sales agent. I'm going to show you in a minute with some numbers and things how different they are. I want to give just a small analogy first. As I've walked around Japan a lot, and I'll see shop owners, and they're out there, and they're cleaning in front of their stores. When you go into a restaurant or a store here in Japan, typically it's a shop owner. These are small business owners. They own that business.
They care about it. They care about how customers are taken care of. It's an ownership mindset. That's what our Life Planners are like. They are owners. They're entrepreneurs, but they're owners of the business. Their compensation is based, we call it C equals C, Cash Equal Contribution. They understand that the value, the advice that they give to the customers, the service they provide, is ultimately going to determine their success. That's what differentiates them. The second thing I want to cover is that the market here remains wide open for us. It's true for our core business, the life insurance protection needs of individual customers, and also it's true for the small business owners, and then increasingly, it's the inheritance and retirement markets where they need that same kind of trusted advisor.
Finally, I think everybody knows, because you've seen it for years, that properly executed, the Life Planner model is very, very successful and can generate outstanding results. How is this model properly executed? As I just said, Life Planners are at the core of the model. They are the difference. They do needs-based selling. They focus on the protection needs. Affluent professionals, small business owners, upper income, that's the target market. They are the ones that really value the sophisticated advice of a Life Planner. The Life Planners are extremely productive, averaging seven policies per month per Life Planner. Their income is substantially higher than in other companies. That leads to the high Life Planner retention, right? On top of that, the high Life Planner retention, the customers are very satisfied. The person who sold them the policy is still around providing good service to them.
The customers are satisfied. That leads to the high policy persistency. In addition to that, it leads to good referrals. Those customers are willing to refer their friends and their family members also to buy coverage from us. That returns us back to high productivity. When we talk about the beneficial cycle, that's what we're talking about. High productivity, high retention, high customer satisfaction. That's the cycle that we're in, and that's what we maintain. I'm talking about the beneficial cycle at work at POJ. Again, all of you must hear from everybody, they talk about their company, their people are the best. You're going to hear that a lot. That's probably about the time when you start flipping through your pages and you have another sip of coffee, and okay, let's get done with the fluff.
I want to show you, I want to support why I believe firmly the POJ Life Planners are the best. The first is the MDRT membership. You saw some slides where Kuroshige-san had pointed out that in the industry, typically in Japan, less than 2% of agents qualify for MDRT membership. Yet for POJ, it's over 25%. Also, even though POJ still has only a small fraction of the total agents in the industry, we've led the industry in absolute number of Life Planners for over 15 years. In addition to the MDRT membership, which is just one key measure, if you look at the key drivers, looking at the productivity, the average premium, the retention rates, and the policy persistency rates, all of those key drivers are good evidence of how these Life Planners really do stand out.
The most compelling evidence is not these quantitative numbers. As I described, I've been here now for three years. I've had a chance to meet them. These are truly professionals. They are committed to their customers, and this model really works because of their capabilities. I do want to clarify just one thing. We're presenting information here. The agent productivity is the standard Japanese measure, and in which case, that includes the small medical policies as a policy count, so the 6.9 policies per month. The typical way we present average premium, the way we've always done it in the U.S., is to take the medical policies and riders are lumped together. We just use in the denominator the base policies. The average premium then is really including the medical rider itself.
It's a little bit, it shows up, but that's small difference, just wanted to point it out. We wanted to be consistent with the presentations in Japan and the U.S. Okay. This slide is just a simple visual of the steady results that are generated by our Life Planners. This is right through the financial crisis. This was done, all of this is post-bubble, for the Japanese economy period. Our whole history has been in that same environment. I think Ed mentioned earlier that this economy has not been great for years, and we've gone right through it. There's another reminder, the jump in 2004. You may recall the Aoba Life Insurance Company, Ltd. closed block acquisition, that's when you see that jump up of policies.
What's important, this steady growth on our own, and then coupled with the growth with the Prudential group as a whole in Japan, has led to significant scale efficiencies. When you see our bottom line growing, and faster even than the top line, because we continue to get those kind of benefits, those expense efficiencies. You can see that the sales growth last few years has been very good. It's all management. Just kidding. Really, there's a combination. We've had some policy productivity improvement, increase in average premium, and a small increase in the Life Planners themselves. All combining to get the growth in sales. The growth in the first half of this year obviously is inflated. That includes a couple of big changes. We repriced our dollar products beginning of June, that's included in primarily in the second quarter.
We also had, there was a change in the rules on a cancer product that affected the business market. Both of those are inflating the growth in the second quarter. If you look at the three-year trend, if you look at the sales trend over a long period of time, you can see the steady sales growth. There's always going to be fluctuations. Conference closes, first quarter is always a big number for us. Product repricings, new product introductions. There are fluctuations, but the underlying trend is always there, steady growth. I want to get back to explain why do I say there's still opportunity here. Everybody is, I think, aware that the Japanese population has actually flattened and begun slight decline. What's not as well known is the number of agents has declined much more dramatically.
The result is that there's an increasing need for our Life Planners, for people to show people to identify their life insurance protection needs. There's more customers per Life Planner as far as I look at it. This is just one of the reasons why we need even more Life Planners than we have. The market, as far as I'm concerned, just for our core, is still growing. In addition to our core market, there's another opportunity that we've been taking more and more advantage of, and it's going to be even greater for us in the coming years. 10 to 15 years ago, all of our Life Planners were in their 20s and 30s, for the most part. Because we have high agent retention, more and more of them are in their 40s, some even in their 50s, and so are their customers.
Increasingly, the protection needs are already met. They're thinking about additional benefits, additional needs, primarily retirement income needs. This is going to accelerate, as you see, as a shift over the next 5 or 10 years. Our more experienced Life Planners that are maintaining those lifelong relationships with their customers, have built up that trust. That's going to enable us to capture a growing share of that market as well. This is another opportunity for continued productivity improvement. Here are some numbers that kind of support that. As you can see, additional sales to our existing customers are very significant. Next one. Here, what I've tried to just visualize the possible career paths for our Life Planners.
The strong relationships that they have with their customers allow them to move with their customers through those 30s and when they initially sell the policies and right on into the 50s and so on. Not all Life Planners operate in every one of these markets. Some of our Life Planners focus strictly on the individual market. Some of them focus on just small business owners. Some of them do both. This is a natural result of the, we call the entrepreneurial nature of our Life Planners. The market is out there for them, and we're trying to support them in reaching those markets. It's another reason that we feel very confident of success in every economic environment. As I showed you earlier, even through the financial crisis, the Lehman shock period, sales kept going here.
Finally, the more complex the customer's needs are, so as you get into an inheritance or estate tax, those types of things, the more our competitive advantage stands out. Just a couple more slides. Bear with me. I want to explain how the various products meet the different customer needs. The term products you've heard is they're the purest form of protection. That's what we want to sell primarily to a lot of the younger insureds. All the way through the age range, people need life insurance. Whole life has a significant protection element, but it also has a savings component that sort of pre-funds, ultimately to keep the premium in the future as you get older, the savings build up. Finally, and the product that has been big at POJ for many years now, since 2005, the retirement income product.
I think some of you may understand it, but I'll just explain again. This is really a combination product. At POJ, this product is typically sold, almost always sold even in the 30s or the 40s. The average age is actually below 40. In the early years, this product is designed typically to mature at 60 or 65. In the early years, it has a very significant protection element. It is much like whole life. Since the premium is a little larger, that extra cash value builds up over time, over that 20, 25, or even 30-year period. It builds up so that it can provide a substantial retirement income component at maturity. Since 2005, when it was introduced, this has been a leading seller for POJ, the dollar-denominated retirement income product. Very popular in Japan. It remains very popular.
For each of these products, we also can attach riders, supplemental. Many of our customers want what we call the demand products, the medical, those types of things, supplemental. The thing that we want the customers to understand is make sure your protection need is met, but they also have other needs and desires that we can provide with a medical that we call the third sector rider add-ons, and those both meet the customer's needs and also provide additional profit for the company. The final topic I wanted to cover was the source of earnings for our products. As I think everybody knows, mortality margins are significantly larger in Japan than in the U.S., and Ken will talk much more about the profitability of the product margins.
I wanted to talk again about the way our products go across the range from term, which is almost pure protection, to whole life, which has a savings component, retirement income with a little more savings component, and then you might have a pure endowment. At POJ, we pretty much stop at the retirement income side. Almost all of our products have protection at a core. That mortality source of earnings is great really in all of our products, but obviously more so in the term than in the retirement income. The reverse side, the investment spread component of earnings, it is the reverse. Obviously, the higher the savings element, the more that is a factor.
Given the low interest rate environment we have had here in Japan for years and certainly for the whole time we have had the retirement income product. The investment component is immaterial at POJ. We essentially break even on that. It is the mortality. The mortality is the first main driver. In addition to the mortality driver, there is also the expense gain, the expense loads as opposed to our actual expenses. At POJ, the productivity is very high, the retention is very high, persistency is very high. All of those things contribute to the profitability of our products. On top of that, we do add the third sector products, and they increase our profitability even more. If I summarize, this Life Planner model, it is built around Life Planners. The POJ, Prudential Japan, is built around Life Planners. These are very, very high-quality professional individuals.
