Good morning. My name is Maria Hackley, and I'm a managing director in Citi's Financial Institutions Group covering insurance companies. Citi is delighted to welcome you all to Prudential's second annual Financial Strength Symposium. We're thrilled to have a long-standing relationship with the group. On behalf of the Citi team, we want to thank the Prudential management for inviting us to co-host this important event. We'd also like to acknowledge all the key participants in today's investor conference, which include debt investors, rating agencies, stable value managers and credit analysts, institutional insurance brokers and consultants, as well as all of senior management of the group. We thank you for taking your time today to learn more about the positive trajectory of Prudential. We greatly appreciate your support of Prudential, and we hope that you enjoy today's event.
With that, I'm going to turn it over to Eric Durant, who is the Senior Vice President and Head of Prudential's Investor Relations Group. Thank you.
Thank you, Maria. Good morning. I passed up the opportunity to be in Newark this morning to be with you. Our co-hosts and our management are allowing me to say a few words, a very few words. First, I'll add Prudential's welcome to this, our second Financial Strength Symposium. Those of you who attended the first Financial Strength Symposium will recognize that we have upgraded our venue. Even though we are, again, at a hotel with a French name, at this hotel, we are less likely to run into Dominique. We had a similar meeting to today earlier this week in this very room, where our focus was on our goal to achieve a 13%-14% ROE in 2013.
One of the themes today is that we are equally committed to the maintenance of our financial strength, as measured and reflected in things like capital, liquidity, leverage, risk management, and a high-quality general account. We see no conflict between financial strength and financial performance broadly, or ROE specifically. On the contrary, we view them as complementary, hand and glove. Indeed, favorable credit attributes are central to our business models. Mark Grier says this all the time. You see that in institutional markets. You see it in third-party distribution, on which we are increasingly reliant in the U.S. In Japan, the appearance and, in fact, the fact, the substance of financial strength permeates our business. Just in case I wasn't clear, the ability to achieve and to maintain our return on equity goal is dependent, really, upon our ability to maintain our financial strength.
These are the customary legal statements. They're in your binder if you'd like to read them in greater detail. I recognize they're not terribly easy to read up here. Also in your binder, you'll see an agenda for today's event. With that, it's my pleasure to hand off to Charles Lowrey, who will take you through our U.S. businesses.
Thank you, Eric, good morning to everybody. I'll spend about half an hour taking you through the financial businesses in the U.S., then I will turn it over to Bob O'Donnell, who will give you a deeper dive into annuities. After that, we'll take questions. Let me start first with a rather simple slide, it's an important one, I'll make a couple of points on this page. The first is that we spend a lot of time thinking about business mix. If you look at the left-hand side of the slide, you'll see the protection businesses. We rely on those businesses and expect those businesses to deliver stable cash flow, stable earnings, a lower growth.
On the right-hand side, you see our higher growth businesses that we expect to also deliver a higher ROE, they go in order from retirement to asset management to, obviously, annuities. The other point I'd like to make on this slide has to do with market sensitivity, that each of these businesses have a different exposure to market sensitivity. If you take the two businesses again on the left, the insurance businesses, they have very little exposure to market sensitivity. As you move further to the right, retirement has some exposure. Asset management is really a beta play. Then you have annuities, which probably has the most exposure to market sensitivity.
We think a lot about the percentage that we want for each of these businesses, we think a lot about the actual mix and diversification of these businesses in order to create an overall profile that is stable. A lot of words on this page. We put pages in here that have a lot of words. We're not going to go over every word or every bullet point. We do this for your reference afterwards so you can remember some of the key themes. There are a couple of points I'd like to make on this page. The first is that we believe the retirement market is coming to us. That doesn't mean that we're waiting for it.
In fact, we think we have the expertise, the experience, the talents, the products, and in fact, the capital to take advantage of this opportunity or opportunities as they arrive. As we go through the presentation, we'll point some of those out to you. First, let me go back to the diversification issue. I think this slide demonstrates diversification of the businesses graphically, and there are a couple of ways to look at it. One is you can see that you have each business segment in one of the quadrants. You have about a quarter of the business that's related to protection and about a quarter of the business that's related to retirement asset management and annuities. On the other hand, the other way to think about it is from a market sensitivity lens.
You have about 50% of the businesses that are less market sensitive, i.e., the protection and the retirement businesses. You have about 50% that are on the more market sensitive side, i.e., asset management and annuities. Again, you have a good diversification in terms of market sensitivity. For the next couple of slides, I'll talk a little bit about the market developments and how we're positioned vis-a-vis those developments. First, we'll talk about the annuities retirement and asset management division. Here we've divided the page into an upper and lower section, and you can think of it on the one hand as individuals and on the other hand, as pension funds. On the upper part, you've all heard the fact that there are 10,000 baby boomers retiring each day, and those boomers are in desperate need of income certainty and longevity protection.
We think our annuities product has and remains a very important component of that need. Down below, you see that we talk about pension plans and that pension plan sponsors face increasing financial and regulatory scrutiny. There are a couple of responses that plan sponsors have had. The first is to seek innovative asset management solutions, whether that's LDI or barbelling their pension plans between fixed income and alternatives on the other hand, or they seek to eliminate that risk because of PPA, Pension Protection Act, or because of some of the rating agency scrutiny over the pension plans. They seek to eliminate that risk by transferring it to someone else. We'll talk a lot about pension risk transfer later on in the presentation. On the protection or insurance side of the business, we talk about individuals, and we talk about employers.
On the individual side, we maintain that Americans are woefully under-insured, what we seek to do is to expand this market prudently and to serve customers in a cost-effective and capital-efficient manner. On the employer side, employers are under tremendous pressure to reduce benefit costs, one way to moderate those costs is to limit the benefits to employees that they provide, that the employers provide, but provide employees the ability to purchase additional voluntary benefits. We're very much in that market. Let me spend a couple of minutes on each of the businesses. The first is annuities, and Bob is going to go into a much deeper dive here. There are a couple of points I'd like to make. The first is we think we have a pretty good mousetrap. We're the only firm that provides the Highest Daily Lifetime Income.
Importantly, we think that this provides value to the customers as well as provides protection to our stakeholders, namely our debt holders, by virtue of the algorithm and the fact that the algorithm cuts off the tail. Bob will go through that in much more detail. We think this provides significant protection to us. We don't think the two concepts of providing value to the customer and providing protection to us are mutually exclusive. The second comment would be that we're committed to prudent growth. This is a theme you'll see throughout every presentation. We're not interested in being number one or chest-beating. What we're interested in is supplying the right product to the right customers at the right value proposition for us, and the sales will fall out where they may.
During the presentation, I will give you proof points of watching our sales drop because we have had price increases over time. Again, we're not interested in league tables. We're only interested in them because we want to stay relevant. We have no desire to compete for being number one or number two or number three. Consistent with this thought, we just filed pricing revisions to recalibrate our existing annuities product to our view of the new interest rate level. Again, Bob will go through that. We are not afraid of repricing or recalibrating our product and seeing where sales fall out. You can see that here. Account values, what you see is consistent growth over time, and I'd use the word consistent for our annuities business. In sales and flows, you see consistent sales over the past few years.
You don't see huge spikes and drops. We were down slightly in sales in 2011, and that's specifically due to a price increase and benefit reduction that we put into place at the beginning of last year, which made sales fall. That's fine with us. We have no problem in having lower sales. Let me talk about Prudential Retirement. As you know, there are two sides to Prudential Retirement. The first is the full-service record-keeping side, and the second is what we call IIP, or Institutional Investment Products. I'll touch on three products, the full-service stable value, the investment-only stable value, and then pension risk transfer. Before we go there, let me talk about account values and sales and flows.
I'll first do this on a consolidated basis, then I'll talk about them and unpack it, if you will, between full service and the IIP business. On a consolidated basis, you see we've had consistent AUM over the past few years and very good sales and flows. We look at this business on a consolidated basis because the business has been changing. The business mix has been changing. Last year, the full-service business, from an AUM perspective, represented about 70% of all AUM, and IIP was the remaining 30%. This year, with full-service AUM staying pretty much flat, that now represents about 60% of the business, and IIP represents 40% of the business. The business mix itself is changing. If you look below at the sales and flows, most of that are stable value flows.
In fact, investment-only stable value, but some is pension risk transfer, We'll talk about that a little bit later. This is unpacking the two sides of the business. The first is the full service at the top, Here you see that full service flows have gotten progressively weaker over the past few years. This, I would come back again to the point of discipline. In other words, we look at and do a postmortem on every single client we lose after every single quarter and analyze why we've lost them. There are really four buckets. The first is M&A or bankruptcy. Many times, or sometimes, we're on the acquiree side as opposed to the acquirer, or companies go bankrupt and you lose those. That represents between sort of 40%-50% of the business.
Sometimes it's personnel changes, where at the plan sponsor or the consultant level, you'll get personnel changes, and they have their own relationships and want to come in and make a change. The third and the most important area is pricing, and that's about 60%-65%. If you add all these percentages up, they obviously are more, which means that some of the business we lost through M&A was pricing under our target, so you can't add up the percentages. However, this fact remains that over half of our business we lose or let lapse because of pricing. The business doesn't meet our targeted rate of return. This is another proof point about the discipline we have, and we will continue to have this discipline.
There is a fourth category, and the fourth category is there is some business with clients who we would have liked to keep at prices that were above our targeted rate of return that we just lost. They're usually a handful of those clients every quarter. That's just business. Again, most of the business that we lose has to do with pricing below our targeted rate of returns, and we will have that discipline, and we'll have it in every single business. If you look at the IIP side of the business, that's a very different story. This is where the investment-only stable value flows have been very strong, and we think we're in a good position to have this continue going forward. Let's go a little bit deeper into stable value. There are two types of stable value.
The first is a full-service stable value. That's our general account product. This is a spread product. It has significant protections to it, many of which are listed on this page I won't go through. The majority of the AUM is not at the crediting floor yet. About 75%, $31 billion is not at the crediting floor yet. That is not to say that we are going to reduce crediting rates on all $31 billion by 125 basis points this next quarter. We're not. We live in a competitive environment in which we have to calibrate against the competition and against what's going on in the markets. However, we do have a history of resetting crediting rates on a semiannual basis for different cohorts within this $31 billion in order to maintain a spread margin, and we will continue to do that.
As an example, on a particular cohort, we lowered the crediting rate by 25 basis points in December. We have another trigger point coming up in June. Moving to investment-only stable value, we like this product. This is a very attractive product. We stepped into a breach a few years ago when others were getting out. We raised the pricing considerably. We increased the protections considerably. We think this is a very attractive product on a risk-adjusted basis. It's also good for us because we insist that we manage at least half the assets. Right now, Prudential Investment Management manages about just over 60% of the assets. In some ways, it's a two-fer. The interesting thing is we have significant protections here. We control the investment guidelines where there's a 0% crediting floor. There are liquidity buffers.
There are a whole series of protections here which make us feel comfortable about this product. Pension risk transfer will be, we think, a very big market in the future. Obviously, it's an extraordinarily large potential market. We like the product. It's a product with relatively limited exposure to financial markets volatility. We have the skill sets to do this. We've been doing it for 80 years. We have the capital to do it. We have a strong track record. I'm going to make a very bold statement here, but I think hopefully you all will corroborate it. We have the best team in the business. We've been investing in this team for years. We've been building it up in anticipation of what we think will happen, and we have been concentrating on this area for a long period of time. Don't take my word for it.
Talk to colleagues, talk to consultants, talk to our clients and see what they think. We believe we absolutely have the best team in the business. We also like this because it's a very good hedge. In other words, longevity risk is a natural hedge to mortality risk of the insurance product. This is a great fit for us when you think about the overall business mix relative to the company. When we talk about pension risk transfer, we really talk about core products. The first is your traditional closed-out annuity, which goes into the general account. The second is what we call a buy-in, and this is a product that has been around for a very long time in the U.K. It's been done forever over there.
We imported this technology, if you will, this financial technology, a number of years ago to the United States, worked through all the regulatory issues that were involved with bringing it here over the course of a couple of years, and did the first transaction ever in the United States last year for a small furniture company in North Carolina called Hickory Springs. It was only a $75 million transaction, so it was a small transaction, but it was a shot heard around the country because it was the first ever done. What a buy-in is where you take an annuity and you embed it into a pension plan to immunize a certain number of lives within the pension plan. The important thing is that it doesn't trigger settlement accounting. It's a very interesting and innovative product here.
Again, the point to be made is it's been done for a very long time in the U.K. We were the first to bring it here. The third, the portfolio protected buyout, is really when we assume the liabilities and place the assets into a separate account. The fourth is longevity insurance. Again, something that's been done for a very long time in the U.K., and we've now become a major reinsurer of longevity risk in the U.K. All told, last year, we did about just over $2 billion worth of this kind of product or products. It isn't enough yet to move the needle, per se, but we think it's a very good start for what will be a very big business going forward, and we're extremely excited about it. Let's talk about Asset Management. Asset Management is a business we like very much.
It uses a limited amount of capital. It has high ROEs, but as importantly, it provides what we think is significant expertise to all our businesses that use their services, and most of the businesses do. In this business, we think our biggest competitive advantage is our experience and track record because we focus on one thing and one thing only in this business, and that is talent. For the simple reason that if we can attract and develop and retain good talent, it stands to reason that over time we will have good performance, and we have very good performance. If you have good performance, the result of that will be an increase in your assets under management. We don't ever set an AUM target, per se, saying we want to grow 10% this year. I think that's very dangerous.
Instead, what we think of is AUM growth is the result of good performance, which is the result of having the best talent, and that's why we focus on talent in this business. If you look at the composition of our assets under management, we have $637 billion at the end of the first quarter, 80% of which is in public securities, public debt and public equity. The remainder are in what we consider to be areas that we have a significant competitive advantage, namely real estate, commercial mortgages, and private fixed income. Scott Sleyster will talk about the importance of those areas in the general account later. By AUM, you see that 64% of our assets under management are managed for third parties. If you compared this to last year, what you would see is that the institutional client part of this has grown.
It's not that other areas have shrunk. In fact, the general account has grown considerably. It's the fact that the institutional clients have grown more. That's because we're attracting a lot of assets. You see here, 2011 was a very strong year, as you see on the far right. Not as strong as 2010, which was a record year. In that year, we had some CDO takeover business as well, where we're managing CDOs for others. The one thing I will point out is you see retail flows appear and in fact are lower than they were in 2010. That's not because of weaker mutual fund sales. In fact, mutual fund sales were up considerably last year for two reasons. One was performance and the other was our investment in our distribution system.
The reason why retail flows were down a little bit was because there was a rebalancing of some of our sub-advisory accounts due to a concentration risk of Prudential. It was not due to performance. It was due to the fact that because of our good performance, we had grown to be too large and a couple of sub-advisory accounts cut us back, and that is why you see a slight decrease in retail sales. Just to show where we are this year, the first quarter retail sales were $3.2 billion, so they almost equaled all of last year in the first quarter of this year. Those assets under management show that the sales and flows show that we have had consistent growth in our assets under management, and you see here at the end of the year, we are at $619 billion.
At the end of the first quarter, we continued that, we were at $637 billion. What that has led to is a significant growth in asset management fees. I would argue that those fees are relatively stable as we go forward. That is important because the fees are becoming a larger portion of the asset management revenues, which you see on the following page. If you look at the blue part of the pie chart, that is the asset management revenue. The other part is what we call ITICM. ITICM stands for incentive fees, transaction fees, strategic investing, and commercial mortgages. It is all the other stuff, if you will. That is becoming a smaller portion of the pie, and it is becoming a smaller portion for two reasons. The first is obviously the asset management fees are growing. The second has been our commitment over time to reduce that.
We have reduced the size of strategic investing, as an example, from $2.7 billion down to $1 billion for that portfolio. We are letting the interim portfolio and commercial mortgages run off. At its peak, it was $1.8 billion. It is now down to $600 million. That will run off over time. That will reduce the size of the green portion of the pie chart. It will also reduce volatility going forward, and that has been a commitment we have had for a number of years, and we have been living up to that commitment, I believe. The major point of this is that this business will become less and less reliant on ITICM going forward for revenues and more reliant on the stable asset management portion or the asset management fee portion of the business.