They produce these sustainable, profitable, and expandable results. That's it. Ijo desu, which is I'm done. Thank you.
Sit down here with us. Okay. The next up is Sato-san, who is John's counterpart as the CEO of Gibraltar. Sato-san.
Thank you. Good morning, everyone, and welcome to Japan. I am Kei Sato. I took over responsibilities for Gibraltar from Kurashige-san in January this year. This is my first opportunity to make a presentation, even if it is in English, in front of you. My English may not be sufficient, but I believe it is better than John's Japanese.
He's right.
Okay, let's move to the slides. In January 2012, Gibraltar Life merged with Star Life and Edison Life and became Big Gibraltar. In starting as new Gibraltar Life, we have set three philosophies to share in the company. First, we provide products mainly focused on death protection for our customers. In Japan's current life insurance market, many companies emphasize medical insurance with a focus on price competition, and the bancassurance market tends to emphasize saving products. We believe that death protection needs of customers are not adequately addressed today. Our objective remains focused on selling life insurance to meet the death protection needs of our customers. Second, we differentiate our company from others by three qualities. The quality of people, the quality of our products, and the quality of our services. As Ed already addressed, these three qualities are very important for Gibraltar as well.
We focus on continuing to enhance each quality. Expansion of our scale by the merger has positioned us very well to differentiate our company in the market. We will continue to stress the concept of cash equal contribution. This drives a professional culture throughout our company. Next slide, please. Okay. With the merger now complete, the integration of each function is proceeding smoothly. Basically, we are integrating each area with a focus on the standards that have made us successful. Among the key areas are Prudentializing the salesforce by introducing proven training and compensation approaches. Integration of systems, integration of product lineups, integration of investment portfolios, strengthening of risk management and internal controls. Our expected business synergies have not significantly changed from the original plan. Integration costs are expected to be about $450 million before tax in total, which was reduced by $50 million from the initial estimate.
About $270 million of integration costs have been incurred through the first half of this year in total. An additional $70 million is estimated for the second half. Consistent with our initial estimates, we are targeting annual cost savings of $2.5 million after the business integration is complete in 2015. We expect that about 65% of these savings will be achieved in 2012 and 80% by 2013. Okay, next. I briefly explain details of the main integration measures. In the Lifeplan consultant channel, there were geographical overlaps in the sales office networks of the three companies. We reviewed the array of sales offices with the goal of strengthening our coverage of key urban areas and the specific markets in a cost-effective manner. In this process, a number of sales offices were merged or closed, reducing the count from 660 to 461.
We are transitioning the agents who joined us from Star and Edison to the Prudential compensation system, which helps build productivity by rewarding it appropriately. Prudential's recruiting and training method was introduced to field employees and the sales managers who came to us from Star and Edison. After specialized training, we are assigning field employees from Star and Edison to the teachers market, strengthening our coverage through the teachers association relationship that I will discuss in a few moments. We are strengthening our field support functions such as sales support desk. In an independent agency channel, the three companies had a business alliance with over 4,000 agencies in total. We terminated about 700 inactive and low-performing agencies, bringing the total count down to about 3,400 agencies at the end of June.
To support these agencies, we have 59 sales offices which are distributed nationwide but are concentrated in key urban areas. We have established high standards for agencies seeking to work with us and maintain their relationships, and for our marketing representatives to support our pursuit of quality business and high productivity. Next slide, please. Please take a look at the slide which summarizes integration measures taken in areas other than the sales channel. As for IT and operations, we completed our usage of transition services provided by AIG in June. Systems in key areas including new business, call center, and accounting were integrated as of the time of the merger at the beginning of this year. We are addressing system development to support sales activity and insurance administration.
Insurance administration centers previously located in two areas in Tokyo, one in Yokohama and one in Nagasaki, were centralized into single locations in Tokyo and Nagasaki. In other areas, we improved the risk profile of the business, bringing asset liability management to Prudential standards and reducing or eliminating exposure to classes of risk assets that were included in the acquired portfolios. With the merger, we moved to a single product platform, which includes a replacement for a popular Star Medical Insurance product called Shindan Kakumei. Okay. This slide represents Gibraltar's presence. Our company's scale almost doubled as a result of the merger. With the addition of Star and Edison's 3.5 million in-force policies, the number of in-force policies reached about 7.4 million at June 30. The number of field employees also doubled to 12,000 people.
As I said before, the number of independent agencies is now about 3,400 as a result of the merger and the review of the alliance. For Big Gibraltar after the merger, what will the key drivers of our growth be? We will continue our approach to the market with the main focus on death protection products through agents who are incentivized by Prudential's compensation system and supported by our proven training. We will expand the sales organization's coverage of the key market of teachers and their families, peripheral markets, including PTA, and the Self-Defense Force market built on a relationship established by the former Edison. We have developed a high-quality network of selected independent agencies, expanding our geographical reach, and we are increasing the cost-effectiveness of our distribution system and the support operations through synergies being produced by the business integration. Okay.
This shows the history of our sales growth by distribution channel. Gibraltar has produced steady sales growth, developing complementary distribution channels while building the strength of the primary Life Plan Consultants channel. Today, the bancassurance business has been driving a substantial portion of sales in the Japanese insurance industry. Although our company is a relative latecomer, our bancassurance business has significantly contributed to our sales based on a strategy emphasizing protection products. Mr. Tanigawa will explain that point during his presentation. In addition, our core Life Plan Consultants channel has consistently produced solid sales results, and the agency channel, which we started in 2010, has begun to make a significant contribution. Our Life Plan Consultants channel benefits significantly from a long-standing, strong position in the teachers market. We produce results in this attractive market by taking a special approach.
Our alliance with the Teachers Association enables our company's Life Plan Consultants to access schools and the teachers' offices, which other competitors cannot. Our Life Plan Consultants meet with teachers in schools on a one-to-one basis and conduct marketing activities at the schools. We provide specialized training for Life Plan Consultants assigned to the teachers market. Life Plan Consultants also conduct promotional activities jointly with employees of the Teachers Association who are retired teachers. We tailor our approach to characteristics of association members in the nation's 47 prefectures. We provide products specially developed to respond to the life status of association members. We can price these products competitively due to favorable claims experience and a high persistency rate. Big Gibraltar continues to view our teachers market as a key driver of the Lifeplan consultant channel, and it remains an important and stable market after the merger.
Looking at new business sold during the first half of 2012, the teachers market accounts for about one-fourth of total sales in the Lifeplan consultant channel in both policy count and annualized new business premium. We view the teachers market as an opportunity for future growth. To enable us to continue strengthening development of the teachers market, we are providing training to former Star and Edison field employees. Thus, we can target broader coverage and greater contribution from this market. Okay. This slide provides some additional background on the Teachers Association. The Teachers Association was established in 1952. Gibraltar's predecessor, Kyoei Life, has had an alliance relationship with the Teachers Association since it was established and greatly contributed to the development of the organization. The Teachers Association is a public interest incorporated foundation approved by the Prime Minister.
There are about 36,000 public schools in Japan and about 950,000 teachers nationwide, of which about 600,000 are members of the Teachers Association. The Teachers Association is conducting activities to increase its membership, and our Lifeplan consultants sell insurance products designed exclusively for its members. As of the end of June 2012, about 4,700 LCs are assigned to cover all of the 36,000 public schools nationwide. As noted previously, we believe we can further expand our coverage of this market by increasing the number of Lifeplan consultants who are specially trained and are providing support. What is attractive about the teachers market is that there are always about 950,000 teachers, because although about 20,000 to 30,000 of Japan's teachers retire every year, almost the same number of teacher is newly hired every year. This is Japan's national policy.
It is an everlasting market because the number of teacher is not reduced even under conditions such as economic downturns. Since the Teachers Association allows teachers to remain as members even after retirement, the 120,000 retired teacher members offer an attractive opportunity in the retirement market. The population composition of Japan's teachers shows a peak at around the age of 50. As teachers reach this age, they enter what we call the retirement red zone and are prime prospects for pre-retirement and retirement products. We are addressing this attractive market with targeted products and sales tools. Of the teachers who retired in March 2012, that is the end of Japan's school year, 11,541 were Gibraltar policyholders. Of these newly retiring Gibraltar customers, 2,770 persons, about 24%, purchased additional Gibraltar products during the three months from April to June, with total annualized new business premiums of $24 million.
Our multicurrency fixed annuities and yen-denominated whole life products are well suited to meet the needs of retired teachers. Basic strategies of independent agency channel business are as follows: We don't pursue top-line growth alone, but also focus on business quality, including the persistency rate, customer satisfaction and profitability. Therefore, to win business through price competition is not our goal. Our goal is to build a strong partnership with independent agencies with high productivity who subscribe to our business philosophy. For this, it's important to develop agencies and producers who have high awareness of client needs and are committed to meet these needs through life insurance solutions, and develop high quality our marketing representatives who can support these agents. As mentioned previously, we have significantly strengthened our position in the independent agency channel as a result of the acquisition.
The independent agencies partnering with us have over 8,000 locations nationwide, broadening our geographical reach. In order to provide strong support and develop new relationships, we have 59 field offices to support the independent agencies, mainly in major cities. Our company's independent agency channel focuses on individuals as well as businesses. The mix of the Lifeplan Consultant channel and the independent agency channel enhances our opportunities, including new markets which the Lifeplan Consultant cannot sufficiently cover, customers who want to receive advice from non-exclusive agencies with a position of impartiality, customers who have strong relationships of trust with agencies. While most of our independent agency sales are currently in the business market, we are seeking to increase the contribution from business sold to individuals.
Finally, key points of future growth and returns are new Gibraltar Life has expanded and strengthened both the Lifeplan Consultant channel and the independent agency channel by acquiring Star and Edison Life. We are realizing synergies from the business integration as planned. We are maintaining our focus on death protection insurance with a stable and diversified business model to meet a broader spectrum of client financial security needs. We are serving a wide range of markets, including a long-term and a strong relationship with the teachers market. While the acquisition of Star and Edison greatly increased our scale, our underlying growth is driven by our proven approach and commitment. We believe our continued focus on the quality of people, services, and the products we offer differentiates us in the market. This is the end of my presentation. Thank you very much.
Thank you, Sato-san. Questions for Sato-san and John Hanrahan. John has promised that he will answer his questions in English. Yes, Eric. Please. Oh, whoa.
Thank you. Eric Berg from RBC Capital Markets. John, because most life insurance agents, not always, but generally speaking, are contemporaries of their customers, same age, similar backgrounds, is it the case that because the agents today have sort of grown up with their customers and are therefore in their late 40s and, say, early 50s today, that they really have no choice but to evolve? That the life insurance business on which they built their business is sort of the chapter that has just ended, and that the next chapter almost has to be something different for them because their customers are in a new phase of life.
That's a very interesting question. Let's see if I can do it justice. Because life insurance agents typically sell to people of similar age or background, by the way, 80% of our Life Planners at POJ are between 30 and 49. It's about equally split between 30 to 39 and 40 to 49. Isn't it just the natural progression that they would sell a different mix of products to meet the changing needs of their clients? Is that fair?
I think in general, the answer is yes for the Life Planners as they mature themselves. Don't forget, we're bringing in new Life Planners as well. As Eric said, the average age of our Life Planners is still fairly young. Secondly, it's not always the case. As I mentioned, some Life Planners stay focused strictly on individual market, and others are working more in the small business owners market. I think generally, you're right that a Life Planner who has been in this business for 15 and 20 years, the people that they're selling to are primarily at a similar age range, and those can be buying additional needs, and that's part of what we're allowing for. One of the opportunities for us is additional expansion into inheritance and additional retirement income coverage.
Any more questions? Okay, the gentleman in the middle with his hand up, we'll get to you next, Suneet.
Hi, Jimmy Bhullar, J.P. Morgan. If you look at your sales, they've been very strong recently. I think part of the reason is just timing of product changes and price increases. At POJ, for instance, historically, the sales growth has been highly correlated with just the growth in the agent count, and that's been slowing down. Do you believe longer term you could grow the POJ business if the agent count remains stagnant? Maybe you could just discuss what your outlook is for growth in life planners.
Okay. Have we repealed the historical relation of growth in life planners and growth in sales? First question, and the second question is, what is the outlook for the growth in life planners at POJ?
Yeah. Okay, on the first side, I think the growth in sales is, as you said, is tied to growth in life planners, but also to growth in productivity, which could be the number of policies sold or the average size of those policies that are sold. What we've had and what has been going is that our life planner growth itself has slowed, even if you take out the fact that we've transferred some of our life planners into the Gibraltar, the bank channel, and so on. The productivity of the remaining life planners then actually has been going up. Part of it is the experience level of our life planners is going up, and therefore they're selling in, I guess, again, larger size policies, additional amounts per life planner. It's not just life planner count, although that's a key driver as well.
That's the first part. In terms of outlook for life planner growth, the one thing from the very beginning, we focused on quality. That's always been more important than quantity. That means we're willing to recruit fewer if we're not maintaining that high level of quality. Last year, we recruited about 100 and something fewer than the year before, but our growth in life planner was still about the same modest amount because we're retaining more. We want to do both. We want to recruit and retain life planners and continue to grow. That's what we're setting up to do. We've made changes to improve the attractiveness of the field management career because that's been one of the things that has been an impediment. Our life planners love being life planners. Getting them to become sales managers, unlike other companies, it's a challenge.
We have made some changes to attract some of our stronger Life Planners because we need high-quality sales managers to attract high-quality Life Planners. Those are the changes we're making. We want to grow our Life Planners more than we have grown. The key, we're not going to let go of quality. If we can do both, and that's our goal, we'll do it. If we can't, quality first.
If I could, I would add a little bit to that, and that is that you're absolutely accurate. Historically, there was a high correlation between the growth in the number of Life Planners and the growth in sales. That started to decouple at least three years ago, maybe further back, not just in recent quarters. If you take a look at the last 12 quarters or so of POJ, you'll see sales growing in double digits. You'll see headcount growing in low single digits. The reason is, as John pointed out, three factors drive sales. Headcount is only one. The second is their productivity, the number of policies, and the third is the average premium. I think there are two trends that are driving that average premium. If you look at the average premium five years ago in POJ, it was around $2,700, $2,500, somewhere in that range.
You will have noticed the number that John threw up was about $3,600. It's grown materially. I think there are two things driving that. One is the steady expansion in the retirement income, and the second is the point that Eric Berg was bringing up, which is as the Life Planners age and mature, so too does their client base. They're in a position to better afford a higher average premium product. I think we're seeing a sustainable, I don't want to make forecasts, but we've seen a multi-year, steady double-digit growth here in sales driven not by the headcount, which used to be the sole driver. That's still part of it.
One of the reasons I think it's credible to think of double digit is if you look at the 10% as the definition, if we're getting even 3%, 4% growth in each of those three, you get that double digit. I think there is a meaningful historic break that has taken place over the last three, four years between that historic linkage.
Okay. Suneet, the gentleman on the aisle over here, please.
Thanks, Eric. Suneet Kamath with UBS. I guess I was curious about the key differences in terms of target market between the life consultants and then the independent agencies. It seemed based on your slide that you're, I guess, encouraging cooperation between the two. I guess I'm curious why we don't see channel conflict or distribution conflict between the two.
Okay. The question is, what is the difference in the target market between the life consultant channel and the independent advisor channel, why do we not see more channel conflict?
Let me reply in Japanese.
I forgot about translation for a bit. In terms of the customer segment of Prudential, John is sitting right next to me, so maybe I shouldn't be the one to explain this. They're mainly targeting affluent customers. In terms of Gibraltar, we are going after middle market.
そこで違いがあるというふうに考えております。
Also Gibraltar also has, affiliation and association market, which I mentioned in my presentation material too. That is our existing markets, and that is why we do not have any conflict with Prudential's customer versus Gibraltar's customer.
Excuse me. Is the individual target market of the independent agency channel more affluent than that of the Life Consultant channel?
はい。ごめんなさい。まず、ライフプランコンサルタントのチャンネルは先ほど申し上げましたけれども、学校の先生であるとか、ミドルクラスの層をターゲットにして、face to faceで活動させていただいております。
Going back to Lifeplan consultants market, we are going after middle market and also school teachers, and we do have face-to-face sales.
一方、independent agencyの方は、彼ら自身が独自のネットワークを持っている。
As the independent agency, they have their own network.
そのお客様の層は実は様々です。
Customer could be varied pretty much.
ある代理店は会計士の方、会計事務所が代理店になられている。そして、クライアントが彼らのマーケットである。
For example, some IA, independent agencies, their market is accounting firm and their accounting firm's client is independent agency's customer too.
今の は一つの例ですけども、それぞれの代理店がそれぞれのカスタマーベースを持っている。実は、ジブラルタルのLCはそこにリーチできていないということが多いです。
That is just one example. Independent agency have their own customer and Gibraltar's Lifeplan consultant do not normally reach out to those market.
通常、independent agencyのネットワークのカスタマーというのは、保険会社に直接アクセスするということよりも、代理店さんにアクセスして、保険のニーズについて確認をするというアクションが通常です。
The customer behavior is quite different because customer of those independent agency, they do not directly come to insurance companies. They more rather talk to those agency and ask questions about their coverage.
従って我々は、先ほども少しお話をさせていただきましたけども、ライフプランコンサルタントでリーチできないターゲット層、お客様層に代理店チャネルでアクセスをさせてもらいたいということを考えております。
Those are the customers before we couldn't reach with our captive agent. Now because we have independent agency channel and we can cover those market which we could not reach before.