I have one important announcement to make, that is we are getting rid of the ridiculous acronym ITICM going forward. We will be calling it other related revenues. That has three attributes. It is comprehensible, it is pronounceable, and it is utterly and completely bland. Our aspiration for other related revenues going forward is for it to be smaller and for it to be bland. Let us talk about Group Insurance. Group Insurance is our smallest business. Represents about 5% of our business. As I said on the first slide, we manage this business and expect this business to deliver stable cash flows and strong earnings. The life portion of this business is 75% or three quarters of the business.
What we said on our earnings call was when we looked at the first quarter results, as measured by the benefit ratio, the first quarter was the worst quarter in 5 years after the fourth quarter, which was the best quarter we've had in 5 years. We didn't see anything that would indicate a continuation of this issue, this issue being defined as a high benefit ratio. What I can say today is we have further examined this book in detail and continue to see nothing that would make us believe that the first quarter was anything more than an abnormal fluctuation. Oops, sorry. That is not the case for disability. Again, let's put this into perspective. Disability is 25% of 5% of our business, so it's about one and a quarter percent of our entire business. Obviously, we had a miss.
A couple of you have said something that we really appreciate in some of the reports, and that is that Prudential has a history of dealing with its problems quickly, and that's precisely what we're doing. As I said on the quarterly call, we didn't just wake up and figure out we had a problem. We saw this coming. It does take a while to fix it. However, there are things that we can do and in fact are doing to remediate cases. First of all, not all cases are underpriced. There are only certain cases. We've identified those cases, and we're going to those cases to either have them repriced or to try and eliminate those cases as quickly as we can. Just a cautionary note, even if you eliminate those cases, you still have the residual claims.
The benefit ratio isn't going to precipitously fall. It's not going to be a stairstep function. It is our commitment to fix this business and to fix this segment of the business. We will grind the benefit ratio tighter by using the same discipline that we've exhibited in all the other businesses as we go forward, and we will get there. This is an important slide because it indicates, again, the discipline we have. We've grown premiums over the past 2 years. However, if you take out one large case, which was a life case of $180 million in 2011, you see that our premiums were actually less, and in fact, far less than they were in 2009. Consistent with the other businesses, the mispricing was not mispricing in order to drive sales. That would be completely inconsistent with what I said originally.
The mispricing occurred because we misjudged the effect of the economy on certain of our disability cases. Again, it was not done to drive sales. Let me end with the life business. The individual life business has very solid cash flows and a very solid ROE. They have extraordinary discipline in terms of pricing and underwriting, and a real focus on capital management. Perhaps of all the businesses, this shows what I've been talking about. In 2009, if you look at new business premiums, in 2009, we raised our pricing twice and watched our sales plummet. That was fine. We would rather write less profitable business than more unprofitable business. That's what we do. In 2011, as the market came back up towards our pricing, we began to see some increase in premiums. Again, we are sticking to our discipline.
In conclusion, a lot of words on this page, I'm not going to read them, but there are three points I'd like to make. The first is that we're well positioned for what we believe will be significant changes in the retirement market. We believe we have the talent, the expertise, the experience, the products, and the capital to really take advantage of these opportunities as they arise. The second comment is that we are committed to prudent growth. You've seen what we've done in life, in annuities, and in retirement with regard to letting sales fall, and you will see this in group as well. The final point is on business mix, as defined by the businesses themselves and the market sensitivity of those businesses.
That business mix should limit the downside if, again, we hit really choppy markets, but also enable us to participate in the market recovery when it comes. We like that balance. With that, we look forward to proving that to you over time, and I'll now turn the podium over to Bob O'Donnell. Thank you.
Thanks, Charlie. Welcome, everyone. I'm excited about the opportunity to provide an update to you all on Prudential's U.S. annuities business. Prudential's annuities business is characterized by us having a strong position in what we feel is an attractive marketplace. This strong position, though, is born from a strategic philosophy around prudent risk management. We don't believe that, for example, increased value to a contract holder has to come with increased risk to the insurance company. All of our strategic endeavors are born from aligning our constituents on the same side of a challenge. It's with that alignment that we can deliver a sustainable value proposition born from prudent risk management and evidenced in a consistent approach in our space. One example that we'll go through is our core contractual embedded risk management strategy, and we'll walk through that in much more detail.
What that means with that approach and with those strategies is that as we work our way through our marketplace, we sell our way to a fundamentally different risk profile than what I would describe as a traditional annuities business or even, quite frankly, older business at Prudential. These strategies have been in place in various forms since 2001, but mainly in our income guarantee business since 2006. It was not a reaction to capital markets events, but rather a manifestation of our core focus on risk management. The current annuity marketplace is characterized from the buyer's perspective as essentially requiring increased responsibility on the individual. We've talked about this for years. This trend continues. Traditional sources of retirement income guarantees are becoming less and less available, as evidenced by defined benefit pension plans, increased uncertainty around Social Security.
That reality is magnified by other events like increased volatility with respect to the assets that they are managing to close the gap from the reduced availability of traditional alternatives, and also alarming headlines that's fueling that volatility, whether it's political or economic. The reduced availability of traditionally safe investment vehicles to generate a reasonable return simply increases the focus of the individual responsibility on trying to close that gap that is there with respect to their future needs, that future liability for guaranteed lifetime income. Our position with the retail buyer fits squarely with their driving decisions elements. Our Highest Daily Benefit leverages the assets that they're using to, again, close that gap to meet a future liability. The risk mechanism that we employ, again, aligning our interests with those of the buyer, serves to introduce some comfort around periods of volatility.
The idea that we will buoy or put a safety net on an asset during volatile periods. Yes, it reduces the risk to Prudential Financial and our key constituents, but it also reduces the anxiety associated with owning an equity-based instrument during those times for the investor. Again, aligning those interests and reducing the risk for both is embedded in our core strategy. We offer that with a comprehensive investment management platform that enables, again, the investor and the financial advisor to utilize those assets to hopefully achieve their future retirement goals. From the distributor standpoint, there's a very different perspective, and I'd like to characterize their perception as one of manufacturer volatility of participation. There's a lot of words there. What do I mean by that?
Our industry has experienced an uneven presence by manufacturers of annuity products, that unevenness comes in the form of entrance and exits of traditional major providers in this space, but also the volatility of their value proposition. That value proposition has led to a volatility in sales at the broker-dealer level and at various of our colleagues across the industry. Our presence during that period has remained constant. Thus, that volatility of presence by many in this space has increased the demand on the financial advisor and the broker-dealer. As those value propositions change, they have an obligation to understand those changes so that they can responsibly deliver the solutions to their investors. As that, again, flux in our space for many who participate, there's demands through the system on certain of our partners.
We have seen some encouraging developments in the risk management area in firms that we compete with. These, what we call fund-embedded risk mitigation solutions are a good thing for the industry, they help, much like our strategy, they help reduce the risks associated with providing an equity-based guarantee, I'll get into some of the differences in a few minutes. The headline item there is, we think these are good solutions that are requisite for sustainable and responsible growth in our space. One of the downsides of that is the alternative approaches to risk management in our spaces. They tend to require that investors and financial advisors use a very small subset of funds that utilize these embedded risk management approaches. Then we stand alongside those approaches in a very different way.
Again, we've got a consistent approach to this marketplace, where many of our competitors have offered what I described as that volatile presence. We've been offering basically the same value proposition since 2006. When I talk about our core focus on risk management, this is not something that's a reaction to capital markets. This is something that's core to our culture and the way we approach this business. Again, in 2006, it became a part of our core income solution, but it has been part of our offering since 2001 in various forms. The auto-rebalancing component embedded within all of our products is conducted at the individual investor level. It's remarkably transparent in that the moves underpinning our risk management approach are completely transparent to the investor, and as demonstrated by the purchase and sale of shares and confirmed to those folks.
Again, more than five years of history in that regard. This contract-level approach affords the advisor the ability to continue to manage the assets across a broad array of investment options, thereby preserving a key component of the financial advisor's value proposition. With all of this, I would describe this volatility of participation as simply an evolution of our industry. I think we're going through just a migration, and the next slide, I think, will serve to highlight some of that migration. Part of this slide shows you the strength in leadership position that Prudential holds in the annuity space. We're number two in assets and in sales. While we're proud of that's not the main purpose of this slide.
If I were to show you this slide three or four years ago, I would have spent most of my time discussing the difference between the names on one side from the other. If you look on the left side, we're showing the assets under management leaders in the annuity space, and on the right side, we're showing the sales or production leaders in the annuity space. A few years ago, there were four or five companies on the left side, meaning assets under management, that were no longer on the right side. These would have been characterized as traditional large participants in this space who have either exited or severely curtailed their presence.
Today, there's much more synergy on the left side and the right side, which suggests to me that we're emerging through what I describe as an evolution rather than a dislocation in our market space. We view this as an encouraging sign for the business. There's a few points on this next slide, and the headline item really is, again, one of consistency and prudent risk management. There are a few elements that we should talk about here. One, I wanted to put up the sales levels from 2010 as compared to 2008. Not to show you the rapid growth that we've enjoyed in the annuities business, but rather the consistent presence that we've had since 2010. In 2010, in 2011, and if you've looked at the numbers for Q1 of 2012, you'll observe a remarkable consistency in our production levels in the annuities business.
Evidencing our approach that Charlie referenced around core, responsible, profitable growth. We are not chasing a top-line number. We welcome success from a top-line standpoint, that is clearly a byproduct of a consistent approach on risk management. The more important piece here is really the makeup of the slide, the size of the pies. If you look at 2008, we would largely be characterized as a strong distributor in the independent broker-dealer channel. We invested a tremendous amount of time in balancing out that distribution profile, now you can see a much more balanced position across all four channels. While that's a wonderful thing to display success across those channels, it also is a risk mitigant to the sustainability and consistency around our business.
We are now less reliant on any single channel for our business mix than we have of what we believe is a much more sustainable presence. I'd like to explain from the buyer side what our product is attempting to accomplish, this chart is going to have a few moving pieces, I'll try to walk through this very quickly. The tan mountain chart is intended to represent the variability of the invested assets over a theoretical time period. As the markets go up, the investors assets perform well, you can see increases in the mountain chart. As they perform poorly, you can see reductions in the mountain chart. That is simply intended to represent a theoretical growth and loss over a prescribed time period.
The large locks reflected on this chart, there's three of them, are intended to capture visually the idea that the Highest Daily Lifetime Income of the account balance is captured and protected for purpose of generating future lifetime income. This is really a notional value. We need to think about this as a notional value. That is not a value that's available to the investor or the buyer for liquidation. That value then is enjoying growth during periods of volatility, as evidenced by losses in the account balance at a prescribed contractual rate of 5%. That's what's evidenced by the gently sloping upward line to the right, the smaller locks are simply intended to display the idea that these growths are captured and locked in every day.
It's important to remember, though, that blue line, now the basis of guaranteed lifetime income, is a notional value on which we determine the amount that will be guaranteed for the life of the insured. Those guaranteed amounts, again, based off of that higher notional value, are first funded from the underlying account balance. Our liability, our claims begin not when the investor takes out their money, when the investor runs out of money. I'll get into a few more examples as to how that works. From a market-facing standpoint, what we're trying to convey is actually a message of simplicity and certainty. Investors who buy a Prudential Annuities contract know that they have a 100% chance, a 100% probability, that their future lifetime guarantee will be based on at least the Highest Daily Lifetime Income that their account value ever received.
Many of the participants in our space have contract structures that have a gap or a defined interval during which that amount would be locked in. Many contracts offer a quarterly or an annual opportunity for that, which means there's many opportunities during the year for that account balance to exceed the value of a guarantee that the investor can't participate in. Statistically, it shouldn't be very surprising that on a quarterly contract structure, there is only a 4% probability that the investor will actually lock in the highest value that they've achieved, and on an annual basis, it's actually approximately 1%. We view this more as a simplicity and a confidence element of our sale to the investor. I mentioned a bit earlier about the different mechanisms employed by our industry. I'll just briefly touch on these.
What we've seen, again, born from our philosophy and aligning the interests of our key constituents against the challenge well in advance of a market correction in 2008, we constructed our core strategy with an embedded risk management. I'm hearing some echoes. I apologize. A core embedded risk management philosophy. We have, after 2008, begun to observe additional presence of these philosophies in the marketplace, and we view that, again, as an encouraging development requisite for the sustainable delivery of equity-based longevity guarantees. At a very high level, many of our competitors are delivering these through a fund level mechanism, which again, while we view as encouraging, we think that a contract level approach is better. Again, at the Prudential contract level approach, we are able to preserve the core value proposition of the financial advisor and deliver greater transparency and greater precision around risk management.
In the end, as that is a key focus, the precision in our ability to manage that risk through a contract level approach is really the key value prop for us. One thing I would like to share is that as you see a proliferation of fund level approaches as compared to contract level approaches, you might conclude because of the sheer number difference, there are many more companies employing fund level versus contract level, that, well, perhaps the fund level approach must be better, and that's why other firms are using it as compared to the contract level. We would submit that that's not the case. The contract level approach is actually much more precise.
Really the driver for why the fund level approach is being more broadly employed is that it can be executed more quickly. Just at a conceptual level, I'd like to explain how this mechanism works. This is a very simplified version, and in this example, we're assuming a 30% reduction in the value of the invested asset. Sorry, a 30% reduction in the NAV of the contract that this fund is invested in, and I make that distinction very deliberately. That 30% reduction in the account balance or that NAV is taking place over the first 12 months.
The reason I'm making that distinction is that over that 12-month period, as this hypothetical investor is participating in that fund, our mechanism is coming into play, and it's systematically transferring money to a safe harbor asset, as evidenced by the increased allocation in the yellow line. During this period, this 12-month period, while the NAV has reduced by 30%, the value of the invested asset has only reduced by 19%, and that is a fundamental difference in the way we manage risk associated with our guarantees. The idea that we buoy the asset and keep it closer to the liability enables us to reduce the risk, fundamentally changing the risk profile of our contract. The blue line, again, represents the notional value of the guarantee, and in this example, since there's no volatility, there's been no step-ups or lock-ins, as evidenced in the earlier slide.
Just to highlight that little hockey stick element at the end, our contractual guarantee is a 5% guarantee. After 12 years, there is an extra minimum of 200%. Generally, that's outpaced by step-ups through volatility. In this example, again, since there were none, it's reflected in an uptick at the end. Just a little more information on how this mechanism works and what it means. What we're trying to do, and I think as evidenced by our track record over the past six years, have succeeded in doing, is providing stability in the underlying account value, which is fueling the beginning distributions of the contract and deferring the ultimate claim to the insurer. This example, again, very theoretical, very hypothetical, but based off of the same scenario.
We've got the blue here as representing the account balance on the top chart as that same scenario, negative 30% followed by 0% growth. The top chart, focus on the left side of the top chart, and you can see the difference in how far that account has fallen. The top one will have fallen by 30%. The bottom one would only have fallen by 19%. What you have is a meaningful difference in the underlying account balance as a result of that mechanism. On the right-hand side, we are now assuming that the investor at age 72 is beginning to utilize their full guarantee, which on our contract, at a $100,000 investment with a 5% contractual guarantee, they will be taking out $10,000 a year. These bars are intended to represent their annual distributions of $10,000.
The green portion of these bars are intended to identify what amount of those $10,000 distributions are funded from the underlying client's account balance. The yellow portion of those bars are where our claims would theoretically begin. You could see through the preservation of account balance, we've extended the self-funding of lifetime income by over four years. That may not sound like a lot, but on a $100,000 investment, that represents a $40,000 difference in claims. It is a meaningful difference. Again, as evidence of our focus on philosophical approach to risk management and aligning the interests of our key constituents. I've shared with you a theoretical view. I'd now like to share with you an actual, and this example represents an actual contract that would have been purchased in January of 2008.
There's no magic to the January of 2008 other than that was a date where we launched a particular version of our product. The underlying risk mitigants have been the same since 2005. The important thing to take away here is the appreciation for how effective our mechanism is in reducing downside volatility. Let me just explain what's on this chart. The bottom black line represents the actual performance of the S&P over this time period. The red line represents the performance of a portfolio that we have on our platform, the AST Capital Growth Portfolio. The blue line represents that same portfolio's performance when invested in a contract that has this risk mitigation program, and the green line represents the value of that notional guarantee.
The most important thing to focus on here is the difference between, on the one hand, the notional value in 2008 and 2009 and the blue line, as compared to the difference between that same notional value in 2008 and 2009 and the red line. That is a manifestation of our core risk management approach. That's what makes a Prudential annuity different from most other in the marketplace. This is a risk mitigation mechanism. It is not an account value optimization. Generally, investors who buy this contract should expect a performance drag over time as a result of having this. We don't always live in the averages, and what we've seen through the 2008 period is not an average period. In fact, the sequence of events through 2008 and 2009 has served to actually generate somewhat of an account optimization experience for many of our investors.
We've been very clear with them prior to, during, and today that their expectation should be that over time, this will have a dampening effect on their overall return, and on average, we expect that to be 40 basis points. The important piece of this really is we should be focusing on what does it do during those periods of stress, and the difference between the blue line and the red line in 2008 and 2009 is essential to understanding why we do what we do. I've shown you a theoretical example and then an individual actual example, now let's just take a quick look at how this has performed over the entire book. These charts represent the assets associated with a contractual risk mitigated mechanism and as measured by a quarterly snapshot.
The blue portion of the bar is intended to represent the portion of the invested assets that are allocated to the safe harbor investment or the bond portfolio. The green portion of the bar is intended to represent the portion of the assets remaining in the client-directed investments. You can see that there is a, not surprising, an inverse correlation between what happens to the S&P and the relative portion of assets residing in the safe harbor investment. Again, this works in both directions. As the contract comes under stress, we preserve the account balance by transferring automatically monies into the safe harbor asset. As those contracts are less under stress, that money moves back equally and as efficiently in the opposite direction. I'm going to skip just a few slides here. I hope if I can do this properly. My device is not working.
There we go. Just some demographic information. If you're following along, we're going to go right to this slide. This is perhaps the most important slide when you connect it with the understanding that I tried to convey around our risk management philosophy. When you connect that philosophy to this slide, hopefully you can draw a picture around Prudential Annuities that might be different from others. Basically, what we have here is the account balances or the assets under management at Prudential as captured by a quarterly bar. The important thing to focus on here is the blue portion of the bar. What the blue portion of the bar represents is that percentage of assets under management at Prudential Annuities that are associated with a contract-level risk mitigated structure.
By selling our way through with such an effective risk management approach, we have fundamentally transformed the risk of Prudential Annuities. Again, when you look back at the way these assets are supported during times of stress, this focus on reducing the volatility of those assets reduces the risk associated with Prudential Financial. You'll also notice a relative consistency around the asset growth, that has come as a byproduct of our long-term focus on risk management. We do not experience a volatility of participation, nor do we experience a volatility of the value proposition that we deliver in the marketplace. That's not to say that we haven't taken action. During this entire period, we have taken action to further de-risk and respond to the forces that come to bear on our space.
As Charlie referenced earlier, that includes a filing that many of you have perhaps seen, where we expect to make changes to our product later this summer. At a very high level, I will share with you that the cost of our optional protection feature will increase to 100 basis points. The minimum issue age associated with this benefit will increase by 5 years, a core withdrawal ban, the age 59 withdrawal ban at 5%, will move back by 5 years. These are meaningful adjustments to our performance, they also represent a consistent approach to risk management and a consistent approach to this marketplace. Again, these are consistent with steps that we've taken over the years. It's not the first time we've changed our product. It won't be the last.
All of these changes have been delivered with the core risk management approach and the embedded risk management of our strategy. Just going to skip one more slide here to get to the financials. Maybe. There we go. Our reported AOI contains a number of disclosed items that reflect accounting entries that are purely driven by market conditions. Now, we understand the importance of these items, we manage the risk associated with them very closely. While we understand them and we appreciate the importance of them, we think it's better to track the key drivers of our business to look to our underlying core earnings. When you remove the adjustments for market performance, we think you can better track the performance of our business through those underlying core earnings.
As you proceed from 2009 through 2011, you can see a nice growth in core earnings, and that clearly correlates with the growth in assets under management. In the end, again, we think that we've got a strong position in an attractive marketplace. We believe this is a space that was different 10 years ago than it is today, and that it will be different 10 years from now. As our strong position of leadership, we believe we have an opportunity to frame that future. In framing that future, much like we have in the past six years with respect to risk management, we have a greater ability to control our destiny and again, effectively manage risk with prudent and sustainable growth. All of these efforts are born from, again, that core philosophy of aligning our key constituents on the same side of a challenge.
We do not believe that increased value to the marketplace has to come with increased risk to our constituents. That's the way we've managed the business for years, and we intend to do that in shaping the future of this space. Thank you.
Before Charlie and Bob entertain your questions, just a few words on Q&A protocol, [Foreign language]. First, please wait for me to call upon you. Second, please wait for the mic to appear. Third, please state your name and your firm's name before you ask your questions. Try to keep your questions short. Finally, please respect your colleagues. Don't hog the mic. Who's first? The gentleman on this side of the room towards the front, please. Please keep your hand up.
Hi. Thanks. Seth Levine, Guardian. Just a question on the auto rebalancing and the annuities. Can you comment on some of the liquidity risks and how you think about that as your algorithms kick in and you're forced to change a large amount of account values from equities into fixed income?
Sure. There's a number of provisions that we've employed to manage liquidity. First, the assets subject to this mechanism are spread across a pretty broad and diverse asset management platform. We're not going after one source of asset when we have meaningful moves. The other is that each of those asset management strategies employ what we call a liquidity sleeve. We've got a cash position wrapped in derivatives to replicate the rest of the portfolio that generates a meaningful source of liquidity. We've also modified the calculation over time to increasingly smooth out the volatility of transactions, which has had a big impact on our ability to manage liquidity. We have done this through some remarkably stressful periods with big portions of assets and proven that we can manage the liquidity associated with this as we continue to grow the business.
The combination of enhancements that we've made to the mechanism itself to smooth out the quantity of trades, the liquidity sleeves that we've constructed within the portfolios, and the breadth and diversity of the underlying assets have proven to be very effective in managing liquidity.
Is this a small group? Is there another question? Only one. Only twice. We'll move on to international. Mr. Baird's in the room. Very hairy, Tom. Ed, we're ready for you, sir.
Hi, good morning. I'm going to speak for about the next half an hour or so about the international insurance business. What I'll attempt to do is to focus on the drivers of the business so that you can not only understand the results that have been achieved, but more importantly, be in a position to form your own opinion as to what the results are likely to be going forward. Let me start by characterizing the business as we see it as having three key financial characteristics. The first is high ROE, the second is strong growth in AOI, and the third is very low volatility. As I think you'll all recognize and appreciate, that's a very rare combination, and it's one that we work very hard to maintain. It has been true of this business from its early days. It continues to be true today.
It informs all of our decisions, whether it's about M&A or it's about product design and pricing. As I go through the various components of the business, I hope this will begin to make more sense to you as to how this rather unusual trifecta of results is achieved. Our strategy has been steadily evolving over the last five or 10 years. On the left-hand side of the screen, you see a description of what was, and to this day remains our core foundational strategy. This is the strategy of what we call the Life Planner organization. It's a small select group, carefully selected and trained, who focus primarily on death protection only and for the mass affluent. That characterized our Life Planner organization in POJ when it started in the late 1970s as a JV, then restarted in the mid-1980s.
It's recently celebrated its 25th year as a standalone organization. About 10 years ago, this strategy started to evolve when we acquired the then bankrupt Kyoei. We renamed it Gibraltar. It was everything we prided ourselves on not being. It was your classic middle market, large Japanese domestic insurance company. Over the last 10 years, we gradually transformed it, but its fundamental character stayed the same in terms of the segment it served and the debt protection needs. It's high quality for its segment, but it's not at the Life Planner level. That strategy continued to evolve across three dimensions, which I will get into more detail. The first segment is that instead of focusing just on the mass affluent of the POJ market, with the acquisition of Kyoei/Gibraltar, we got into the broad middle market.
Through the bank channel and through the maturing of POJ, we started to get into the truly affluent. The number of segments we have been addressing has been steadily broadened. That's category 1. Category 2, the needs of these customers that we are addressing have been also expanded. The first was just death protection. Then increasingly, we addressed accident and health, and third, and most important to understand our present and future results, we're addressing the needs of retirement. That will be a key theme. The third and final dimension of the strategy that's moving is the distribution. For many years, we focused primarily on our own captive agency system. First, the high-end Life Planner, and then the growth of the middle market group, which we call Life Consultant. Starting about four or five years ago, we added a third channel to this, namely the bank channel.
That has been by far the most rapidly growing segment. Most recently, we've added independent agents. Today, the way to understand the unusual level of growth that you've seen in the last several years is by understanding that we have been compounding that growth by an expansion of the segments we serve, the needs we serve, and the distribution we utilize in addressing those needs for the different customer segments. That's the key to understanding the growth. Let me now start to talk about the actual results that back up the statement regarding high ROE, strong AOI, and the stability. Here, let me begin with the adjusted operating income. The notable aspect of this, in my opinion, is the consistency of the results. That's a theme that you'll see throughout.
If you have a familiarity with our organization, starting 25 years ago with POJ, you'll recognize that we have never targeted nor have we ever achieved results by being a price leader. That is not a claim we ever make. We charge a premium price, and we deliver a premium product and a premium experience because we make a heavy investment in the quality of the advisor who's delivering that service. As I'll explain, as we get into the bank channels, we've even extended that concept into third-party distribution. You'll see this relative conservatism in pricing and in product design carried through in every dimension of our business, including in the investment portfolio, which I'll talk about a little bit later because it's reflective of our strong solvency margin. That's a theme that is embedded in our strategy.
It's also one of the reasons you see this very strong performance. The second element I would draw your attention to is the composition of the earnings. Please note what's in the blue portion of this. This is the classic M&E, the mortality and expense. You'll see this is what constitutes the bulk of the earnings. A relatively smaller portion on the investment income side. In fact, the only business of ours that generates meaningful earnings in that category is Gibraltar. The reason for that is when we acquired Kyoei, it was a bankrupt company. It went through the bankruptcy court. We had the opportunity to reset the crediting rates, which therefore eliminated the negative investment spread that had caused the bankruptcy and allowed us to put in place a new baseline from which we have been able to make positive earnings ever since.
In all of our other companies, we don't rely, we don't meaningfully price, therefore, to include this kind of investment income. That's meaningful in a couple of regards. One, it contributes in a significant way to that stability of earnings that you see here. Secondly, it informs other aspects of the business. For example, our M&A strategy. One of the reasons you see us continue to acquire in a country we're already in, as opposed to taking that capital and entering many new markets, is because one cannot achieve the economies of scale and the resultant expense savings if one invests more broadly. You can only get the benefits of scale which are meaningful in this industry if you're investing in a current operation and in a country you already operate.
This aspect of our source of earnings profile informs many elements of our overall strategy, from product design all the way up through the pricing. I would also just want to highlight what to me is impressive about the stability, which is that these earnings and their persistent steady improvement have occurred in spite of an almost unprecedented level of volatility during this period in macroeconomic events, not to mention the extraordinary events that have taken place in Japan over the last 18 months in economic, political, and sociological terms. In spite of that, you see this kind of delivery, a very rare phenomenon, and as you can see, no evidence, virtually whatsoever, of any beta effect. This leads to the second characteristic. We talked about the strong growth in AOI. The second is the high ROE.
That number on the left-hand side, north of 20%, that has been true of this business for the last decade, ever since we became a public company. The reason you see the drop is highlighted there in the red box on the side, and that's the result of the reduction coming from the acquisitions of Star and Edison. Over the next several years, you will see that ROE steadily move upward again in the direction of its historical norm. While it's a pretty good performance number now, that will continue to improve and return more in the range of our historical norm. New business growth. Here again, you see a steady and consistent improvement year after year. You do not see the high volatility that would be characteristic of a hot product strategy.
Instead, you see a very consistent growth that's more reflective of what I've described in terms of going after a broader segment of customers, addressing a broader range of their needs, and utilizing new supplemental distribution. For example, even without the addition of the red box showing the results of the Star and Edison acquisition, you see very strong mid-teens growth here year after year coming out of the existing organic growth organization. Here, I'm going to shift the focus to Japan, which in reality constitutes the vast majority of the division results that I've just highlighted. You will see some differences in the numbers. I'd refer you to the footnotes, which will detail for you some of the differences in definitions, for those of you that want to pursue that.
Here you see the same themes that I was touching upon earlier because indeed, those division results are driven by Japan. The first is the steady growth in adjusted operating income. The second is the growth in the annualized new business premium. This slide identifies a relative handful of characteristics of the Japanese market. It's a market which sometimes people question why such a deep investment in that market. Here I've identified a few in single sentences, and then I'll proceed to elaborate on the ones that I think are particularly worth understanding. The first is it's a big market. The second is there's a lot of wealth. The third is the liquidity of that wealth is meaningful, as I will explain. The retirement needs are significant and growing.
In addition, the product trends, this is a marketplace that for decades has evidenced a comfort level, even a preference for insurance products versus alternative asset classes. Finally, I'll talk a little bit about the distribution trend. Let's begin by recognizing that Japan is the second largest life insurance market in the world. To really put that in perspective, please take a look at the bar just to the right of that. The Japanese life insurance market is bigger than the life insurance market of every other country in Asia combined. Because of the growth rates in some of those newer, smaller markets, they get a lot of headline attention. It is worth noting that this Japanese market is bigger than all of the other ones. This, by the way, includes China, it includes India, it includes every country you can think of under the Asian label.
It's a big market. Of course, it dwarfs those of some of the more mature markets in the advanced industrialized nations of Europe. Here, let me shift to the point about the wealth. Again, the wealth on a per capita basis, and I'm speaking specifically here about the financial assets of the household. On a per capita basis, it's comparable to what you have in the U.S. What we see in the bottom is the breakdown of that that I'm going to elaborate that's in a more liquid form. Before focusing on that, I just want to compare this wealth to the wealth that exists in some other of the advanced industrialized nations. As you can see, there really is no comparison. The accumulated wealth in these households and financial assets is quite extraordinary.
Here, let's focus on the blue portion of those bars on the left. Here I'm referring to the truly liquid assets, bank deposits in particular, and the deposits that are sitting in the Japan Post. This now moves the ranking of Japan from number two to number one, and it truly dwarfs every other nation in the world, even with that first multicolored bar, an accumulation of a number of countries. This is our target of opportunity. This is the very rare example where not only is there a retirement need, but there is the existing wealth to address that need. The retirement need is not unusual. What is unusual is having the accumulated wealth in readily available liquid assets to address that need.
It is our linking of those two that gives us these extraordinary results of recent years and confidence that this is sustainable over many years to come. Let me highlight for you the composition of this wealth so that you can understand why it is that so much of the assets in the households are sitting in these liquid assets. I'll draw your attention to the segment on the left-hand side of each pie, which has to do with equity. What you'll see is the enormous disparity between the 30-plus% or so of that's addressed to equity in the U.S. market versus the very small single digit that's associated with this in Japan. This is evidence of a long-standing Japanese characteristic, which is a very low tolerance for the risk.
It's one of the reasons they have a very strong comfort with the general account portfolio of insurance companies, and that's been true for a long time. When we entered this market in 1979 on a joint venture with Sony, at that time, they already had some of the largest insurance companies in the world. We didn't go there because they were under-insured. We went there because they were underserved. Indeed, the last 30 years have demonstrated that insight of the leaders at that time was absolutely spot on. This is why you see this huge disparity in the accumulated wealth in liquid form, and one of the reasons that the depository institutions in Japan are indeed among the largest in the world. It is for those reasons that we were not only comfortable but excited about the opportunity to buy two more insurance companies in Japan.