I do think you're onto an issue that I would offer a different perspective on. I think that more than the life consultant channel, the independent agent channel does overlap with the end target customer closer than with the Life Planner. The life consultant market is at the middle market. The Life Planner is the high-end market and the small business owners. I think that the independent agent channel is targeting a comparable segment, but the two are addressing it in a different way because they have different skills. If you take a look at the leading product of our independent agent channel over the last quarter, it was the cancer whole life, which is a very small product for the POJ Life Planner. The POJ Life Planner targets a similar segment, but they target a different need, as John explained.
They concentrate much more on the debt protection and the retirement income. Those are more complex products. They require stronger selling skills. I think there is some overlap, as you were assuming in your question, about the socioeconomic segment that they're targeting, but they're addressing a different need for that segment. The state of the independent agent business in Japan, which is still quite new compared to the U.S., for example, is leaning more towards addressing tax-supported products, those kinds of products. They don't currently have the skill set, which is why you noticed on the pie chart for the IA channel, it's about three-quarters small business, only one-quarter individual, which is sort of the flip side of the way it would be for POJ. On the small business segment, there is some overlap there. Mr. Finkelstein, the gentleman in the middle, blue shirt, hand up.
Prudential has historically generated most of its earnings out of mortality margins, expense margins. There has been a shift towards larger policy sizes, an aging population, and more retirement income products. I guess the first question is, why shouldn't the component of spread in the product become a larger part of the overall earnings model? Secondly, going back to the discussion in the first section, how impacted are your retirement income products, at least the yen-denominated retirement income products, impacted by the change in the discount rate?
I missed a little bit of the last one. How impacted would the yen-denominated retirement income products be by the change in the yen discount rate?
Yeah, the 1%, moving to 1%.
The first part of your question was?
Why shouldn't spread income become a larger component of the earnings model?
Why shouldn't spread income become a larger part of the earnings mix because of the growing proportion of products that are sold with a relatively large retirement income component to them? Okay. The first question I think Ken's going to take for you when he comes up and talk you through that actually in some detail, that issue. He will articulate sources of earnings and the impact of shift in product and so forth. Let me leave that for him. The other, I would just remind you on the second product retirement income is primarily a dollar-denominated product. As I think John pointed out earlier, they've gone through a repricing, et cetera, and that they've been selling that for seven years. That's a very successful product, not just top line, but bottom line.
We've got time for one more before we break, and I'm going to give it to someone who hasn't had a chance to ask a question yet. That's going to be Chris over here on the left.
Thank you. Chris Giovanni, Goldman Sachs. Ed, at the beginning, you talked a lot about sort of the history and evolution of Prudential and certainly led with the value proposition of the captive distribution controlling the economics. The distribution is certainly evolving here over the past four or five years to more the independent channel, the bank distribution. How do we get comfortable that you can continue to control the economics of the products that you're selling as the distribution evolves? Maybe for John, I guess, is the value proposition of the high net worth being diluted by expanding sort of the middle market with Gibraltar? Then lastly, how should we think about kind of margins, stabilization, contraction, expanding as you introduce new products, new distribution? If there was contraction, would it be because of distribution or because of product mix shift?
All right. I'm going to leave the margin part of your question to Ken Tanji, but let me take a stab at either your first or second question. That was how can we control or can we control the economics of the products that we're selling as we rely increasingly on third-party distribution?
Frankly, that was the key reason that I provided the opening comments that I did was to address that question. Let me recap it. The whole premise of our approach in the captive agency system, whether it's the high end or the middle market, is to design a value proposition that is built around a premium offering, quality product, quality price, et cetera, such that we are not dependent on having to go with a low margin, highly competitive price. That same strategy is precisely what we've taken into the bank and into the independent agent channel. That strategy will not change. As a result, however, what you do have to live with is volatility in your top line. Under the captive agency system, you cannot get explosive growth for some of the reasons that John was articulating because you're not going to get 50% growth in head counting.
You're unlikely to get it in productivity. You'll get the steady growth. With the third party, the trade-off with the third party is you can get explosive growth. If you're committed to that, then you will sacrifice margin. We will not sacrifice it, which is why we are quite willing to live with the volatility that's necessary so that we can preserve the margins. If you get a competitor who is prepared to be aggressive because of third party, you get more spreadsheeting. Captive system, you don't get that. One has to either be willing to sacrifice the profitability of the market share. We're very clear as to what our priority is there. We will control the economics. We're quite prepared to accept the volatility in the market share. We have that luxury because for us, this is supplemental distribution. It's not our core distribution.
While it has grown from nothing into a meaningful number, the foundation, the ballast of the ship is around the now multiple captive agency systems that we have and that we've leveraged the back office through the supplemental. That's a key distinction between us versus some of our competitors who are dominated by the third-party distribution. It can give that growth, but unless one is disciplined about it, you will sacrifice on the earnings, and we're not prepared to.
Let's take a break. Back in 15 minutes, please.
Okay, great. I'm just going to try to speak. Okay, there it is. I can see level here as well. Okay. I can see. As long as I can see like this when they're speaking into this microphone, it's okay. While they were speaking before the break, there was nothing like this. Okay. How about the microphone? Maybe we can try speaking in one of those, but I think if they max out everything already, then I should be able to hear something from the podium as well. Yeah. I think it's working now. I want to see when we go back into the session and see what happens. Can you take off maybe?
Here he comes. We're slipping further and further behind, which is cutting into your lunch. I'm assuming that at least some of you are going to want to eat lunch. We've got two more formal presentations, that of Tanigawa-san, who is responsible for the bank channel within Gibraltar. Then to tie it all together financially, we have the Chief Financial Officer of Prudential International Insurance, Ken Tanji. Next up, Tanigawa-san.
Thanks. Thank you, Eric. Good morning, everyone. My name is Takeshi Tanigawa. As introduced by Eric, I'm responsible for the bank business development in Japan operation. As President and CEO of the PGFL, Prudential Gibraltar Financial Life. Okay. I would like to start my presentation with Prudential bancassurance business. Prudential has established the presence as a leading brand in Japan bancassurance market. I would like to talk about how we were able to grow rapidly in such a short period of time, and about differences in business strategy between us and other companies. Okay, let's go next. This year, bancassurance entered its 10th year in Japan. The market has rapidly expanded, especially in variable annuity since its inception. Various foreign-affiliated life insurance companies have entered the Japanese bancassurance market considering its growth opportunity.
The left of the slide shows the typical strategy of foreign-affiliated life insurance company in this market. Most of them have been engaged in fierce product competition with variable annuity as a main product. As a result, the sales have tended to be concentrated in specific variable annuity product, and have been heavily influenced by market conditions such as stock price. This strategy has large risks in terms of product profitability and business continuity. As a result of changing market conditions, some of these companies have faced deteriorations of product viability and, in some instances, have suspended sales or are withdrawn from the market. The right slide shows Prudential strategies.
We sought to establish a business model that focus not on variable annuity, but rather on the sales of protection-type products using the full deregulation that occurred in 2007 as a good opportunity to build on the Prudential strengths in distribution of protection product. We saw a major early opportunity in rolling out protection-type business jointly with the Bank of Tokyo-Mitsubishi, one of the Japan mega banks, we have established our presence as a pioneer of protection-type product in the bank channel. While our emphasis in the bank channel is on this protection product, we offer a diverse portfolio to meet the financial security needs of bank customers, including retirement-oriented product like endowments and annuities. Timely product introductions keep us current in meeting these needs. Effective sales support is key to our success business model.
This includes utilizing the expertise of former Prudential of Japan Life Planners at certain of our partnering banks, where they are driving strong life insurance sales results and training bank employees to sell our product. Against the backdrop of successful distribution of protection product with Bank of Tokyo-Mitsubishi, we have broadened our presence in the bancassurance market, including expansion of business partnerships with leading regional banks. Our business model is based on the product for which sales are not primarily influenced by the market or economic trend, it therefore supports our sustained growth. Next. Currently, the world largest pool of cash and deposits balance is held by a household in Japan, mainly in bank accounts. We can effectively access these financial assets through our bancassurance business. I'll tell you about six of our key competitive advantage in bancassurance. The first is Prudential distribution strength leveraged to bank business.
The second is our protection-focused product lineup. By satisfying bank customers' needs, we strengthen our business partnership with the banks. The third is our retirement solutions. Our retirement type products, including fixed annuity, are well received by bank customers seeking to prepare for their post-retirement years. The fourth is the strong Prudential Gibraltar brand. Our brand provides assurance and trust, especially for customers considering large purchases who great emphasis on the safety of their assets. The fifth is the marketing support we provide for partnering banks. Our high-quality training program and the representatives strongly support the bank insurance business for each partnering bank. Finally, number 6 is our track record in establishing successful relationships with partnering banks. Continued contribution of partnering banks offers us an ongoing growth opportunity. Go next. Okay, on this page, I explain the Prudential business resources and the product composition.