Let me point out, these now represent our fourth and fifth acquisitions in Japan. The first was the Chiyoda, 10 years ago. Rather interesting, in fact, that last year was the 10th anniversary. That company, which had been the largest bankruptcy in the history post-World War II of Japan when we acquired it, was the acquiring company that purchased the Star and Edison. We had successfully Prudential-ized that institution to the point where it was not only surviving, it was acquiring these two other companies. Between those two, we had bought a book of business from Aoba that had gone bankrupt, and a book of business from Yamato. We had bought both of those companies. We have a history there, which is well recognized and respected by the regulators, I might add, and gives us the confidence to take these companies on.
What have these acquisitions given us? A number of things, but let me highlight a few. The first is in terms of the number of policies in force. Roughly a 50% increase from approximately six and a half million to 10 million. That has a couple of benefits. One, you'll recall my point about the benefits of economies of scale. Taking on this kind of an increase with the infrastructure we have is a tremendous opportunity for expense savings. Secondly, I'll touch on later the facts about the opportunities from a marketing perspective when you grow your in-force. The second is the number of captive agents. I do want to highlight to you, this is likely to be the peak number for a number of years. Again, we don't focus on the top-line numbers. We really focus on the quality, the productivity, and the resulting profitability.
I cannot predict how many of the Star and Edison agents will survive the current changes that we are making. I will point out to you that when we acquired Chiyoda, which was a far more stressed company, it was bankrupt. These are not. These companies went through bankruptcy about a decade ago. When we acquired Chiyoda, they had about 7,000 agents, almost the exact number of these two companies combined. Over the next couple of years, it shrank by about a third, it steadily grew back up to the point where it's about 6,500 today, 10 years later. We've then added another 7,000 from Star and Edison to that. What we will do is what we did then. We provide a high level of training, but in turn, a high level of expectation.
We remove a lot of the salaried or subsidized portions of the compensation to make it highly variabilized, and those agents who are productive will thrive and do well. Those who are not will likely seek employment elsewhere. Number of bank relationships. We had started in the banking distribution business a couple of years before the acquisition. Both Star and Edison had been in that business for many years prior to our entry. Consequently, they had many more relationships, close to 100. There's a certain amount of overlap with what we had. You'll notice here that we are still reporting growth from what we had, but not the growth that would be reflected by having taken on all of the relationships they have. Here again, it's our strategy. We're not necessarily wanting to target having maximum number of relationships.
We're looking instead to use this as an opportunity to identify those relationships that we think are really consistent with our expectations and develop them. You will continue to see growth in this, but it will be on a very controlled basis before we move towards, and maybe not reach, that number of 90 or 100. The integration is going extremely well. In fact, our colleagues in Japan have from the very beginning been exceptional in this. They have a track record, as I mentioned earlier. They also had the benefit that we had just spent two years, which we have reported in earlier years, putting together a consolidated data center for the then existing two companies we had, namely POJ and Gibraltar.
Having just spent two years doing that and having built the infrastructure to do it, we had not only the plans, we had the team, we had the experience to go about a comparable exercise, at least in that one functional area. Tremendous experience, tremendous momentum. They actually closed on the deal two months early and completed the merger right on time, which was January 1st of this year. You'll see below a recap of our original estimation that was put into the valuation, which by the way, is based 95% on the value of the in-force book, only 5% on new business. What we did here is we estimated that we would spend $500 million of one-time expenses in order to achieve a going run rate improvement of $250 million.
Just two days ago, we announced that we have, as a result of the experience here, because the integration is quite far along, even though the merger just occurred, we've actually revised the estimated one-time expense from $500 million down to $450 million with, though we're confident now we can achieve this spending $50 million less than we originally estimated. In every respect, we're very pleased with the progress made by this group. As a result of the acquisition, in addition to the organic growth, we have been able to move our market position from sixth, which we have been gradually building over the years, to, as you can see, a very strong number 3 in terms of new business. To put that number in perspective, because that level of sales is quite exceptional, let me use the U.S. as a point of comparison just to give another perspective.
The sales of our companies in Japan are equal to the U.S. sales of the top four companies in the United States combined. This is a lot of life insurance. Solvency margin. I'm sure most of you are aware, starting about three years ago, the FSA announced that they would be revising their definition of the solvency margin rules. My personal opinion is this was done for a couple of reasons. One was that just in general, post the financial crisis, regulators around the world were strengthening their requirements for solvency margins. I think it also had a little bit to do, frankly, with the history of some of the bankruptcies that I referenced earlier.
Some of those companies were reporting technically solvent and acceptable solvency margins, yet in point of fact, were ultimately bankrupt and had to reach out, but at a very late stage, for acquisitions to be acquired. I think that the regulators, in addition to having the broader macro interest, had a quite a specific interest to try and prompt some of the companies who were facing solvency issues to deal with those issues sooner than they historically had been. The new definition ultimately led to lower numbers across the board, estimations of about half from what they had been under the prior. Yet the 200 definition as a minimum standard did not change. I believe one of the objectives of this is to push some of the weaker companies a little closer to the edge and get them to confront the reality of their situation.
Our numbers are quite strong, I think you'll find, in comparison to almost anyone. Both of these companies are above 700. In fact, we've done various stress tests. They remain quite strong and under a variety of scenarios, indeed remain over 600. I draw your attention to that for a couple of reasons. One is, it's our opinion, albeit an early one, that the sort of the new definition of what an AA company ought to be, a strong company ought to be, is in the 600-700 range. We'll wait to see if rating agencies choose to opine on this. We'll wait to see what the leading competitor organizations do. That's our general impression, that's the range that I think most companies of top-tier caliber will be targeting.
One of the reasons we're able to sustain this level is because of the conservativism in the portfolio that I described. We've given these details before, but let me, as a reminder, just give a quick profile. On our general account portfolio there, about half of it is in JGBs. The equity portion is extremely small, 1% or so. The risk assets are just a couple of percent more than that. It's a very conservative portfolio, which is why even under this new solvency margin rules, which applies a much higher capital requirement for higher risk assets, our solvency margin remains very strong. I'd now like to take a look inside the new business to show you a little bit more about the shift in the needs that we're addressing and therefore in the products that we are selling.
If you look over the last four or five years, you see the very steady growth that I alluded to earlier. Here we see the breakdown of it by product category. I would start by drawing your attention to the fact that the largest remains the most basic, and that is death protection. That is the core product, essentially whole life insurance. Either yen-denominated or has become increasingly popular, dollar-denominated, so that the customer is willing to take on the currency risk in exchange for accessing the higher yields that they can get in a dollar-denominated market versus the yen market. You look at the accident in health. For us, that's primarily as riders going on to the death protection, but it's also a cancer whole life product that gets sold into the corporate market, small business owners. The yellow is the retirement.
Now for us, retirement is simply another form of life insurance. It's not an investment product. What we sell here, the biggest selling product within this category, is a product we refer to as dollar-denominated retirement income. That name is unusually accurate in revealing. It's denominated in dollars for the reason I described. By the way, it's paid in that, so it's dollar for dollar. There's absolutely no currency risk on our part on that. The retirement income refers to the fact that it has a very high cash accumulation associated with it. You would not sell this product in the U.S. because it would be treated as a modified endowment contract and taxed accordingly. They don't have a comparable tax treatment in Japan, so it's attractive from a tax perspective.
That's one of the things that, as you can see, has supplemented, not substituted, but supplemented the basic growth that you see on the death protection. Finally, you see the annuities. Let me just remind you, for us, this is essentially fixed annuity. 88% of our global, outside the U.S., international, is in fixed annuities. In Japan, which constitutes the bulk of this, it's actually 97%. Taking a look now at the most recent quarter on the far right and comparing it to the comparable quarter of the prior year, you see even stronger growth continuing here. I do want to temper this a little because there are some advanced sales or in more common parlance, some fire sale activity taking place here. It's coming from two areas. The first is really driven by the regulator, and that is that the cancer products, which I briefly referenced earlier.
Earlier in the quarter, the government announced that they would be changing the tax treatment. They left it somewhat in suspense as to what it would be, but ultimately in April, announced the details. That prompted some, I think, advanced purchases that would not otherwise have taken place at that time. The specific treatment was that prior to this, small business owners could write off 100% of that premium as a business expense. These are products that are typically used to fund retirement programs. Subsequent to that, under the new rules, they can write off half of it at point of purchase. The other half can be expensed over the duration of the policy. I'm told by our folks locally that it's likely to remain still an attractive product, but it won't have some of the level of purchasing that took place during the first quarter.
The second element that I believe fed into this, was that we, like a lot of companies, announced a series of reductions in crediting rates that would take place over the coming months as a result of the steady drop, both in the dollar market as well as in the yen. Although, as we all know, the yen market has been living in a low interest rate environment for 20 years, so it's less of a phenomenon there than it is in the dollar product. We did announce a series of reductions ranging from, I think, 50 to as much as 100 basis points on a variety of products that was announced in advance, so you've got a certain fire sale phenomenon going here.
Nonetheless, as you can see, even if one were to strip out a fair bit of growth based on that, you get a continuation of the growth that, as you see, has been going on now for the last 5 years. This slide simply attempts to recap the basic point I was making earlier, which is that we're, through these different products, now addressing a broader array of needs, not just the fundamental death protection, but also the morbidity risks that can occur at any time during the life cycle. The retirement risk, which starts to take place, of course, typically later during a working career. Here we take a look at a very interesting phenomenon for which POJ, our best company, is the clearest illustration. There's an old adage in the insurance business that the best prospect is a current customer.
People who have already purchased are more likely to purchase again. What you see here is evidence of that adage. In POJ, you see that year after year, they sell more and more business to in-force customers. The second thing this slide illustrates is this broader retirement phenomenon that I mentioned. You'll notice at the blue on the bottom, that's the basic death protection. This is the classic selling of a second or third policy to someone whose either needs have grown as they have matured, or their ability to address those needs has improved as their income. That's the classic phenomenon. That's done in any highly effective insurance organization. What's interesting now is you see that the even faster growth rate is taking place in retirement. This is our picture perfect scenario.
This is what we train for. First sale should be to take care of the immediate risk on debt protection. After that is done, based on the resources and capacity available, then address the second need, which is the retirement need. This picture, as you can see, illustrates that that's taking place very clearly. This is what gives us the confidence that this phenomenon can continue for some time, because, of course, the aging in Japan is a very powerful wave, which we'll focus on momentarily. Another benefit of that retirement aspect is in selling to an older person, whether it is for a renewal, so to speak, of addressing the debt protection or for the retirement, is illustrated here, which shows, not surprisingly, the older the individual, the higher the average premium.
This increase in premiums is much greater than you would guess simply by having a greater mortality risk at an older age. This is driven by the fact that these individuals are buying products that have much greater retirement, i.e., savings associated with it, and therefore a higher premium associated with it. This demonstrates the need. This is a level of detail regarding the very well-known phenomenon that Japan is the most aged nation in the world. What you see in the final two bars here is the opportunity that we see for the next 20 years. That is that the top three cohorts here, representing the ages 45 and older, every one of those cohorts either stays the same or in most cases gets quite a bit bigger over the next 20 years. That's the opportunity.
Quite in contrast to the more typical thinking, which is that the sales will take place to the younger groups, starting families, and in this case, obviously, the percentage of the population addressing those is steadily going down. What we see here is a little bit more detail about how the premiums shift by product to address this, what you see is the phenomenon we touched on earlier. For the reasons I've mentioned, the highest average premium is going to be on those high cash value kind of products that are addressing retirement. The next is the annuity, the death protection, finally, the accident and health.
Here, on the next row of bar, what it illustrates is that in spite of this shift, by far the biggest block of business in the new sales area is still coming from classic whole life death protection, whether it's term insurance or cash value. You have retirement, number 2, the accident health, as mentioned earlier, the annuities represent a relatively small portion for us. We've talked about different customer segments, we've talked about different needs. Here, let me address the final shift in the strategy, which is different distribution. Let me remind you, if you look to the far left, you'll see that the vast majority of the sales at that time, just five or so years ago, was our Life Planner organization. The red at that time was the Gibraltar organization, you see a tiny sliver associated with the bank channel.
What you see emerge graphically here over this five-year period is what is now a much more evenly distributed weighting of product production coming from these different channels. The POJ, the Life Planner generally, has grown slowly but steadily, which is the nature of that business. You see the Life Consultant growing steadily with a step jump in 2011, resulting from the acquisition of Star and Edison. Most dramatically, you see growth in the next two. The bank channel, which for us went from an almost invisible sliver on the left to a very meaningful portion. To give numbers associated with that started in sort of the $50 million range, last year was over $500 million.
You see the independent agent, which grew from almost nothing a few years ago to a meaningful number, partly as a result of the organic growth we were starting, supplemented by what we acquired from Star and Edison. Let me spend just one slide as a reminder on the Life Planner model, and in particular on POJ in Japan. Because this is a company that although even today only has about 3,300 salespeople, produces over $1 billion of earnings year after year. It's characterized by a high degree of selectivity, three or four out of every 100 or so, steady investment in the training and development of these agents. They focus very much, as we saw on the slide, with selling death protection and then supplementing that with retirement-oriented as they and their clients age.
Their productivity, persistency, any metric you would care to apply is quite exceptional. For those of you that look at that degree of granularity, let me give you a couple of numbers. Their productivity averages six to seven policies per month. That's for every agent, not just so-called active agents, but every agent. Their average premium has been moving up. A handful of years ago, that average premium per policy was in the range of, say, $2,500. In the last quarter, that average premium is about $4,000. For those of you that want to do the arithmetic, and for those of you that know the industry well, I think any agency force that can produce six to seven policies, average $4,000 per policy, that's a highly profitable organization.
I would give you one other little factoid to back up the quality item, because I realize that can seem a self-serving appraisal, although I think the quantitative metrics support it. I'll cite one other in regards to that. Keep in mind, we have a little over 3,000 salespeople. The bigger companies in Japan have 40,000 to 50,000. We have the most MDRT, Million Dollar Round Table qualifiers in Japan, in spite of that 10 to 1 sales size difference. Last year was the 15th year in a row for which that is true. From day one, the focus has been on the quality of the individual, which allows us, therefore, to sell a product with a premium pricing and to produce the kinds of stability of earnings that I've referenced. The Japan Life organization is very different given the history I've described to you.
We have Prudentialized it, so it's very high quality. For the segment that it serves, it has one truly distinguishing characteristic which is worth understanding, and that is this relationship with the Teachers Association, which has been in place now, this year celebrating 60 years. If you like, if you jump to the bottom line, you'll see that this relationship produces a lot of new business year after year. This is an exclusive relationship with the teachers. Take you through a few numbers here about the Teachers Association. As you can see, there's 950,000, a little under a million of these individuals. We see 3 categories of opportunity. The first on the far left, 20,000 to 30,000 new teachers join every year. That's your classic starting life cycle debt protection opportunity. Let me jump to the other end. 20,000 to 30,000 retire every year.
That's our classic opportunity to address retirement, albeit late in the cycle. The reason it's still a rich opportunity, these teachers get a lump sum pension, which today, given the exchange rate, is something north of $350,000. We, for the reasons I described earlier, can offer them products that are very attractive in terms of the returns, the stability, et cetera. Then, of course, in between, there's a whole career life cycle, where we have the opportunity to continue to deepen the penetration rate. Which is why if you look at the two little pie charts in the top, you'll see that the active market, we have roughly half. For the retired market, we have a quite an astounding 87%. We utilize that relationship over a period of time to deepen the penetration. This is a very high quality relationship. Bank insurance.
This, you will recall from the bar chart, has been the fastest growing contributor to the new business sales. A little bit of history on it. The banks were given regulatory authority to enter the distribution of this business. They cannot manufacture, about 10 years ago. Their initial authority limited them to annuities. They concentrated on variable annuities. We did not see how it was possible to offer the kind of products that some of our competitors, both foreign and domestic, were offering. We stayed out of that. What occurred in 2008 revealed that indeed our fears were well-founded and that industry blew up. The bank made a major shift, which was enabled by the regulators to enter traditional insurance. That was our cue. What we did is we developed our initial early relationship with the number one bank in Japan, The Bank of Tokyo-Mitsubishi.
Instead of doing the traditional, just sending a product, we sent a product and we sent a person. We took some of the lower producing agents out of our best company, POJ. People whose ability to do a presentation in a close was outstanding, but who were struggling with prospecting, which is a perennial problem no matter how long someone has been in the business and how good they are. Here, we put them in an environment where they did not need to prospect. For the bank, it was an ideal scenario, and they have a very high-end client base. Consequently, for them, it was quite worth it to bring in these, what I would call player coaches, who could not only train their people, but actually do some of the selling. For some years now, we have had what we call seconded people in that bank.
Today, we have about 175, 180. It has been in that range now for quite some time. At one point, that relationship represented somewhere between 90% and 100% of our bank insurance. It has grown very steadily, we have been able to add a number of new banks. Even today, that one relationship still represents somewhere over half of our sales in the bank channels. This has been an enormously successful relationship and one in which we have been able to leverage our distinctive strength of our POJ business in terms of the quality of our Life Planners, but utilize that in entering and succeeding in a new distribution channel. The second aspect by which we are differentiated in this business is that we focus on debt reduction, less having to do with the annuities. That is illustrated by this slide.
You see here that by far the biggest part of the sales is in the blue portion, which is debt protection. It does tend to differ somewhat from the sale that is done through an agency system in that more of it is sold with three to five-year pay and sometimes in a single year, single premium pay. By the way, let me clarify something about that. For those of you that may have listened to our first quarter earnings call. There was a question about the benefit ratio in Gibraltar having gone up, and gee, did that reveal that there was some kind of a claim problem, potentially in the newly acquired Star and Edison book. What we did not have an opportunity to explain there, I would like to clarify here. The simple answer to that is no, it does not reveal that problem.
What it reveals is an accounting treatment of single premiums. You will have noticed that in the first quarter results, $70 million of the sales were single premiums. The way that works is that actually that's only 10% of the premium. That's the rule by which one treats single premium business. There was actually associated with that, $700 million of premiums. The accounting rules require that you have to set up a reserve on a single premium sale that's virtually 100% of the premium. You have a $700 million reserve being set up against that product, which is obviously not reflective. It shows a zero margin, so to speak. That distorts the benefit ratio, which distorts the margins, which means that in this kind of an environment, with this shift in products, not really possible any longer to derive meaningful information out of a benefit ratio.
The way we price, by the way, is not attentive to margins. It's attentive to IRR. We're more interested in the lifetime ROE than in the margin, because the way the product's designed, the way the accounting works, margin is not necessarily a good revealer of what the true profitability of the product is going to be. Here, again, you see very strong growth in the first quarter of this year versus the prior year. Some of the same sort of tailwinds that I described earlier that were buoying what I think is still very strong organic growth also took place here. Not with the cancer policy, because that's not in this channel, but with the anticipated reduction in crediting rates. The only item one needs to extract from this slide is on the lower right, maybe two items. One is the average premium. That's a big number.
To put it in perspective, the average premium in POJ, you recall I mentioned a few minutes ago, is about $4,000, which is high. Gibraltar is probably a little under $2,000. This is a big number. The number of Life Planners I referenced earlier. The number of bank relationships, just a couple of things worth noting. We're in three of the top four banks. As I mentioned, we've been with the Bank of Tokyo-Mitsubishi from our early days in this channel. Last year, earlier in the year, we developed a relationship with Resona, later in the year with Mizuho. We have a number of the regional banks signed up, as a result of the relationships we've inherited from Star and Edison that I mentioned, we will be gradually vetting through those relationships to determine which ones we will reestablish under our ownership.
The independent agent channel, spend just a moment or two on this. This is a new channel, as I mentioned, for us, but one in which Star and Edison had a significant longer-term presence. Here again, I'll draw your attention to the $4,000. That's not significant for us in terms of utilizing all of it now. For us, it's significant as an opportunity to screen through them and see which ones do we really think are going to be the most productive. Here again, as with bank relationships, we're not chasing. You won't see us publishing bigger and bigger numbers there. We're more interested in the quality than the number. It does give us an opportunity to expand geographic reach, which is interesting in many ways.
One of the things, by the way, Star and Edison allows us to do is to tap into more of the school districts I referenced earlier, where there are tens of thousands of schools all over the country. We had 6,500. In other words, we didn't even have enough to put one Gibraltar agent in each school. There were multiple schools for each agent. The acquisition of the Star and Edison agents allows us to more deeply penetrate into that already very rich relationship. The key takeaways, final slide is, I hope that you can see the reasoning as to why we believe there's a very solid business model here. Quite a lengthy record of success with consistency. The three characteristics I started with, high ROE, strong AOI growth, and remarkably low volatility.
We have a strong and increasingly leading position in the Japanese market with all of the benefits that accrue therefrom. We have some meaningful competitive advantages in the distribution for the reasons I mentioned. We think that this expansion of the product portfolio, addressing broader segments, broader needs, multiple channels, that's been what's fueling our growth for the last few years, and we think there's a lot more behind. Thanks very much for being attentive, and I'm more than happy to try and respond to any questions you might have.
Questions for Ed. Okay. The gentleman over here on the left, blue shirt with his hand up, please.
Good morning.
Good morning.
Tim Stambaugh from J.P. Morgan. You talked a lot about Japan, could you comment on your other international operations, perhaps in terms of where your areas of focus for growth are and how you seek to achieve that?
Sure. Our second most meaningful is Korea. Korea, we earn about $250 million. That's a big number, but it's about 10% of what I described on Japan, so that's why we don't spend a lot of time on it. We have a very strong presence there. It is limited exclusively at this time to the Life Planner model. One of the things that we're deriving from the successes in Japan is recognizing there may be opportunities to supplement our Life Planner model with these alternative distribution forms. In terms of growth prospects, one of the things that we are doing in Korea and in other markets is reevaluating whether or not some of the opportunities, which will not be identical, but are worth re-examining, that we've been able to tap into in Japan to the existing Korea. Korea is quite a different market.
Japan tends to be slower moving, more predictable, very stable. Japan is a faster-moving marketplace, very competitive, not always rational. Consistent with what I'm sure by now is an almost annoyingly repetitive theme, given our focus not on chasing market share, but on profitability, we have not had top-line growth in Korea for probably a half dozen years now. We have very steady productivity profitability. The next country I would jump to that I think is most interesting for what I'll call the mid-range is Brazil. For all the reasons that Brazil is exciting to others, we've been in Brazil about a decade now. We have a very high-quality Life Planner organization. To scale it for you, we have a little over 500 there. You'll recall I mentioned we have 3,000, a little over 3,000 in Japan. We have about 1,700 in Korea.
We have about 700, 800 in Taiwan. We have a little over 500 in Brazil. I think I've skipped over Taiwan. I'll get back to in a second. I think the Brazil opportunities are tremendous. We can ride the secular growth wave there. As the middle class and the more affluent classes grow, that's our target opportunity for our Life Planner model. As I mentioned, we'll look at alternative distribution. Taiwan is a difficult market because of the serious negative investment spread problem that one has in Taiwan. Very difficult to get long duration assets to go with the long duration liabilities that characterize your typical life insurance product there. The other and final category I'd mention would now be in the long-term opportunity, that's China and India. We entered India on the only basis one can as a joint venture there.
We're capped at 26%. We've been there about three years. We are utilizing there not a Life Planner model because the average premium will not support a Life Planner model. We use there a combination of third-party distribution and part-time salespeople. Still relatively conservative. By that I mean, I think we're up to 4,000 or 5,000, which in India is they consider a very small organization. Of course, China. There we announced last year that we got approval for a joint venture. We got a license towards the end of the year. We're hopeful that before this year is out, we will get that started.
I think both of those markets has all of the long-term potential that's associated with their scale, but I think formidable challenges between now and, say, a decade out when one can hope to get, I think, potentially material returns out of them.
The gentleman in the same row. Mr. Levine, I believe your name.
Hi. Hi, Seth Levine from Guardian again. Just a couple of ROE questions. One, why are the ROEs in Japan so robust, especially compared to the U.S.? Is that a function of stronger retail demand, better pricing? Is it a regulatory issue? Secondly, what do you anticipate the new solvency rules, their impact on the ROE profile going forward? Thirdly, if you're getting 1,200 basis points better return in Japan versus the U.S., why not just do more in Japan?
Let me start with the third. I would argue, I think we are doing a lot more in Japan. There's a reason we put $4.5 billion there and not here into our life insurance company. Let me go back to your first fundamental question, which is how is it possible that the returns are so good there? Indeed, that has been the situation for decades now. It's a very, very different market than in the U.S. I would suggest to you that a couple of things. Number one, our U.S. operation is getting mid-teens ROAs. They're not able to get the growth, however, because if you really want to grow in this market, given how hyper-competitive it is, you'd have to be sacrificing that kind of an ROA. In Japan, it's quite a different marketplace in that regard for a couple of reasons.
First of all, if you took the fundamental performance characteristics I described with POJ, I've never done the arithmetic, but if you could get six or seven policies per agent and an average premium of 4,000, you could get an extraordinary return in the U.S. or virtually any market. A proprietary distribution system is expensive. If you can get the productivity level where you can cover that fixed cost, it is also extraordinarily profitable. The challenge is, I don't think you'll find a company anywhere in the U.S. that will have those performance numbers that I just gave you. The other is, keep in mind, the nature of the challenge that the domestic companies have. What I mean by that is, we were fortunate when we arrived. All of our growth took place post the bubble bursting in Japan.
For a number of those, the big domestics who had been there for many, many decades, they have, to this day, very significant drag on the negative investment spread of their old book, which does not prompt them to want to be too aggressive about some of the chasing they might feel in the new business. The other is just the dynamics of the business. I think you would hear them acknowledge that the traditional model, which was in place then and to a large extent is today, which is sometimes referred to as a sales lady, commonly in that country, has to do with the fact the reason they have 40,000, 50,000 is they sell through largely part-time, mostly women selling to friends and neighbors.
When I referenced earlier to you that the reason we went there in spite of the fact that even in the late 1970s, it had the highest per capita insurance coverage in the world, which would not suggest an opportunity, was that the individual who headed up our business at that time, who was the first Japanese member of the American Actuarial Society, his recognition was that that model was inherently weak in its ability to be professional. That's why he designed precisely the opposite, which largely, with some modifications, continues that. He hired only college graduates, only males, and only people who had never worked in the industry. His view was that you could not retrain. You had to imprint from day one. There was this zeal, this missionary zeal, about the business. Given that relatively small size, high productivity, profitability can be very high.
Ed, Seth had a third element to his question about the new solvency margins.
Oh, I'm sorry. Thank you. The solvency margin has not really affected us because of the nature of the portfolio that I described to you. As you watch these numbers come out, I think the companies you'll see that are most dramatically affected will be those that were much higher weighted to the high-risk assets. Some of the Japanese domestics, it wasn't exclusive to them, but because of the negative investment spread problem I described earlier, they had moved further and further out. Some of them, in contrast to our 1%-2% equities, some of them had 10%, 15%, 20% equities. Indeed, that was the phenomenon we saw that drove some of them ultimately to bankruptcy when that gamble didn't work. The solvency margin rules, a lot of them have started to modify that already, having learned some of the lessons of being overextended.
The solvency margin rules are there to really reinforce that. I think you'll see that some of those companies who have been more aggressive in their crediting rates and therefore had to be commensurately aggressive on their investment portfolios, they're making changes on both sides of that equation, which have been driven by the requirements of the new solvency margin.
We have time for only one more question for Ed, if there is another one. Yes. The gentleman over here near the aisle.
Morning. Andrew Zeltzer, BNY Mellon. Thank you very much for the detailed overview. I was wondering if you might spend a moment and just discuss your branding strategy as it relates to your international activities.
Sure. This may not be politically correct, but to a large extent, I would say we don't have one. I'm not being facetious. Couple of reasons for that. Let's take Japan. We do no advertising. Let's get back to the earlier question about profitability and so forth. Our conclusion was that that money was better spent by investing in the quality of the people and building up word-of-mouth reputation. We do virtually no advertising. If you see an ad, it's probably related to the fact that we merged a company or something like that. We have never done a lot of that. Secondly, I draw your attention to the fact that in Japan, we now have the bulk of our employees working for a company that's called Gibraltar, not Prudential.
Third, in a number of our countries, we're not able to use the name Prudential because there is that other company. In a number of these markets where they had the earlier presence, we use a name called Pramerica. For just those reasons, and I could probably go on, you will not see major consistent global branding from us, at least not in the area of the individual.
Okay.
Thank you very much for your time and attention.
Let's break for 10 minutes, please.
We're actually running a little bit behind schedule. I'd like to ask you to come back in, take your seats. I know many of you really didn't have a whole lot of time to grab your coffee, but life's life. Our next speaker will be Scott Sleyster, who is responsible for our general account. We'll wait another minute or so before I ask Scott to come up and take it away.
Okay. Good morning. Good to see many of you again. I think I got to work with quite a few of you when I was in the Prudential Retirement business. Thank you for your business and for those of you who we deal with as agents and consultants, thank you for investing the time to get to know us even a little bit better. A couple of overarching remarks as we start to talk about the portfolio. I think this is generally true for life portfolios overall, but it's very true for Prudential, which is our management of our insurance general accounts has been remarkably consistent over time. Maybe to echo Charlie a little bit, I think what we do in the portfolio is relatively bland. It's highly consistent.
When you're running portfolios this size that Fukuda-san and I do here in the U.S. and in Japan, you are driving an aircraft carrier. I think your long-term parameters that you set up are very important because quite frankly, when you're running portfolios this size, you don't have the ability to move them quickly, so you need to be very disciplined about what you do. We continue to have a very high quality portfolio. I'll point that out shortly, but that certainly hasn't changed. Probably more important in the low rate environment, the discussion today, I think is probably more about where are you in the low rate environments than the credit discussions we were having in 2008, 2009, and 2010. ALM discipline is the line of defense that you put in place before you hit a cycle like this.
We have some other unique capabilities that I'll talk about in the private asset classes, I think that have served us particularly well. Just like a credit cycle, when we're having the conversations about the credit cycle, it was the actions you took one, two, three, and five years prior to that really determine what you're doing during that credit cycle. I would say when you're facing a low yield environment like we're facing today, the actions that you took around your ALM disciplines are what drive your behavior. Maybe even jumping back to Ed's conversation, the reason we had the acquisition opportunities that we had in Japan were generally related to rather poor ALM decisions that had been made before the equity market and the rate cycle really did in Japan.
You heard a lot about disciplined underwriting from Charlie and things that we do in the U.S. business, and you heard that as well from Ed. I would just continue that theme here, that as I talk about the underwriting that we do here, it's going to be about how do we underwrite credit, particularly in the private areas. The last thing I think I'll go ahead and point to upfront is that we did a pretty good job in the last credit cycle of avoiding some of the really challenging area. I think right out of the box, you know we had some subprime exposure, but that was virtually all triple and double A, so we were at the top of those structures. We really didn't end up having a lot of discussions around junior CMBS or bank hybrid securities or preferreds.
In a like manner, we're not going to spend much time today talking about European sovereign debt because we really have avoided those risks in the portfolio. I think, again, that points back to the underwriting that we have generally done, and the conservative nature of this portfolio generally has done a good job of keeping us out of the troubled waters or the troubled areas. With that, let me jump into an Overview of the investment portfolio. I have to start with this first point, I feel very strongly about it. Actually, sometimes I get questions about it in a manner that I'll get to here shortly. Investment management is a core competency at Prudential. I think many of you know John Strangfeld, our chairman. He started in a PruCap field office.