The left side summarizes our product lineup. We focus on death protection products and develop products that satisfy the bank customers' needs. Complementing our death protection products, we offer retirement products, including fixed annuity in our lineup. The right side summarizes our marketing support. At first, we provide marketing support by sending Life Planner professionals who have experience as Life Planners at Prudential of Japan to certain partnering banks. As of this moment, we have 200 former Life Planners working with partnering banks. The second is about wholesalers who provide marketing support for partnering banks. Our wholesalers are well-versed in Prudential sales skills and technical product knowledge. In particular, our wholesalers include former Life Planners who retired from partnering banks.
They are high valued in this market because they bring several years of experience in life insurance sales at bank branches, and have a proven skill in educating bank employees for these sales. The third is about our training system. Death protection products require more sophisticated sales skills than selling products like annuities. We provide a robust training program for our partner banks based on the years of proven Prudential sales experience. Next. Let's take a look at Japan's market through a slightly different lens. Japanese household wealth held in the currency and deposits is nearly $11 trillion. The broad product lineup we offer through the bank channel, including whole life, fixed annuities, and other retirement-oriented products, enable us to effectively access wealth held by the senior generation, where the huge amount of investable household asset is concentrated.
Our success in capturing this wealth through large scale sales is evident in the average new business annualized premium for life insurance we sold through bancassurance during the first half of this year. You can see which amounted to $8,800 per policy. Let's go next. As you see, our product lineups were well-diversified. We mainly focus on death protection product. Also, the number of products we offer to banks is the largest among the insurance company in Japan bancassurance market. Also, our portfolio includes U.S. dollar and other non-yen-denominated products supported by the matching currency asset and backed by Prudential's strength in asset liability management. Let's go next. This slide shows our partnership growth. The left table shows the number of partnering banks in 2009.
At that time, we sold through only 25 partnering banks. The right table shows today's status three years later. We have business partnerships with three out of Japan's four mega banks and a total of more than 60 bank partnerships. In Japan, there are over about 100 regional banks, of which 36 banks have deposits valued at JPY 3 trillion or more. Our bank relationships include 23 of these 36 largest regional banks, or roughly speaking, two-thirds coverage of influential regional banks. When we include our relationship with the bank-affiliated insurance agents, the number of our distribution partners is over 100 this year. Our partnering banks have more than 6,000 branches across Japan. It gives us access to a sales network covering nearly all of Japan's prefectures. Take a look at next slide. This chart shows the growth in our annualized new business premium from bancassurance since 2007.
This graph tells us that our business has grown dramatically through the financial crisis and beyond, driven by our emphasis on protection product. For the first half of this year, sales amounted to $433 million, up 60% from this point of last year. This increase reflects actions by some competitor to renew sales of M-based single premium product, gaining us shelf space at our partner banks as well as our continued development of relationship. Next slide. This graph provides a breakdown of total sales for the first half of this year, comparing mega banks and large regional banks against other bank sales. As you see, about 80% of these sales were produced from banks with deposit value that JPY 3 trillion or more.
There is a correlation between banks deposit size and insurance sales potential, and we have cultivated a relationship with these large banks to access this potential. Next is the last slide. On this page, I would like to conclude with a view of our strategy for continued growth in the bank channel. First, we will continue to focus on the protection product and offer a broad portfolio to meet the lifetime financial security needs of bank customers. Second, we will expand our support of bank sales by deploying former Life Planners, both by seconded to selected banks and as our wholesalers. We will also increase the number of bank employees who are well skilled in need-based sales of protection type product, mainly in the mega banks, through continuous sales training program by us.
Third, against the backdrop of high quality sales trend and a broad product lineup, we will seek to cultivate new partnering banks relationships and to further develop our existing relationships, some of which were recently formed and have significant untapped potential. Finally, the retirement market and the inheritance market are expected to continuously expand in Japan due to the aging population. These are developing core retail markets for the banks, and we will be there to provide life insurance-based solutions. This is the end of my presentation. Thank you for your listening. Thank you.
Thank you, Tanigawa-san. The next and last presenter is Ken Tanji.
I will provide an overview of our financial profile. As many of you know, our international business has a reputation of having three very attractive attributes. First is high profitability, most notably a high ROE. Second, a strong business and earnings growth rates. Third, low earnings volatility. These businesses have consistently demonstrated these attributes in the past, and we believe there is good reason for these attributes to continue in the future. This page shows the drivers of our financial performance. As you heard in all the presentations today, there is a focus on the highest quality distribution, and that's common to all of our businesses. Our Life Planner business is the hallmark of quality standards, and this quality emphasis has been transferred to our expanded distribution channels. This intense focus on quality provides high productivity and policy persistency.
When you combine that with significant scale, the result is a high margin business with attractive returns. Again, we compete on the basis of quality and not price. You've also heard growth opportunities, including the delivery of both protection and retirement solutions to various client segments through multiple distribution channels. The foundation of our business has been and continues to be protection products with attractive profitability, risk, and returns. Our growth is enhanced by serving retirement needs. We serve those needs through both captive and third-party distribution. In terms of our investment portfolio, our investment portfolio is also aligned with our strategy to differentiate on the basis of quality and relationships and not price. Our investment portfolio is built to support competitive products by closely matching the profile of insurance liabilities, both in terms of cash flow and foreign currency denomination.
We do that with high credit quality, long duration, fixed income investments with low exposure to risk assets. The last important component of our financial performance is capital management. Our international insurance companies are well-capitalized and very profitable. They generate strong returns on equity and free cash flow. These businesses have consistently generated excess capital for redeployment, and our capital structure provides multiple opportunities to redeploy excess capital in the future. I'll cover each one of these four areas of our financial profile in more detail. On this slide, this slide shows you the AOI of our international insurance operations, including those operations outside of Japan during the last four years. These results include transaction and integration costs of the Star and Edison and Gibraltar merger, and they've been restated to reflect the DAC accounting standards adopted at the beginning of this year.
These periods also include a significant global financial crisis and an unfortunate natural disaster in Japan. Yet AOI has been stable and growing here at a growth rate of 13%. This growth rate includes some items outside of organic growth that affected 2011 results. For Star & Edison contributed 10 months of earnings in 2011, and also $213 million of transaction and integration costs. We also recorded gains from partial sales of our indirect investment in China Pacific Life. Those gains were $237 million. Partially offsetting these items was $63 million of cost incurred as a result of the earthquake and tsunami disaster. If you stripped out all those impacts of transaction cost, earthquake costs, and the Star Edison acquisition, our compounded average growth rate would still be 10%.
Next, you see here over on the right is our most recent results, the last six months of this year compared to last year. AOI is up 15% from a year ago. Again, included in both these periods are Star and Edison transaction and integration costs. The first six months of 2011 included only four months of earnings from Star and Edison, while this year we had six. Last year also include earthquake and tsunami costs, and again, the China Pacific gains. If you adjusted for all those items, our growth rate would be even stronger at 20%. This illustrates our past earnings stability and growth, and also our recent earnings trajectory. These items here are few of the quantitative metrics that measure the quality of our captive distribution channels.
You heard about these from both John Hanrahan and Sato-san, and I'd like to show you now how this has driven our growth over the last four years. We'll take a look at POJ. This compares last year of 2011 to four years ago, 2008. Life Planner count increased 2%. Keep in mind, as John Hanrahan pointed out, industry agent count actually declined during this period, and we also supported our bank channel growth by seconding Life Planners to the bank channel. Agent productivity, again, as John highlighted, is very high, just under seven policies per month. Average premium increased 20%. Here's where the real growth was, and that reflects greater penetration of the retirement and business markets. At the same time, policy persistency and agent retention both remained very high, which indicates our high quality standards have been maintained.
Let's take a look at Gibraltar. Please note for 2011, we don't yet include the Star and Edison statistics. Life Consultants were actually down 1%. We've been focused on improving agent quality rather than quantity with a careful attention to recruiting and training. Agent productivity measured by the number of policies sold per agent per month. Also, although not as high as POJ, is very strong by industry standards. Average premium per policy increased 12%. This is an increase in ticket size. Policy persistency and agent retention both made considerable improvement. These measures exclude Star and Edison agents, and with the merger of these three companies, Star and Edison agents will be held to the same productivity standards as our Gibraltar agents.
We will expect that this will reduce the number of low producing agents, but will significantly increase the quality, efficiency, and profitability of the legacy Star and Edison sales force. Turning to scale, as you heard from Sato-san, the merger of Star and Edison acquisition has been well managed and is meeting its objectives. Remind you that nearly all of the value that we saw on this was embedded in the in-force book. Star and Edison added three and a half million in-force policies, an increase of over 40%. Now for all of International Insurance, we have 11.8 million policies in force, and 10 million of those policies are in Japan.