That culture of the importance of the investment business and the disciplined credit underwriting that occurs inside of an insurance company goes all the way to the highest office. I think many of you know that Charlie ran the investment management business before he assumed responsibility for the U.S. businesses. The knowledge of the investment world at the top of the company is very strong, and it is a core competency. When Charlie talked, and I think it's true with Ed as well, but when Charlie talked about the asset management business, he talked about the core competency differentiator there being about talent. I think that's very true. By the way, when you listen to Ed talk about they only hire three or four out of 100 agents interviewed in Japan, I think he would say that's all about talent, too.
As it relates to the investment portfolio and investment management, generally, talent is really critical. I think a unique element of Prudential is the success of our third-party asset management that we have. The question I alluded to before that I get asked sometimes is, well, gee, isn't that a little bit of a challenge that you have an investment management department that manages third-party funds and also manages the general account? I can tell you with great conviction that I would not trade the seat that I sit in as the CIO of Prudential's general account compared to any of my other U.S. competitors. The fact that our investment management talent is out competing for third-party business all the time keeps them strong. It keeps them sharp. It keeps them aware of what's on investors' minds.
All of that knowledge comes back and informs the decisions that we're making on the margin on where we want to tactically deploy our capital. I think I have been extraordinarily well-served by the Prudential investment management model as it relates to my role in managing the general account. The portfolio continues to be very well diversified. At the end of the day, when you're managing credit, diversification really is your best defense. I think good underwriting is your second-best defense. In the early 2000 cycle, for example, we learned there was some fraud in the books and records that we were underwriting against. Your diversification of that is being not too concentrated in any one name. We're well diversified by asset type across industry sectors.
When we talk about real estate, you'll see it's just as true across regions of the country and property type. We underwrite the vast majority of our credit risk. In the case of mortgages and in the case of the Prudential Capital, the private corporate markets, that's directly true. We're meeting with those management teams very thoroughly before a loan or a mortgage is booked. Then, quite frankly, those teams are out there meeting typically more than quarterly. They're seeing the annual financial plans. They've got covenants against a number of different metrics in those plans. They have the ability to actively manage those credits. In a portfolio that's largely public, or I would even throw in 144A there, you may only have one or two covenants. By the time you get invoiced in those kinds of situations, it's pretty late in the game.
On the public side, I would say, given the size and the very positive flows that we have seen in our public fixed income area, we really have a very large credit staff, and I would say our credit staff there is really second to none. As a matter of fact, I'd say the market is actually coming to the kinds of management that insurance companies have done in the general account. Jim Sullivan's teams in the public fixed income area of Prudential is seeing lots of flow from pension plans and other organizations as it relates to long duration strategies and really good ALM disciplines, which is what we've been living with in the general account for a long time. I am going to make comments about both the U.S. and the international portfolios today because that's part of the FSP, which we're speaking to.
Just to point out, if you didn't notice it, with the acquisition of Star and Edison, actually our Japan/international general accounts or insurance portfolios are now slightly larger than domestic FSP. When you include the closed block, the domestic business is still a little bit larger, but you saw the trends and where the growth has been. I think this dual importance of both domestic and international on the portfolios is, in fact, very important. Okay. This is a snapshot of the overall portfolio. The insurance portfolios, domestic and international, about $275 billion. I'll only make a couple of points really on this slide. First of all, if you look in other long term, which is where you typically would see things like alternatives and real estate equity, and then you see other equities, it's 3% for the total portfolio.
I'll point out later that that's consistent across the domestic and international portfolio. This is a bond portfolio. It's got a lot of governments in the case of the international, and it's got a lot of credit in the case of the U.S., but this is a bond portfolio, and it's a very high-quality bond portfolio. You do see the big red quadrant of the chart up there. 23% of the total FSP is JGBs because that's 52%, roughly, of the Japan portfolio, and that's half the business. Okay. This chart breaks the FSP into non-Japan and Japan, if you will. I think it's easier to see the orange bars, so let me start with them, but a couple of observations. First of all, there is the 52% on the far left there, the orange bar, which relates to the government and agencies, mostly JGBs, in Japan.
That is a very conservative portfolio. If you look further over, so call it the middle of the chart, you see equities and other long term, side by side. It's two and one domestic and international on equities, and one and two on other long term. The fact that we only have about 3% in those kinds of risk assets, and by the way, that includes some investments in stock and other things that aren't even real equities at the 3% level. It would say that the strategy that we have around risk-taking on risk assets in the portfolio, is very consistent globally. Maybe a follow-up question is, why do you have any of those assets? We do have to have some of those assets for tax planning.
We do have some cash flows that run beyond 30 years that are very hard to hedge, and we like to invest in some long-term total return type assets to hedge those. Shifting to the blue bars for the domestic portfolio. Looking at the governments, while you see 11% there, very little of that is Treasuries, 1%-2%. The rest of that is really agency securities where we might have some of our mortgage exposure. The other two things that I think jump off the page are that private placements, that's directly underwritten credit from our Prudential Capital organization, is about 16% of the U.S. portfolio, and commercial mortgages are about 14%. If you looked at this chart five years or more, you would have seen even less exposure in the orange bars to privates in commercial mortgages.
The reason that is growing is that we are having more dollar-denominated assets in those portfolios. When we do, we can actually put in some of our U.S. underwritten assets from the private mortgage organization to help hedge them. I think that'll actually really benefit the business over there. As Ed pointed out, you don't really need to earn a positive spread margin in Japan on your portfolio because of the regulatory environment and tax pricing challenges for the domestic Japanese carriers. You've got enough administrative and actuarial margin to earn a pretty good return without a spread margin. As this starts to occur with some U.S. dollar assets, we'll actually be putting some spread margin into the Japan business. In case you don't know that blue bar over on the right, TASL. Charlie, maybe that's one we should think about renaming along with ITICM.
That's trading account assets supporting insurance liabilities. Those are really separate accounts where the performance of those assets really is directly attributed to the customer. By the way, if you chopped up that chart and spread it across, it would look remarkably similar to the rest of the portfolio, but we wanted to follow the GAAP disclosure on that. All right. Let's jump into the portfolio. As I pointed out, this is our fixed maturity portfolio, publics and privates. This excludes mortgages. Look at the portfolio. This doesn't even include the other assets. It's 95% either government securities or investment-grade NAIC 1 or 2 bonds. By the way, that's been remarkably consistent. We've given you all the way back to 2005 here. You can see that maroon bar down there at the bottom is only 5% today. It was 6% in 2005.
The reason you saw that it increased in the 2008-2010 period was, of course, we had credit migration as we went through the credit cycle. This has been a remarkably consistent and high-quality portfolio, and there's really nothing going on that would change that. As a matter of fact, if you had a fear in a low-rate environment that we were reaching for yield and moving more and more into high yield or what have you'd start to see evidence here by us showing you the first quarter. In fact, you see we were down a little from $9.3 billion-$9 billion, even though the percent is the same. This is a snapshot of corporate credit overall. This is non-government, non-mortgage. We like to give you a snapshot of how the portfolios looks against the Barclays aggregate.
This has been quite consistent over time, I'll point out a couple of long-term patterns and maybe one very modest change. First of all, for Prudential and for most U.S. life insurance companies, you'll see that we're generally underweight finance. That's deliberate. The reason for that is that we are a financial services company. We have a feeling that when we're under stress, the rest of the financial services market might be under stress. We tend not to want to be overweight or fully weighted the index there. In general, I would say looking at the portfolio, you would see that we're light finance, we're light non-corporate. Non-corporate would be where you had, we have our BABs in there, and in Japan, we have some of the agency securities.
If you had some sovereigns that weren't part of your domestic company would be in there, because we're very light sovereigns, we're underweight there. Most of that bar really either is BABs that we picked up when they were introduced in this cycle, or they're kind of agency securities guaranteed in Japan. We're long utilities. We're light communications. There's a lot of high yields, because of the cash flows in telecom, we've found that those credits have been more prone to weakening over time, we've been a little bit lighter there. We're strong non-cyclicals. I think it's a pretty good story. It's what you would expect. The only thing that's really changed on this chart in the last two or three years is that consumer cyclicals is now a very slight overweight. We were very light cyclicals going into the credit cycle.
We maintain that through most of the really weak part of the economy. As we've seen the economy begin to recover, we've gone basically to a market weight. All right. I'm going to jump into mortgages. We have a fair amount of mortgages in the portfolio, quite frankly, I'm pretty content in doing what the market will give us now, the market is giving us more because of the ongoing challenges in the CMBS and structured credit market. I want to let you know what we're doing there and give you quite a few snapshots, I think, to give you comfort into why we've reached that conclusion. First of all, you have the big metrics down there at the bottom. Our weighted average debt service coverage is about 1.9 times. Loan-to-value is about 58%. Agricultural and commercial loans that are fixed rate.
In other words, what do we have exposure to floating rate? It's 98% fixed. You can see at this point, we only have about 40 basis points of the portfolio that's overdue. One thing that I've said to you over the years, if there's anybody new in the room, I want to remind you that our pricing grid, our discipline for underwriting mortgages favors amortizing mortgages. We like loans that amortize so that the credit quality is improving over time in case we hit a cycle, therefore, we favor those loans in our portfolio. We have proportionately less interest-only loans in our portfolio. By the way, that also has a tendency to reduce your debt service coverage level because you're amortizing debt. We're more than happy to accept that. If you're looking at other portfolios, sometimes you need to be careful.
If I did interest-only debts, my coverage might look a lot better. We think we do it the right way. This portfolio has held up very well. I'm going to get to a little bit of the credit snapshots next, but let me talk again about diversification here. The bar charts are comparing the Prudential portfolio to the ACLI. This is largely our peers. One big thing I think jumps off of that chart. We're about a third less than our peers in office. We've always felt like being disciplined and in major markets and not being too aggressive in office has kept us out of trouble, and that's a pretty significant underweight. We had it going into the cycle, and we've largely maintained it. If we're that underweight office, where are we long? We're long industrial.
You see that over on the far left side. We're also long senior living. In that senior living and other, that's 10%. About 60% of that category is senior living. We're slightly heavier on multi-family. I think I should comment on retail because that's usually one that has people concerned. We're about an industry weight on retail, but the construction of our portfolio is fairly barbelled. We really like to invest in dominant regional malls, ones with multi-tenant, major tenant anchors. We kind of jump all the way to the other end of the continuum. When we're doing a strip mall, we want to see grocery anchors. Those tend to be very solid. What are we missing in the middle? We've tended to avoid big box or lifestyle malls. Generally, we're underweight those sectors.
I think that really, again, has served us very well through this cycle, and you'll see it in the metrics that we're getting to now. This is a grid just for the FSP. If I had the closed block in here, quite frankly, it wouldn't look much different, but the numbers would be closer to $30 billion in the total. For the $22 billion, this grid really takes debt service coverage, and it gets weaker as you go left to right, starting with two times, and then it takes the loan-to-value ratio starting at zero and then ending up greater than 100. We really spend our time worrying about what's in the blue box there. These are the loans that through deterioration of some type or another, or competition or whatever's happened where that property is, we're getting our coverages just barely to break even.
If we have to sell the property and we're looking to loan the value, we're close to underwater. That number is now a little over $550 million. If I showed you this slide a year ago, it would've been about $1.1 billion. It's down over 50% in a year. This portfolio has held up extraordinarily well through this cycle. I think our aggregate GAAP impairments over the six or seven-year cycle are going to be $150 million-$200 million, or eight or nine basis points. That is well inside of our pricing assumptions. I think the life industry has done well, quite frankly, very well compared to banks and other players generally. Within that sector, I think that Prudential has done very well on its own.
I should mention CMBS, although it's a pretty simple conversation for us, and those who've watched us through the cycle realize that even going into this cycle, we had a discipline. I think this is a real benefit from the way we run our investment management organization in Prudential. Our discipline was that if something is going to trade like a security, it's really going to be followed by the securities market, not a mortgage or not a real estate equity in CMBS, then we're going to let our public fixed income area trade in the triple A space. As soon as you start to move into double A, much less single A or junior securities in CMBS, you're no longer really in the securities market. You're in the real estate market.
Charlie and Bernard before him, and David now, have continued to say that if the public guys want to go down in junior securities in the CMBS market, they have to pull in the mortgage or the real estate people. They really just tend not to do that, and here's the result. We have a portfolio that's 99% A quality or better. The As probably got there through migration, not original purchase, and 91% of the portfolio is triple A. I think you also know we tended to stay in super senior or front-pay securities. Not only were we in the best part of the capital structure overall by rating our subordination, but we were actually in the best sector, the front pay sector as well. All right. Let's jump into high yield.
At the end of the day, this is going to tend to be where you have your problems. If we hit a cycle, what does that portfolio look like? Just a reminder, it's pretty small overall. This is 5% of the credit portfolio. Within that, it's substantially double B, NAIC 3. That's clearly the dominant weighting. It degrades and falls off very quickly, and you can see we only have $221 million in the category 6 at this point. I think maybe the most important part of this chart is the coloration, if you will. That lighter blue here are private placement securities that are in our high yield portfolio. What that says is for these securities, we didn't buy a junk bond, and maybe we're hoping to trade out of it if markets get weak and we're counting on liquidity.
These are credits that we've very carefully underwritten. I like to say that there is absolutely no such thing as a covenant light private placement at Prudential. When we're getting into these kinds of securities, these are really rigorously underwritten. I'm not saying we don't have risk here, and that we won't see a degradation in a credit cycle. What I'm telling you is we know these companies really well. We've got all kinds of covenants in place. They're not going to be able to dividend out cash or take on more debt. Quite frankly, if they're just a weakening credit, we have the ability to bump the coupon. If they're a troubled credit, and it's a private placement, we're going to be the lead lender.
We're going to have the ability to turn the coupon off and tick for a while and work through the cycle with them. Our recoveries on private placement workouts are very strong and dramatically different to the recoveries that we get on public high yields. How am I doing on time? Okay. Yep. Let me make a couple of comments here. Then I'll jump into this slide. If you look by almost any measure where we are, if you think of a credit cycle as a sine wave, and we just don't know how tight or wide the peaks and troughs are going to be, I think we're entering right in the beginning part of the bottom part of that sine wave. Credit's kind of boring right now. I think everyone would acknowledge that corporate balance sheets look good.
I think people have still been reluctant to buy back stock. I think people are still nervous about the election and regulation. The tax code. They've been reluctant really to put the money to work. We've been in recovery, not a strong recovery, but we've been in recovery for a while. Balance sheets are really good. You looked at our portfolio. It's extremely healthy. I think the challenge that's probably on your mind, and the one I get questioned most about now is, well, how are you holding up in a low rate environment? I'm going to go back to where I started on that. Disciplined ALM needs to be in place before you hit a low rate cycle or environment, or you're going to be in trouble.
We've had very good ALM discipline at Prudential for a very long period of time. I've been in this job about 5 years, but I inherited a terrific ALM discipline when I came into this job. There are other things that you can do as well. There are clearly product manufacturing issues associated with a low rate environment. Do you have termination rights? What are your floor coupon rates, and what are your rights in a declining environment? I think we've been very disciplined, and you heard Charlie talk about the disciplines of the other areas of underwriting, mortality, morbidity as it related to group insurance, and even what Bob was saying in how we underwrite the annuity business. That's been just as true on the interest rate side. Now, I don't want to tell you we don't suffer in a low rate environment because we do.
We do have reserve assumptions on some products. More than 7, 8 years ago, some product minimums had 3% guarantees in them. More recently, after the 2001, 2002, 2003 period, most of the product minimum floors have gone to 0 or 1%. We're in better shape there. What I would say here is you basically made the bed that you're going to lie in some time ago when you go into the cycle. I think we've made a good bed. A couple of other comments I'll make. By legal entity, and actually we test it by segment, we look for cash flow matching by quarter by legal entity for the first 3 years of our portfolios. That's a very nice liquidity protection. After that, we have duration corridors and KRD, key rate duration metrics. We are within all of our corridors across every one of our segments.