This scale will allow us to realize cost synergies of $250 million after completion of the business integration. It also lowers our maintenance and distribution unit costs and increases the potential to market to existing customers who are often the best prospects. I want to make a few comments on product mix, and we're showing it two ways here. On the left, you see the mix of our new business sales, and this is for our Japan operations for the first six months of this year. On the left is the mix by product type, and by the right is the mix by currency denomination of the product. First, let's talk about product type. Death protection, which is the blue, includes whole life and term policies and represents the largest portion of sales at 42%.
Accident health products, which includes mostly policies and riders that provide a fixed benefit upon the incident of an accident or the diagnosis of a treatment or illness. That represents 23% of our sales. If you combine those two categories, death protection and A&H, these are the traditional core focus of our business, and combined represent about two-thirds of our product sales. Retirement products, indicated there in the, I guess, light almost pinkish color, is primarily the retirement income product that John Hanrahan described. That combines a death benefit and then at a stated maturity, an option for a cash value or a payout annuity. That was 26% of our sales. Lastly, we offer a multicurrency fixed annuity, and that's primarily denominated in U.S. dollars or other non-yen currencies.
With this product, crediting rates for new sales are adjusted every two weeks. If they're surrendered early, the cash values are subject to a market value adjustment. The frequency of the repricing and the market value adjustment adjust new sales and surrenders to the current interest rate environment and reduces our interest rate risk. Let's go over to the right side of the page, and look at the currency denomination. You see that U.S. dollar-denominated products were 35% of sales for the first six months of this year. Again, U.S. dollar products provide the clients with a higher crediting rate than available with yen products and allow Prudential to earn a higher spread income. U.S. dollar products have consistently represented about two-thirds of our sales. As discussed earlier, we recently lowered our crediting rates in both April and June for our U.S. dollar products.
That's in light of the lower interest rate environment. Sales for the products in other currencies, in there in the yellow, the 7%, that's primarily related with our multicurrency fixed annuity product. This slide is a very conceptual illustration to talk about the source of earnings of our typical products. The products on the left have a greater emphasis of meeting client's protection needs, while the products on the right have a greater emphasis on meeting client savings needs. Similarly, the earnings from the protection-oriented products is primarily for mortality and expense margin, as indicated in blue. While more retirement-oriented products have a greater proportion of their earnings from an investment margin indicated in red. As you've heard from our business leaders today, our core focus continues to be on protection products.
In the first six months of this year, products with the greatest emphasis on protection, such as recurring premium whole life, accident health, and term life, represented about 50% of our sales. Our retirement income products that meet both protection and retirement needs and produce a blend of mortality and expense margin along with investment margin, were about 25% of our sales year-to-date. Products with a greater emphasis on retirement or savings, such as single pay whole life and fixed annuities, represent about 25% of our sales. This product mix is nearly unchanged over the last four years as growth in our retirement segment has been matched by growth in our protection business. Therefore, our source of earnings continues to be primarily from mortality and expense margin.
This slide shows the same earnings over the last four years, and the colors represent the primary source of those earnings. Blue again denotes mortality, expense, and other margin. Red denotes investment margin. You can see the mortality, expense, and other margin has been stable and growing. Mortality and expense margin is consistently between 75%-80% of our earnings, and these earnings reflect the attractive pricing environment in Japan for protection products, the productivity and persistency advantages of our business model, and the scale benefits of our presence in Japan. In 2011, a slightly greater proportion of earnings came from investment margin due to the impact of a couple items. First, our mortality and expense margin was reduced by Star and Edison transaction integration costs and the cost of the earthquake and tsunami disaster in Japan.
Our investment margin actually benefited from gains from the sale of our investment in China Pacific. Here on the right, you see our results for the first six months of this year versus last year. Here you can see about 75% of our earnings continue to come from mortality expense and other margin. Keep in mind, this is after the absorption of merger and integration cost and does not yet reflect the full realization of cost synergies from the Star and Edison integration. We'll take a look at our investment portfolio profile, and again, our investment portfolio is lined with our strategy of competing on the basis of quality and not price. This slide shows the composition of our Japan investment portfolio by major asset class. You see a heavy allocation to government bonds and investment-grade corporates.
We believe high credit quality, long duration, fixed return investments, primarily intended to be held to maturity, are a good match for the profile of our insurance liabilities. Our allocation to commercial loans is 4%. Again, this is primarily high quality investment-grade loans in both the U.S. and Japan, and they are originated through our affiliated asset manager, Prudential Mortgage Capital Company. The allocation to structured securities is 5%. These structured securities are primarily agency MBS, both in Japan and the U.S., and we also hold super senior tranches in U.S. CMBS and small holdings in other high-quality asset-backed securities. Our allocation to the higher risk assets is modest and represents only 4% of the investment portfolio, which you see there in red. Below investment-grade corporate bonds is only 2% of our portfolio, equity is 1%, real estate 1%.
Due to the high quality, long duration nature of our investment portfolio, we believe our investments are well-positioned to support our insurance liabilities, provide a stable source of investment margin, and also exhibit a manageable regulatory capital volatility, which I'll discuss a little bit more in detail later. This next slide looks at our investment portfolio as compared to the four biggest Japanese insurers. What you'll see here is these competitors seem to have a greater risk appetite and have an 18% allocation to equities and real estate. All other things being equal, you could expect our investment results and capital to be more stable than these Japanese competitors. The interest rate environment. Rates are low all across the developed countries, including Japan.
Although rates are low in Japan, this is not a new situation, you'll see in that chart that 10-year JGBs have been below 2% for over 15 years. The majority of our POJ book of business was written in this low rate environment. The proportion of our in-force business with high crediting rates is fairly small. Within Gibraltar, rehabilitation measures lowered through bankruptcies of the companies that we acquired. Actually, they had their crediting rates lowered on these legacy businesses, and subsequent business has been priced in this low interest rate environment. As a result, nearly all of our Gibraltar's in-force business has crediting rates consistent with this low portfolio yield environment. Again, our business is supported with long fixed investment portfolio. As mentioned earlier, U.S. dollar business represents a meaningful portion of our new business.
This year, steps were taken to reduce crediting rates on new sales of our U.S. dollar products. Guaranteed crediting rates were lowered up to 100 basis points, and now rates are 3% or lower, depending upon the product. The profitability of protection products, which is our focus, is also relatively less sensitive to interest rates than products with primarily savings orientation. These protection products have a stable source of M&E earnings and have lower lapse risk than savings-oriented products if rates rise, since they're meeting a core protection need. Lastly, our core fixed annuity product that I described earlier is designed to mitigate interest rate risk. Again, new business crediting rates of our fixed annuity are reset every two weeks, which keeps pricing and crediting rates frequently adjusted with the market. If surrenders occur, there's a market value adjustment to the cash value.
Although our business is not immune to the interest rate environment, and we have relatively low exposure to high crediting rates, our investment portfolio is well-positioned in high quality, long duration, fixed return investments, and our protection product emphasis makes our profitability and return prospects relatively less sensitive to interest rates. In terms of foreign currency. As described earlier, U.S. dollar and foreign currency products represent a meaningful part of our business in Japan. On the right side, you see our U.S. GAAP values of our insurance reserves, and these are reserves for policyholder benefits and account values. Yen-denominated liabilities were $103 billion, while U.S.-denominated liabilities were $25 billion, and other currencies were $8 billion. On the left side, you see our investment portfolio by currency. Yen investments match the Yen reserves, and investments in other currencies also essentially match the reserves in these other currencies.
Our U.S. dollar investments are greater than our U.S. dollar reserves, that's because we choose to hold our equity in U.S. dollars as part of our foreign currency hedging program. Holding our equity in U.S. dollars protects the book value in U.S. dollar terms from fluctuations in the yen exchange rate. This also allows us to benefit from higher yielding U.S. dollar investments. Further on foreign currency. We consider foreign currency from multiple perspectives. At the top here is the perspective from the operating business level. Here, as I showed on this earlier slide, we seek to match the currency denomination of our insurance liabilities with investments in the same currency. This reduces risk at the business level and leads to lower regulatory capital volatility as well. We also think about shareholder value in terms of U.S. dollars as well.
From a corporate perspective, we apply a comprehensive hedging program that seeks to stabilize reported AOI, book value, and cash flows. We hedge our AOI denominated in yen and other foreign currencies such as the Korean won through a rolling hedge program where we purchase hedge instruments over a multi-year period for the future expected earnings in these currencies. As indicated on the previous slide, we also hold our equity in U.S. dollar investments, which serves to stabilize our book value of our international operations, again, in U.S. dollar terms. We manage the structure of these hedge instruments to minimize cash flow volatility as well, the goal of this comprehensive hedging strategy is to reduce the volatility of Prudential's ROE from changes in FX rates. The last consideration is an accounting consideration, there is an anomaly in US GAAP accounting involving foreign currency remeasurement.