Actually, if you pick the midpoint of our corridors, I would say we're just slightly under the duration midpoint. If I were sitting in your seats and saying, "All right, we've been in a low rate environment for a while, what kind of behavior would I be worried about?" I think the first behavior I'd be looking at is, are they buying a bunch of high yield? Are they moving out of investment grade to below investment grade? Are they migrating from double Bs into triple Cs for yield? I showed you those numbers. We're doing nothing like that. Our actual portfolio is healing. I think the second question I would say is, well, what are they doing with duration? Are they reaching further and further out? Are they stretching those corridors? Again, we're right in our corridors and on the midpoint.
Why have we been able to do that? One, I think we're a disciplined firm, we haven't moved away from those disciplines. I have had a very fortunate wind at my back in the midst of plenty of headwinds that we're all facing, and this is really it. We have a very strong private placement capability, this I'm using it broadly. Private corporate and private mortgage capability within Prudential. I started my career in the private placement organization since the first half a dozen years or so there. That was back in the late 1980s. A few competitors at that point had regional offices. We actually had, I think, 13 regional offices back at that period of time. When the market went through a big contraction, there was too much high yield.
The Milken blow up in the high yield market, if you will, Executive Life, all of our risk appetites came in. Virtually every one of our competitors shut down their field offices. We reduced our PruCap field offices, I think, from 13 to six, we're back up to seven or eight. Seven? Yeah. We have the three in Europe, I guess. While we paired back by half, we still maintained our regional presence, and really strongly with six field offices in the U.S., I think then two in Europe. We've built back from there. That's more true in the mortgage sector. PMCC, I think, has 13 U.S. offices. They have one in London, and they have one in Tokyo. Let me throw out some numbers now to stand behind how we've benefited from that.
In the mortgage business, in PMCC, pre-crisis, you would have typically seen us doing $3 billion-$5 billion a year. I'll call it four, $3.75 billion or $4 billion in mortgages a year. Last year we did about six, I hope we do six or six and a half this year. That's another two and a half billion in mortgages. Why are we able to do that? The CMBS market, the structured credit market generally, is still in disarray. We've got the relationships, we're there to back up that market. While I think the CMBS market did a pretty good job of moving out the wall of maturities, if you will, we're starting to hit it. A company like Prudential is extraordinarily well-positioned to pick that up.
In a like manner, when you go over to the Prudential Capital organization, something similar, but I think for different reasons, has happened. People were very disappointed in their bank lenders during the crisis. They often, it was probably the weaker credits or smaller credits that weren't generating other fees for those organizations, found themselves getting cut back or not extended. That was, I'd say, modest in the U.S., but very strong in Europe. It's continuing in Europe as the banks are shrinking their balance sheets, and they're buying some sovereign debt because of the risk weights and what they're trying to do with LTRO. More and more credits are being cut back from their bank lenders, and they have to find a place to go. The bond market, particularly in Europe, hasn't grown quickly enough for that. Where do they go?
Where do lenders go when they typically, in a cycle, move from their banks to the public market? They stop in the private placement market, and we're there. We're there with field offices in Europe, and we're there with field offices here in the U.S. On the PruCap side, in a like manner, we might have been doing about $5 billion a year pre-crisis. We did close to seven and a half last year. These are really high-quality loans, no covenant life. By the way, when you look at the stats across private placement weightings for our industry here in the U.S., a lot of times you'll see privates being about 30% of the average life company bond portfolio. In the case of Prudential, 28% of that is direct or agented originations, and only 2% is 144As.
The average for our industry is about 15 and 15. I think the quality of this portfolio, the illiquidity premium that we pick up in the covenant, has really given us a very nice partial offset to all the headwinds that we face. Okay. Really, I think I'm only able to cover a couple slides on what's going on with the actual yield. This chart just shows you that, look, we are not immune. No one is immune to a declining rate in a narrow spread environment. You can see on the top, that's the total general account. That includes Japan and the U.S. You see commercial mortgage rates have held up pretty well, going back to 1Q09, 564. They're 531. In the, call it the corporate markets, you've seen the decline from 462 to 374.
In the U.S., look at how well that mortgage rate has held up in there. When I'm able to do another two or $2.5 billion of high-quality mortgages and maintain rates that were out there in 2009, it's a very nice opportunity. Indeed. Of course, look, corporate spreads are in, rates are in. We're feeling the decline. Where we've had the ability to take rate action, we have. I think about 38% of our assets in the U.S. general account have floors. We've only touched the floor on about half of that. We have a fair amount of crediting rate work that we can continue to do. We benefit from the private placements, but at the end of the day, I think everyone should expect spread margins to come in throughout this cycle. I just think we happen to be a little bit better.
Our ALM positioning helped us to begin with, I think this private capability has given us a unique advantage compared to most of our peers. I think that's really it. In summary, I think it's kind of a bland, but it's a consistent story. We've got good ALM disciplines. We've got great private underwriting skills that give us an advantage. We're extremely well diversified by name, by region, by property type across the corporate and mortgage sectors. I wouldn't trade my hand. I really wouldn't trade my hand as a CIO of a life company for any of my peers. I do, actually, a fair number of them are former Pru. I know all of them reasonably well, and I feel very good about how I benefit from the structure and the organization and the decisions that we've made over the years at Prudential.
With that, I'll open it up for questions.
Well, actually, we're so far behind schedule, I'm going to suggest a slight modification in program. Let's hold your questions for Scott, and when Rob finishes, fire away at all three of them. How's that?
Good morning. Good morning. I'm going to try and get us back on time.
We can't hear you.
Okay. What I'm going to do is get Mike to stand at the podium. I'll stand at the podium. Can you hear me now?
Yep.
Okay, good. What I said was I'm going to try and get us back on time. When you think about a financial institution, these are the first three things that should come to mind. We're going backwards here. Okay. Not that. These are the first three things that should come to mind. What is the financial strength of the institution, and how does it perceive itself, and how does it measure that financial strength? Is that financial strength reflected in its ratings? People can think what they think. The rating agencies have their view, and for the most part, we've got to depend on them. The last thing is, are they delivering an appropriate ROE? I'll talk about that in a minute or two. A financial institution cannot deliver ROEs beneath its cost of capital. It doesn't work in the long run.
When we think of financial strength, as long as this works, okay, we measure it in these five buckets here. The first one is liquidity. The mischief in a financial institution always starts with illiquidity in a crisis, and it normally starts at the holding company. You can have plenty of capital. There have been plenty of financial institutions that enter a crisis or float along with sufficient capital, but illiquidity. While your ratios, your debt to capital, and your RBC can drop to levels that are not comfortable, you can still operate. You miss one commercial paper payment, you can't operate. Liquidity at every level, both at the regulated level and at the holding company level, is critical. Leverage is not a four-letter word. Bad leverage is. What's bad leverage? Repo'ing treasuries to buy subprime is bad leverage.
Good leverage is borrowing in the capital markets to finance DAC that's connected to a business that has growth. DAC that is really supported by either surrender charges in the future or asset management fees in the future that you're taking out of an account balance. The liability is essentially defeased by future revenue, but it's financed currently with leverage. That's good leverage. It supports your business. A strong rating financial institution is inviolate. We sell to both institutional and to retail customers. They have to be comfortable that we're going to be there in 20 years or 30 years or 50 years, in some cases, to pay off these long-term liabilities. Financial flexibility is, I think it's under-managed a lot. Was certainly under-managed up to the crisis.
When I say under-managed, I mean it was in the system, but it wasn't as intentional as it is with us today. The best way to think about this is on the next slide or view this is on the next slide, if we have a next slide. Okay. I used to have to have a car that I had to hit like that to make it start. Yes, I'm that old. This was our liquidity picture, and I'm actually going to use it to point out the financial flexibility. While our liquidity picture wasn't that bright, or brilliant, I should say, back when the crisis began, we had sufficient financial flexibility to take the regulated entities, hold them upside down, and shake them and get some cash up to the holding company.
We had flexibility within the holding company to draw in cash through some of our structured notes between the holding company and the regulated subsidiaries. We really never hit a cash crunch. We also were either smart or fortuitous and raised almost $3 billion in June of 2008. If you remember, the markets shut in July 2008, the capital markets for financial institutions. Today, we're much more structured. We have an intentional liquidity cushion held at the holding company, and Rob is going to take you through what we call the capital protection plan, and he calls his toolbox of stuff that has created financial flexibility and liquidity inside the company that can withstand extreme levels of shocks. It's not cheap. We spend $100 million to maintain these cushions, liquidity cushions, capital cushions, and financial flexibility.
It's far, far greater than we spent back in the day, five years ago. ROE, I said I would get back to that. It's obvious what the drivers of an ROE are. You have growth in your businesses, you manage your capital, you have a good ROE. Why is 13% so important? Because it covers the cost of capital. The cost of capital varies in our businesses. Ed's business has probably got a cost of capital of 10%. The annuity business, good business, but it has a cost of capital probably above 13. You average it all out, our cost of capital bounced around over the years between maybe 11, 10, 12. In the bad times, probably over 13. Over time, it should settle in below 13, which is why our target is 13.
To exceed the cost of capital, but not to a level where we've incurred so much risk, it's not sustainable, something's going to go wrong, and the volatility is going to take out all the value of the excess ROE, that extra ROE. 13 is important. It's a good thing to have your return beating your cost of capital, I think. Organic growth. It's easier for me to talk about this on the next slide. We've broken our businesses up into three bunches here, three food groups by their ROEs. Let's take a minute just to look at the numbers. 43% of our capital, and these are unlevered. When I speak of capital here, I'm talking about our equity. We roughly have $28 billion of equity.
43% of the common equity, ex AOCI and all the accounting noises, is sitting in the international insurance business, they deliver 48% of our earnings with an 18%-19% potential return. Their potential is here today. They're delivering 17 now, but that's because they're absorbing the one-time charges for Star and Edison. You pull them out, they're in the 18%-19% zone now. They're going to stay there. Prudential Annuities, Prudential Retirement, and asset management, that collection needs to deliver 14%-15% to cover their cost of capital on the average. We think within the next year or so, we'll reach those levels in that food group. The last one, they've got 44% of our capital. The last one only has 13% of the capital. The funny thing, I think Ed mentioned that the individual insurance was in the mid-teens.
Actually, individual insurance has a 25% ROE. We can thank our friends at the Financial Accounting Standards Board a lot for that, to be fair, because we wrote off all the DAC. We're no longer holding capital, not all the DAC, a lot of DAC. We're no longer holding capital against the DAC that's in that business. That did help the ROE. Prior to that, it was delivering in the mid-teens. Today, it's delivering over 20%, I think 25. Group insurance has its troubles now, but we'll get that back on track, and it'll on average, with the individual life business, be in the 11%-12% zone. You average all that out, you're going to get about 16% on a weighted average basis. You drag in the corporate another $1 billion-plus loss, where all the leverage is. They're unlevered.
You bring in the leverage, you bring in the cost of leverage. The 16%-plus weighted average ROE there drops down to our 13%-14% target. That's the simple arithmetic. The last slide. This sums up everything I've said and a lot of what Rob is going to cover. I'd probably flip the middle box and the first box. First, you deploy your capital. You make sure you protect the earnings base and the capital base and the liquidity based upon the risk profile that you create by deploying your capital. You build up retained earnings through that deployment of capital. At some point, you've got to deliver it back to the shareholder. A healthy stock price is probably the greatest symbol for a financial institution, not a technology social media company.
For a financial institution, the return on equity and the return to the shareholder and a healthy stock price is probably the greatest sign of its financial strength. Okay, now Rob is going to bring us home.
I was advised quickly. Home stretch. Following on in Rich's theme, we see no disconnect between, in fact, see a necessary foundation in financial strength to business success, and therefore we manage to what we believe are AA standards across our businesses with respect to capital, leverage, and liquidity. As Rich highlighted, liquidity is particularly important. It is where the mischief, as he said, begins in financial institutions. We have a substantial amount of liquidity at the holding company and down at our operating companies. Importantly, we have significant and diverse sources of alternative liquidity, and I'll walk you through those.
The capital protection framework, we think, is something that's innovative, fairly unique to our organization, and something we've put a lot of time and energy into. That's a framework that allows us to restore capital within our businesses to competitive levels under the defined stress scenarios that we've laid out that are tail events. I'll talk a moment about that as well. Let's start with capital and start with a regulatory view on capital. On the top, you have the domestic insurance company. We manage to a AA standard. Generally, a AA standard is targeted to be a 350 RBC. We actually target a 400 RBC, and as you can see, we've exceeded that. We're running at, as of year-end, at close to a 500 RBC.
The 400 to 350 gives us a cushion that we think is prudent to absorb volatility, bumps in the road that allow us to stay above a AA level should we hit unforeseen stress events and not have to worry about deploying capital down into the businesses in order to maintain that AA standard. Our solvency margin ratios, as Ed indicated in his presentation, we believe that somewhere between 600 and 700 is going to be a AA standard. That will evolve over time. We are well in excess of those numbers in each of our Japan entities, and I think we'll be publishing those numbers for the quarter in the next couple of weeks. You'll have access to that. The other lens on capital is a GAAP lens. This is how we think about or articulate capital and capital capacity.
We start with identifying the required amount of capital that we need in our businesses in a GAAP framework. We take our statutory required capital at the double A levels that I just articulated. We put those over into a GAAP framework, and that is our required equity shown here at around $34.5 billion. We then compare that to the actual equity that we have on balance sheet, including our actual capital on balance sheet. It includes our capital debt, and the capital component of our hybrids. That gives us a number that's close to around $39 billion. When you compare that $39 billion with the amount of capital that we deem necessary to maintain our double A standards, you wind up with an on-balance sheet capital capacity or available capital of about $4 billion-$4.5 billion. Now, we nuance that.
Of that $4 billion-$4.5 billion, about half of it is what we consider to be, quote, "readily deployable." What does that mean? That is capital capacity that we have that we can use in the form of cash to acquire something, to make dividends, to do stock buybacks, to finance extra organic growth within the businesses. The remaining half of that is available capital, but it can't be readily translated into cash in a very short period of time. It can, however, absorb the risk associated with growth within our businesses, and it also can absorb risks in our businesses. To the extent that we have stress events, that's additional capital, RBC, that can absorb those stress events without us having to have to put more capital down into our businesses. It will eventually, over time, translate into monetizable or readily deployable capital.
Let me turn now to leverage off of capital. Increasingly, we're looking at leverage on a total leverage construct. We hear from the rating agencies that it's increasingly difficult to differentiate between that which is capital leverage and that which is operating leverage, and the concern is just leverage on an overall basis. While we manage our capital leverage ratio, we also look now more than we have in the past at our total leverage ratio. We've established a target of around 40% for that number. We're running a little in excess of that. Now remember, we took about a $2.9 billion write-off in DAC as of January 1st, and that's what's showing up in these numbers, and it's used that leverage ratio by a couple of hundred basis points.
Our intent is over the course of the next 12 months or so to work that back down to or below our targeted number. Our coverage ratios are very strong. We're running in excess almost two and a half times our defined fixed charge coverages. The numerator of that equation is the operating cash flows that we get from our businesses. We take out the dividends that we pay to shareholders, and we divide that by the total fixed charges, gross interest expense, and fixed expenses that we have at the holding company. Let me move off leverage and talk about liquidity. The first and primary source of liquidity from us is operating cash flow from our subsidiaries, and that's what we're showing you here.
The bars represent the amount of cash flow that was either dividended or returned up in a form of return of capital from operating subsidiaries to the holding company in each of the indicated years. The colors in those bars indicate the different businesses that contributed that capital going up. When I talk about return of capital, what we're talking about is net return of capital. To the extent we had to infuse capital back into the business is deducted from these numbers. If you look at those numbers on average, expressed as a percentage of our AOI, you would find that that represents about 55% of the AOI of the businesses. We're taking a little bit over half the earnings generated by our businesses in the form of cash out of the businesses and up to the holding companies on average.
It varies year to year, as you'll see here. Probably a couple of things worth highlighting. 2009 financial crisis, or we're right on the heels of the financial crisis. You'll see an absence of blue in that particular bar chart. That is the dividends from PICA. We took no dividends out of PICA in that particular year. In 2010, we had an excess amount of dividends that we took out of PICA, and that was harvesting the gains in the Wachovia venture that we had sold that was down in PICA. We sold that, took the after-tax proceeds of it, and included that in our normal dividend coming back up to the holding company, so you had an outsized number in 2010. The other thing I want to point out is the orange bar.