I think people are pretty familiar with this, let me cover it briefly. Since the currency denomination of our investments and reserves are well-matched, we believe the economic exposure to changes in foreign currency exchange rates is minimized. Unfortunately, US GAAP accounting for FX remeasurement of investments and liabilities is not matched. The functional currency of our Japan companies is the yen, when non-yen liabilities such as U.S. dollar liabilities are remeasured to yen, the impact is recorded to income. While when non-yen investments such as U.S. dollar investments are remeasured to yen, the impact is recorded directly to equity in accumulated other comprehensive income. This creates an accounting mismatch, we consider this non-economic accounting noise and exclude it from AOI. On to capital. As I think people are familiar with, new solvency standards were implemented as of March 31st of this year.
Here you see our new solvency ratios under the new standards, 721% for Prudential Japan, 810% for Gibraltar. For Gibraltar, this is on a consolidated basis, which gives the effect of the merger of the Star and Edison legal entities into Gibraltar, it also includes our bank channel company, PGFL. You can see that these solvency ratios are strong as compared to major insurers in Japan, we believe our insurance companies are well capitalized. Here, what you see is we've modeled our solvency margin ratios under a stress scenario, let me recap this scenario. The value of Japanese equities declined 38%, the value of direct real estate investments declined 36%, the yen depreciates 20%, interest rates rise by 100 basis points. Basically, here we're assuming all these market variables go against us in terms of our solvency margin measure.
After this stress, you can see all of our ratios are well above 600. This highlights how our investment portfolio helps reduce regulatory capital volatility. Since we have a low investment allocation to equities and real estate, changes in these markets have very little impact on our regulatory capital position. Also, since our insurance liabilities are well matched with our portfolio in terms of foreign currency, FX rates have little impact on our regulatory capital position. When interest rates rise and the market value of fixed income return investments decline under J-GAAP, investments designated as available for sale are marked to the lower market value, which lowers solvency capital.
However, since the majority of our investment portfolio is of high credit quality and well matched against our insurance liabilities with the intent to hold to maturity, the majority of our portfolio is designated under J-GAAP as held for reserve or held to maturity and carried at amortized cost. As a result, regulatory capital is not subject to market fluctuations that would occur if investments were held as available for sale. We believe we are very comfortable with the current capital level of our insurance companies, and we are also comfortable that they'll hold up well under stress scenarios. Now, in terms of capital management opportunities, our Japanese companies have multiple ways to redeploy excess capital. First, in accordance with the regulatory and solvency standards, both Prudential Japan and Gibraltar have the ability to pay dividends.
A portion of our insurance company's capital structure is also in the form of subordinated debt from affiliates. This debt could be repaid as another means of redeploying excess capital. Our insurance companies in Japan also have the ability to invest in Prudential affiliates. Such investing is done on an arm's-length basis and is subject to prudent credit standards of these insurance companies and is done within regulatory limits. Our insurance companies have a long track record of maintaining strong capital positions while also generating capital that we can redeploy. Now, in terms of returns, our ROE in 2011 was 17.5%. While this is quite strong, it's lower than the ROEs that exceeded 20% in prior years.
Through the realization of cost synergies from the merger of Star and Edison with Gibraltar Continued growth with attractive returns and redeployment of excess capital, we believe we can improve our ROE to 18%-19% next year. Okay, to sum it up, here I hope are your key takeaways. Quality distribution drives our margins and ROE. Our third-party distribution leverages our scale and enhances our growth. Emphasis on protection products provides stable and growing earnings. Our investment portfolio is high quality, well managed, and is a good fit with our strategy. Lastly, our insurance companies in Japan are well capitalized and positioned to redeploy excess capital as it's generated. Thank you.
Ken has asked if he can begin the Q&A by addressing a couple questions that were asked earlier but were not fully addressed. We'll start with that, then we'll open up the floor. If you keep your questions short and clear, I won't rephrase them. Okay, Ken?
Okay. The first question I think that got deferred was the impact that's expected from the reduction in the assumed interest rate from 1.5% to 1%. First, I want to clarify that this applies to new business, not in force, and that will be effective April 1st of next year. As Kurashige-san had described, effectively, this means that reserves under JGAAP will need to be increased, and all things being equal, that would reduce the profitability of products in Japan. I think we and others will be looking at that in terms of modifying perhaps product design and pricing, but we're still working through that, and we expect much of the market will be doing the same. The second question, I believe, was around margin expansion and what are our beliefs in terms of margin expansion.
I think there's good reason to expect margin expansion from these businesses. POJ has consistently grown and found ways to grow highly profitable, and if they continue to increase across all those metrics, whether it's productivity, average premium, and life plan count, margin expansion is possible there. But really a big source of margin expansion will come from Gibraltar, again, as we realize our full synergy numbers, but also as we Prudentialize, as Sato-san described it, the Star and Edison force to increase their productivity, which increases their efficiency and their profitability. Lastly, our growth now in the third-party business really leverages our scale in many ways, whether it's systems or management or infrastructure, that's very complementary to our growth. I think those were the two questions.
The floor is open. If there's anybody who hasn't yet asked a question who would like to, you're going to get the first shot at it. Sean?
Thank you. Sean Dargan from Macquarie. My question is about the bank channel. I'm wondering, typically, within a given bank, how many carriers are let on the shelf, and if there's any limit to the number of carriers that a bank will use? I'm wondering about the composition of those carriers. Are they foreign, domestic? Are they the Big Four? Who are they typically?
That one I will take a stab at because I think Tanigawa-san is going to want to address it. In the bank channel, typically, how many carriers would the bank use? Is there a way to generalize as to what sort of competitors those carriers might be?
In order to avoid misunderstood or transferring wrong information, I would like to speak Japanese for now.
The number of carriers are actually different by mega bank and regional bank. It's subject to the size of the business of the bank. In terms of mega bank, I would say average is 10 to 15. Some of the big players have 20 relationships with each other. Regional bank also, this is subject to the size. Some of them might have 10 relationships, and some smaller ones only have single-digit relationship. In terms of the competition of foreign insurer and domestic players, the mega banks using foreign insurers are pretty much limited. Actually, I would say foreign insurers entering into mega bank market is pretty much limited. We are one of them, and there are only a few others. If you think about mega bank have a large number of tie-ups, considering that, the majority of the relationship are domestic players.
In terms of the foreign currency denominated products, the only ones offering these products are foreign players, of course. If you look at the regional banks, they only have a limited number of partners, if they want to offer foreign currency products, naturally the share of foreign players become larger.
Okay. Next up, David Small, the gentleman right behind Sean.
Just quickly, on page 71, could you help us understand how spread margins on retirement products have trended over time? You show us the breakout right now of investment margin versus mortality expense. Just maybe how has that retirement income product, how has that spread margin trended? Thank you.
Yeah. How it's defined is it's simply what we earn on our investments versus what we're crediting our policyholders. How has it trended over time? It's been quite stable. As again, we have a very disciplined asset liability matching, and we're very disciplined on staying current with our pricing. As a result, it has been quite stable. It has trended down very modestly given the lower interest rate environment, in general, quite stable.
Nigel? The gentleman here on the aisle.
Thanks. Nigel Daly from Morgan Stanley. Looking at the solvency margin ratios, clearly very high, and they remain high under a stress scenario. That implies a significant amount of excess capital. Can you discuss the opportunity to shift some of that capital out of Japan into the U.S. so it could be used for other purposes like buybacks?
Sure. I think on the slide there in terms of capital management opportunities, those are the primary mechanisms. One is through normal dividends, which we would do with the JGAAP standards and within regulations. An example of that would be POJ just declared a dividend from its last fiscal year of JPY 19 billion. That's one obvious way. Now, Gibraltar could also make dividends, but Gibraltar has a substantial amount of subordinated debt from affiliates in its capital structure, and we can repay that debt, again, as long as our capital ratios are strong. An example of that was we have just recent repaid JPY 31 billion. Those are two examples.
The last one is our Japanese companies can invest in affiliates of Prudential, those are good investments for our Japanese insurance companies because they're high credit quality and typically long duration, it's a good fit with their liabilities, and they're done at market terms.
I guess just in terms of the regular dividends, how should we think about the limitation as to how much can be bought out without running into any sort of restrictions?
Yeah. That's governed by the FSA standards, right now we can dividend up to five-sixths of our J-GAAP earnings. Once retained earnings equal additional paid in capital, which we'll meet in POJ, we can dividend up to 100% of our earnings. Again, we would do that with a careful eye of how well those companies are capitalized.
Who's next? Anybody else who hasn't asked one yet? Do I see a hand in the back? I'm sorry, I don't know your name, so you'll have to
Hi, it's Nick Pope from Newton. I just had a question about your spread, actually. Do you generate different amount of spread from your U.S. backing assets compared to your JGBs? It would strike me it's quite difficult to generate too much spread from a 1% yield on the JGB. As the U.S. interest rates have come down, should we therefore see sort of a disproportionate decrease in the spread income going forward?