That's capital that comes up, or cash and capital that comes up from our international subsidiaries. We do that in a variety of creative mechanisms to make it as tax efficient as possible. What you'll see in 2010 is that number shrunk fairly considerably from the numbers that you saw earlier and even after. And that's because in that year, we told the subsidiary to sit on its capital. We kept about $800 million worth of capital down in the subsidiary because we then used that to help acquire finance to pay for the acquisition of Star and Edison. If you want to think about the normalization, about another $800 million would have come up from those subsidiaries, which we then redeployed in M&A. M&A is typically outside of the bars in each of these cases. That's just extraordinary deployment of capital.
The other lens on liquidity, looking at the holding company, our actual at cash balances. As of the end of the first quarter, we had about $3 billion worth of net cash sitting on our balance sheet. We use the term net cash because if you look at our balance sheet, you'll actually see a larger cash number sitting on the left-hand side of that balance sheet. We deduct from that number our commercial paper outstandings and any intercompany borrowings that we've got going on. So we have a presumption that usable cash is net of whatever we would have to do if we had to immediately repay all of the commercial paper that's outstanding. So that's that $3 billion number. We have a minimum cash cushion that we want to maintain of $1.2 billion.
We increased that from about $1 billion, the number that we were targeting a year ago. That was Board approved just fairly recently. That's the cash we sit with on our balance sheet in excess, obviously, of the cushion that we require. We have alternative sources of liquidity. We can borrow more under our commercial paper facility. We have two commercial paper programs, one at the holding company, one at the insurance company. The holding company probably has capacity for another couple hundred million dollars. We only have $200 million or $300 million of commercial paper outstanding today at the holding company. Without stressing markets with existing customers, we could easily gear that up to something that was closer to a half a billion dollars.
We recognize that in a stress environment, that's probably the first thing to dry up, we don't really look to that under stress conditions. We would look to it for sources of liquidity that might be needs that are unique to us. We also have committed credit facilities. We only have two credit facilities. We have a $2 billion, five-year facility at the holding company. That's for working capital to be used actively by us so that it's not perceived to be a stress event if we ever were to draw down on that revolver. In addition to that, we have a $1.75 billion credit facility that is shared between the holding company and the insurance company. That's what we typically think of as the backstop to our commercial paper facility.
Not likely to see us draw on that except in events where we needed it for commercial paper. We hope to actually never have to draw on that. Not designated specifically as the commercial paper, but that's how we think about it as we're managing those two facilities. That's a three-year facility. No MAC clauses in either of those facilities. In addition to that, we've got about a billion and a half dollars of alternate internal sources of liquidity where there is cash in other parts of the enterprise that we could bring into the holding company in order to provide about a billion and a half of additional liquidity. That gives us close to $8.5 billion worth of liquidity should we need it between what we have on balance sheet and other ways in which we could get cash into the holding company.
A similar view of this for PICA, the insurance company in the U.S. Here we started with cash of about $5.5 billion. Similar to what I went before on the far right-hand side, you'll see we could use commercial paper of about another $2 billion under that facility. We've had commercial paper pre-crisis outstanding in excess of $10 billion. Today, we have about $1 billion outstanding on it. Taking it up to $3 billion is very achievable within the context of our existing investor base. We are a member of the Federal Home Loan Bank of New York. Within the U.S. insurance company, we have incremental capacity under that of almost $4 billion. It's in excess of $6 billion worth of capacity. About a third of it is outstanding today, so we could draw down an additional two-thirds under that.
I mentioned before, the $1.75 billion credit facility that we're using to backstop the commercial paper program that's shown there to the right. Available liquidity resources, inclusive of the cash that we have on balance sheet, about $13.3 billion. Again, that cash number is net of the commercial paper. In addition to that, we have substantial liquid assets. We hold a large portfolio of treasuries and high-quality corporates. We could access the repo and sec lending market to the tune of another $30 billion in terms of what we have as readily liquid, high-quality securities that could be lent into that market in order to provide additional liquidity up to the holding company. Let me close then with the capital protection framework.
The capital protection framework is a methodical evaluation of the impact on capital of defined stress events and the identification of available alternate sources of liquidity and capital that would allow us to address those stresses such that we keep our subsidiaries well-capitalized and competitive even under a variety of different stress scenarios. If you start on the left-hand side, these are the stress parameters we've shocked each of our businesses. That was usual. Each of our businesses with respect to the equity markets, interest rates, credit, and currency. Equity market declines are about a 60% decline in the equity markets down to a 600 S&P. Interest rate shock, actually it's 100 basis points, but it's actually a 100 basis point decline in the U.S. In Japan, it's a 100 basis point increase in interest rates.
When you think about 100 basis points, it doesn't sound like much of a shock, but if you're today at a 10-year treasury of 1.7 and a handle, and you're shocked up by 100 basis points, that's actually a fairly substantial shock on the downside. In Japan, when you're talking about sub 1% treasuries and you're shocking it up by 100 basis points, that's actually a substantial shock. The constraining movement in interest rates is different in our U.S. business than it is our Japan business. We, in this particular scenario, assume interest rates are moving up in Japan at the same time that they're actually moving down within the U.S. Our credit shock, we look at through-the-cycle losses. We work with Scott and his team.
We have provisioned about another $4.5 billion-$5 billion of credit losses in addition to those that we've already taken through this part of the cycle. We're working now to actually increase the sensitivity and through-the-cycle look of those credit shocks. Finally, currency shock. This is perhaps a little counterintuitive. We are in our business long yen as the primary currency to which we have exposure. Therefore, we hedge that, which means that our financial instruments are short yen. Therefore, the stress to us is actually an appreciation in the yen. Long term, wonderful thing for our business. We have an appreciating yen. We're going to be bringing the earnings back from that business at an elevated rate, which would be more dollars to our U.S. shareholders. However, on an interim basis, we've hedged that, and therefore, we have to satisfy the marks and pay the maturing hedges.
An increase in the yen will lead to a need for liquidity and capital in order to pay off the hedges that we've taken, which are short positions in the yen. We have stressed the yen to an appreciation down to around 52. We've never seen that. Over a three-year period of time, we take it up, down, depending on how you look at it. We take it from around 79.80 today to a yen to dollar of around 52, and we hold capital against that movement in the yen such that we can satisfy our maturing obligations under our hedges. Incidentally, we do all of that, and then we take no covariance benefit. There's no diversification benefit taken at this point in time.
We just add up all of that, then we say, all right, what available capital do we have to handle those stresses? We start with on-balance sheet excess capital capacity. Recall that I'm running at an RBC of close to 500. My targeted number is 400, and I have some ability to go below that and maintain a double A standard. Therefore, I have on-balance sheet capacity to absorb risk in any of these shocks. In addition to that, we have a derivative portfolio of macro hedges that we run both in the equity markets and in the interest rate market. From an equity standpoint, we've been building a portfolio of essentially exotic short equity derivatives such that they begin to pay off when the S&P is piercing down below 1,000 and continue to pay off down to an S&P of 600 and even below that.
We give away some of the downside in order to pay for that. If we hit an S&P of 400, we sort of throw in the towel, sort of readily acknowledge that. From an interest rate standpoint, the way we express that is we've under-hedged our Rho, our interest rate risk in our annuities book of business. It's not an annuities short that we've done with regard to that interest. Found that for us to protect ourselves in a rising interest rate environment from a capital standpoint, that's the one that we're worried about. Everyone's always asking us about, how do you feel about a sustained low interest rate environment? We don't feel great about it because it's not good for the fundamentals of our business. However, it doesn't create a capital problem for us, at least not a material capital problem.
It's a slow bleed kind of an effect to the business. The challenge you have as an insurer is you've been in a low interest rate environment and interest rates spike up. When they spike up, that's when you're going to have capital calls. We need to protect ourselves against that. The most economic and efficient way that we could do that, as opposed to going out and doing swaptions, was to actually underhedge the interest rate risk that we have in our annuities book, then we assign that to our corporate and other business. That gives us protection for the first couple hundred basis points of rise in interest rates. That simple underhedge there would cover all of the losses that we would have from an increase in interest rates across the rest of the enterprise.
Those two pockets, equity markets and interest rates, is how we're thinking about macro strategies. We continue to add to that over time. We have reinsurance in place. Specifically with our closed block, we have two levels of reinsurance so that any of the losses in the closed block now are fully absorbed through that reinsurance. It will not create noise in our RBC and our capital capacity. Finally, we have other contingent sources of capital, including the $2 billion revolver that I mentioned before, and other cash and sources of capital that we have that we could draw from the enterprise and put down into any particular operating subsidiary in order to improve their capital position. We feel really good about what we've got in place here today. We stress this. We look at it.
We make sure that when we're articulating redeployable capital, that it's capital that exists after the set of stress that we just articulated and in the application of our toolbox. We continue to evolve this. We're looking at additional stresses, for instance, behavioral stress. We're looking at compound stresses. As we add more risks and stresses, we will undoubtedly begin to take some covariance benefit associated with some of those. The other thing that we're doing is we're looking at making this more dynamic, and we're already well into this. What do I mean by more dynamic? We don't want to just protect ourselves in the tail event, which would be shown here on the far right-hand side of the graph, which is the worst in history event. Rather, we also want to make sure that we have a competitive RBC. I get that RBC and solvency margin.
I use RBC as a shorthand for capitalization. We want to make sure that we're competitively capitalized across a variety of scenarios. If you think of this as just a pictorial representation of a philosophy or a strategy. When we hit stress events, which we would consider to be cyclical, we would not expect that to have any impact on the targeted level of solvency or RBC that we would want to maintain within our business. As you move from cyclical to more modest stress events to severe to worst in history, we would look to actually let the RBC ratio or the solvency margin ratio decline to levels that we still believe would make us highly competitive under those set of circumstances, but not at the 400 that we're currently targeting today, which would be an impossible level to maintain in a worst in history set of tail events.
We're modulating this. We're modulating not just the risks, but also the tools that we have, such that the tools have payoffs not just in the tail events, but in the cyclical modest and severe events that we've articulated as well, so we can continue to manage the RBC to the appropriate level under those sets of stresses. With that, I'll just conclude with some summary observations. The theme that you've hopefully heard today is that we believe that a strong financial picture is an important foundation, a necessary foundation to having a strong business franchise. As Rich identified, a too low ROE is not healthy for us. It's not healthy for debt investors in our company because it impairs our ability to access the equity markets over time.
On the other hand, too high an ROE is not helpful either because it means you're onboarding too much risk in order to reach that ROE. We target an ROE that's above our cost of capital, but above it at a margin which we believe we can achieve without taking on excess risk. We are actively deploying capital in a way that supports both that ROE and that strong financial foundation. We're managing to double A standards. We hope that will be universally reflected in our rating agency ratings over time. We have diverse and deep sources of ultimate liquidity, which is the primary point of defense. With that, I'll stop and open up to questions. Thank you.
Okay. Questions for Rich, Rob, and Scott. Don't be shy. Yes. Mr. Levine.
Hi, sorry about that.
What's your name again?
Seth Levine from Guardian. I am not being paid to ask questions. Just on that last slide seems a little bit counterintuitive. As the severity of shocks increase, typically, a lot of your constituents would look for higher RBC ratios and particularly, no offense to anyone in the room, the rating agencies who tend to stress a stress environment when they look at your capital solvency or we have seen in this last cycle. How do you balance that in your sort of capital planning activities? Secondly, any thoughts on simplifying your capital structure and maybe changing the way that you do your retail notes program, maybe moving more towards traditional SABN programs? Lastly, if you can comment on sort of as Japan grows your ability to repatriate cash back to the U.S. Thanks.
Let me see if I can handle those in order. The first, just to be clear on the impacts of capital from stress. When the rating agencies define a double-A standard for capital, what that literally means is that after the double-A event, you will have $1 of capital left. In other words, you are solvent. There is not an expectation that you survive a double-A event and maintain a 400 RBC. That is sort of not how the construct works. You define a stress event and you say, okay, after that stress event, you have to survive it. Our capital protection framework says we want not just to survive it. We want to have more than the $1 of solvency. We pass the test, stress the balance sheet to a double-A level. We are still solvent. We have paid off all the liabilities of the company.
The shareholders left with the block. What we want to do is make sure that we have a level of capitalization that allows us to continue to write business and continue to write business in an environment where many of our competitors will be unable to write business if they have not already gone out of business. In order to have a 400 RBC under a double-A event. Think about a double-A event, a combination of the interest rates and the equity markets that I described. If you had a 400 when that was done, you would have to start with an RBC that was probably twice that number in order to maintain it.
If I was sitting on my balance sheet with an RBC that allowed me to have 400 after stress events, I could never provide an adequate return on equity that would allow me to attract any shareholders to the company. I do not think it is at all inconsistent. I think what you would naturally find is under stress events, everyone's RBC is going to decline. In fact, you did see that. What we are trying to do is mute that decline by restoring it through this capital protection framework so that we decline significantly less than others to levels that we think would be appropriate under those set of circumstances. That was question one. Question, I remember the Japan-
Retail notes.
Repatriation. Retail notes.
Retail notes.
Yeah. We actually have not issued FANIPs or Retail notes, sort of the sister to the standup in several years. That has not been particularly attractive to us as spreads on financials have blown out and the investments we can then make in a diversified portfolio, we wouldn't want to load up on our financial exposure. We just don't facilitate doing positive spread lending on that. I won't say we wouldn't reenter the standup market. I think we would under the right set of circumstances, but we haven't yet found that those circumstances have allowed us to get positive spread on investing without taking an undue amount of portfolio risk. Scott, I don't know if you want to add anything to that.
The benefit from issuing retail notes as opposed to-
Yeah. The retail note program specifically allowed us to get a lower cost than if we had issued an institutional note. That's why we did it. I think we continued to look at what we did. Even as we did issue a FANIP, we would look at whether we did it at the holding company or at the insurance company. We would look at that as where we could get the best cost of capital from issuance in order to maximize the spread when we invested it. With respect to Japan, our view is that we should, on a sustainable basis, be able to get about $1.1 billion-$1.2 billion of capital return on a normalized basis, return from Japan in a combination of dividends and structured transactions.
When we did the Star and Edison transaction, we put the capital down into Japan in a combination of equity and surplus notes so that we would easily be able to get capital back from there in the form of interest payment and repayment of those notes. Through the dividends and structures like that and others, we're able to pretty predictably get in excess of $1 billion out of Japan. There'll be one-time opportunities as we rationalize the operations there to probably take more capital out. On a run rate basis, we sort of plan and think about it as $1 billion-$1.2 billion.
Okay. Anybody else? Okay. I think we're done, and we'll hand it off to Chris to conclude our day.
I'm Christine Marcks. I lead the Prudential Retirement business for Prudential, I just wanted to have the pleasure of wrapping up this session. I wanted to first say thank you for taking the time to attend. We really appreciate the opportunity to talk about the business. In the Prudential Retirement business, which serves thousands of employers and millions of participants and annuitants, I like to tell our clients and our intermediaries that we take very seriously the commitment we make to delivering retirement security through stable value products, pension risk transfer solutions, and guaranteed income products. What stands behind our commitment is the overall approach to managing the business, which you've heard discussed today. That approach includes having a diverse set of high-quality businesses, which really allows us to balance risks.
It means ensuring that we take a conservative approach from a capital standpoint in terms of putting it behind business where we see growth opportunities, and also pursuing acquisitions only when they make real economic sense. It means managing our capital liquidity and investment portfolios carefully to support the liabilities we're bringing in. Finally, it means attracting and retaining very high-quality talent, deepening and broadening the expertise in the business. Talent really is, I think you've heard it mentioned several times here, at the core of our franchise. This really is quite simply what's enabled us to help our clients meet their challenges and to keep our promises to clients for the past 135 years. We've got a very dynamic and sometimes difficult environment, but we look forward to a continued