The first question was how does the opportunity to earn spread income compare U.S. versus JPY? I think you're exactly right. There's more opportunity to earn spread because there's higher rates. We have the opportunity to capture a higher spread with our U.S. dollar products than our JPY products. The last one was, I didn't catch that last question.
We're just asking should we expect that to come down now given what's happened to the U.S. interest rates recently?
Again, it's been very stable because of our focus of investing long and matching our liabilities. The question will really be around what we do with our pricing of new business. We recently substantially lowered rates, and we'll keep a careful eye on that.
Let me just add one little additional comment to that. There was a slide that showed we had $150 billion of general account assets in Japan, of which about $33 billion were U.S. dollar denominated. About half of those are fixed annuities, where the spreads are pretty much locked in. You have exposure on roughly half of $33 billion out of $150. Pretty manageable. Tom.
Tom Gallagher, Credit Suisse. I guess just to follow up on Nick's question, what kind of guarantees are you actually offering on your USD product today, just from a percentage rate standpoint? Because obviously, you can probably still get 3%, 4% in terms of yield, in terms of what you're buying. What is the guarantee you're selling today?
Yeah. It varies by product. A recurring premium whole life product, which would mean we're still collecting premiums over time, would be 3%. Single pay would be 2.25%, and then the others vary somewhere in between.
Got it. Just a follow-up as well on ability to take dividends out of Japan. I know it says on slide 80 that you've redeployed approximately 60% of after-tax GAAP earnings.
Right.
What percent would that represent of FSA-based earnings? Maybe just talk a little bit about what the percentage is in terms of what you're earning on a Japan statutory basis versus GAAP.
Yeah. I actually don't have that exact number, but it would be higher, again, because.
Can you give just? Are we talking 50%? Just approximately what the ratio would be.
I don't have that handy. Keep in mind, with Gibraltar, our GAAP earnings have been low because of the Star and Edison acquisition. I'm sorry, our J-GAAP earnings have been low because of the Star and Edison integration, bringing the two companies together, the investment foil restructuring, the reduction in the tax rates led to a DTA write-off for J-GAAP. Actually, our J-GAAP earnings for Gibraltar have been low during this integration period. We haven't been looking towards earnings as our source of capital repatriation up until now.
Got it. Just one last one, if I could. Ken, you had also showed the slide 67, where you talked about a 10% CAGR, I think, over a four or five-year period in terms of the earnings growth. Does that include the benefit of FX? Because I think you've had.
Yeah
ex-FX, we're talking about mid-single digit CAGR?
No. It'd be eight or nine. It's been about 2% growth due to the FX.
Thanks.
Again, this reflects our earnings on a planned rate basis. 2011 would be at 85, not current FX levels of around 80 or lower.
Thanks.
Gentleman over here on the left in the blue shirt. John Hall.
Thank you, Eric. John Hall with Wells Fargo. Just a couple of quick ones. On the slide that shows the 18%-19% ROE potential, I was just wondering, does that reflect any capital coming out of the international operations, or is all that a function of margin expansion?
Yeah, it does. Our normal capital redeployment, which again would be roughly 60% of our earnings, we redeploy, and that would be in consideration of keeping our companies well-capitalized. Yes, there's capital redeployment in there.
We're not making a prediction that it'll be 60% next year. That's an average over time.
All right. On the Life Planners, the retention numbers that you show, I was just wondering, how do you account for the repurposed Life Planners that get put into the bank channel?
Yeah. That's obviously we've retained them just in a different way. They're considered retained.
Remember how those calculations are done. It's 13 months and 25 months of retention. Typically, the Life Planners who are being assigned to the bank channel, I think, have been with us longer than that. They wouldn't be in the statistics in any, in either of them.
That's a very good point.
All right. Thanks.
Sure. Okay. Back in the middle of the room. Trying to go as fast as we can because we're running late. Steven Schwartz.
Yeah. The use of policy reserve management. Steven Schwartz, Raymond James. What I'm wondering is if your SMR ratios that you have are very high, and that would tend to indicate to most of us that there is room above and beyond to take more dividends out than maybe you have. I'm just wondering if the use of policy reserve management, the held for reserve, affects how much you could possibly take out.
When you mean reserve management in terms of structured transactions?
I'm talking about the JGAAP accounting where you have to match up your assets to the liabilities, and if you get that within a certain range, you can designate your assets as held for maturity.
Yes. We do that quite actively. As I mentioned when I demonstrated that our solvency margins are quite stable. A good portion of the reason for that is because the majority of our investment portfolio is designated either held to maturity or held to reserve. We've already actively taken those steps.
Right. No, I understand that.
Again, that's very consistent with our investment portfolio strategy of investing long, well-matched with our liabilities, so we can do that.
My question is, does that strategy affect how much you could take out of Japan because you might break that relationship?
No, not necessarily. We have a lot of liquidity, and we have premiums coming in. We have very liquid investments, and there's not a liquidity issue there as a result of our investment classification.
Okay. Any thoughts on the sales tax and how that might affect you?
The sales tax, you mean?
The sales tax increase in 2014.
Consumption tax?
The consumption tax, excuse me.
Yeah. There's the consumption tax increase. Well, first, I'll start with the income tax changes, which are already been enacted. Those have been reduced from 36% to 33% this year, and then later to 30%. That's offset by the increase in consumption tax, which will come in 2014 and 2015 in two steps. We are looking at how to manage that. We don't see that as a big issue.
Okay, thank you. Ed? It's okay.
Thanks. Ed Spehar from B of A. Question for Ken. If you look at your forward currency hedging strategy, it looks like yen-based earnings growth would benefit maybe 400 to 500 basis points from the hedging for the next few years. Can you help us understand how much of that is offset by the dollar-denominated based earnings or earnings from other regions than Japan?
I don't think we're going to be able to address that question, Ed.
Is that just okay for yen-based earnings? Is that-
Well, first of all, I don't want to go beyond 2013. What you're basically asking is, what is the 85 that we translate yen-denominated earnings into dollars at in 2012 going to be in 2013. I'm okay with you addressing that if you're comfortable doing it.
Maybe I'll just comment on how we do it, and then you can make your own guess of what the impact is.
Is it still the three-year forward? Is that?
Yeah.
Okay.
We don't make bets. We're just hedging out basically two years of earnings over three years.
Have your estimates of what the earnings will be forward proven to be fairly accurate?
Yes.
Thanks.
It's the benefit of having a very predictable earnings stream.
Okay, Joanne, this is your chance. Hand up in the air, please. Go ahead.
Joanne Smith, Scotia Capital. Just a question on the mortality margins. You said that you bet a large portion of your income is because you have had very good mortality results. I'm assuming that there's a pad in there. How much of those earnings are from the release of prior year pads? What is the outlook for that going forward?
Yeah. The business in Japan is very conservative in terms of mortality assumptions, that's built into our pricing and therefore emerges in our profits. Now, the assumptions are locked in. It's FAS 60 for US GAAP, those assumptions are locked in. That mortality margin emerges as the business ages and the actual mortality gain is realized.
There's no provision for adverse deviation in there that you're releasing occasionally?
No. It's on a regular basis. It'll come out as the earnings roll forward.
We're getting down to the short strokes. Is there anybody who really wants to ask a question who hasn't asked one yet? Okay, we've got time for two more. Jeff?
Two more.
No, no, the gentleman behind with the white shirt on. Jimmy, you're going to be next.
Jeff Schumann from KBW. Just want to get a little more color around the solvency margin stress scenario. You stressed it for several things. Can you give us a little bit of perspective on which of the stresses matter relatively more and relatively less?
That's a little nitty-gritty because the change isn't that significant in total. Do you have another question? That's a little too nitty-gritty, Jeff.
Okay. Thanks, Eric.
All right, Jimmy Bhullar.
I have two questions. The first one's on your ROE, the 18%-19%. Obviously, next year, most of that's based on where you price the in-force, what price you did the deals at that you've done. Wondering if you could talk about how your new business pricing, is that consistent with the 18%-19% ROE, or is that slightly lower?
Then I had a question on bank distribution I'd like to ask you later.
We target pricing that is consistent with these high teen returns. Now it varies across our businesses. Again, we look at pricing at a portfolio level within business and then also as the combined businesses roll up. Yes, our pricing is consistent with our ROE objectives.
On Bank of Tokyo-Mitsubishi, I think about half of your sales come from that relationship. Maybe if you could talk about how much of their death protection sales does Prudential account for, and how has that number changed over the last few years?
Okay. What is our share of the death protection sales being made through the Bank of Tokyo?
Yes.
Pardon, sir. Our share within the BTMU.
Share in the BTMU.
Yeah. What share of BTMU do we have?
Within BTMU, our sales, especially death protection products, are about 50% of their total sales. In terms of, we do not do variable annuities, but if you combine the rest of the products, then in terms of total BTMU insurance sales, about one-third is from us. Of course, it varies by the quarter.
I think that's it. Now, again, we'd love to have you join us for lunch. It is a buffet. You can get in and out quickly. We understand you've got other things to do today, but thank you very much for attending our meeting.