Ladies and gentlemen, thank you for standing by, welcome to the first quarter 2012 earnings teleconference. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Instructions will be given to you at that time. If you do need assistance during the call today, you may press star then zero, an operator will assist you offline. As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Mr. Eric Durant. Please go ahead.
Thank you very much, thanks to all of you for joining our call. In order to help you to understand Prudential Financial, we will make some forward-looking statements in the following presentation. It is possible that actual results may differ materially from the predictions we make today. Additional information regarding factors that could cause such a difference appears in the section titled Forward-Looking Statements and Non-GAAP Measures of our earnings press release for the first quarter of 2012, which can be found on our website at www.investor.prudential.com. In addition, in managing our businesses, we use a non-GAAP measure we call adjusted operating income to measure the performance of our financial services businesses. Adjusted operating income, excuse me, excludes net investment gains and losses as adjusted and related charges and adjustments, as well as results from divested businesses.
Adjusted operating income also excludes recorded changes in asset values that are expected to ultimately accrue to contract holders and recorded changes in contract holder liabilities resulting from changes in related asset values. Our earnings per share press release contains information about our definition of adjusted operating income. The comparable GAAP presentation and the reconciliation between the two for the quarter are set out in our earnings press release on our website. Additional historical information relating to the company's financial performance is also located on our website. Representing Prudential on today's call are John Strangfeld, CEO, Mark Grier, Vice Chairman, Rich Carbone, Chief Financial Officer, Charlie Lowrey, Head of Domestic Businesses, Ed Baird, Head of International Businesses, and Peter Sayre, Controller and Principal Accounting Officer. We'll begin with prepared comments, then we'll take your questions. John?
Thank you, Eric. Good morning, everyone. Thank you for joining us. Rich and Mark will review our financial results with you in detail in a few minutes. I'd like to begin with some high-level comments on the quarter and on our outlook. Our earnings this quarter reflected a poor result in group insurance. With that important exception, underlying performance of our businesses and the company overall continues to be favorable. As you know, group insurance includes life and disability operations. In group disability, we have clear performance issues, we are moving aggressively to address and correct them. On the other hand, we've generally been performing reasonably well. Although we had an unfavorable underwriting result this quarter, we believe this result is an adverse fluctuation, not an indication of fundamental deterioration in the business. You may have seen that group insurance is under new leadership effective last month.
Steve Pelletier, a proven executive who most recently ran our annuities business, is now at the helm reporting to Charlie Lowrey. Bob O'Donnell has succeeded Steve as head of Prudential Annuities. Bob is intimately familiar with our annuities business and is ideally suited to his new role. Under Steve's leadership, you can be sure that we will be comprehensively reviewing all facets of group insurance and will make all needed changes. Our other businesses are doing well. In annuities, sales for the quarter amounted to just under $5 billion, essentially in line with their levels since last year's second quarter. Stripping out the benefit of favorable unlockings, earnings increased from last year's strong first quarter. In retirement, flows in institutional investment products remained strong, largely because of growth in our investment-only wrap products.
Our sales again included a meaningful longevity reinsurance case as we continue to pursue attractive pension risk transfer businesses. In full service retirement, we again experienced net outflows from case activity as we are maintaining pricing discipline in a highly competitive environment. Asset management once again recorded excellent institutional and retail flows. Although variable sources of earnings were relatively unfavorable this quarter, this business continues to perform well. Individual life also delivered solid earnings this quarter and a healthy increase in sales as our competitors have raised prices, making our products more competitive. Finally, international insurance is benefiting from business growth and cost savings from the Star and Edison integration. Sales are strong in all distribution channels, captive agents, banks, and independent agencies. All in all, Prudential is performing well with the exception of group insurance, which we are addressing.
In addition, our balance sheet and capital position remain significant sources of strength and flexibility, it's still early days in 2012. As for our 2013 ROE goal of 13%-14%, we never said it would be easy, and we still believe it's achievable. We look forward to seeing you May 22nd in our New York Investor Day. With that, I'd like to turn it over to Rich Carbone. Rich?
Thanks, John, good morning, everyone. We reported common stock earnings per share of $1.56 for the first quarter based on adjusted operating income, of course, that's for the financial services business. This compares to $1.62 per share in the year ago quarter, both periods give effect to the new accounting standard for debt.
We have only two market-driven and discrete items affecting this quarter. In the annuities business, the equity market increase in the quarter caused us to release a portion of our reserve to guarantee minimum death and income benefits and led to a favorable DAC unlocking, resulting in a benefit totaling $0.30 per share. Going the other way, in international insurance, Gibraltar Life absorbed integration costs of $0.08 per share relating to the Star and Edison acquisition. In total, the items I just mentioned had a net favorable impact of about $0.22 per share on results. The year-ago quarter benefited about $0.23 per share from the impact of favorable unlockings and reserve releases and a gain on the partial sale of our indirect investment in China Pacific Group.
These were partially offset by transaction and integration costs related to the Star and Edison acquisition and costs from the earthquake and tsunami disaster in Japan. Taking these items out of both quarters, EPS comparison would be $1.34 for the current quarter versus $1.39 for the quarter a year ago. This comparison, as John mentioned, is adversely affected by group insurance, primarily from adverse claims experience and from asset management related to what we call ITSICM. That's incentive, transaction, strategic investing, and commercial mortgage activities. These two businesses had a negative impact of about $0.17 per share in comparison to the year-ago quarter, and Mark will cover this in more detail in his remarks. Moving to the GAAP results of our financial services business, we reported a net loss of $988 million, or $2.09 per share.
For the first quarter, this compares to net income of $539 million, or $1.10 per share a year ago. The net loss for the quarter includes amounts characterized as pre-tax net realized investment losses of $1.8 billion. This compares to $375 million or pre-tax net realized investment losses in the year-ago quarter. The main driver of the $1.8 billion current quarter loss was $1.5 billion of asset and liability value changes, driven essentially by currency fluctuations. Now, for those CPAs in the room, if you pay attention here, we'll give you CPA credits for the rest of the next few paragraphs. We regard this as a non-economic accounting driven by U.S. dollar and other non-yen liabilities on the books of the Japanese companies. For example, we have significant U.S. dollar-denominated products in our Japanese businesses.
The assets and liabilities associated with these products are both denominated in U.S. dollars. When the value of the yen changes versus the U.S. dollar, the change in the U.S. dollar liabilities on the Japanese books runs through the yen income statement. This is not economic because our liability is in U.S. dollars and is matched with U.S. dollar assets, so nothing is happening. In consolidation, back to U.S. dollars, this income statement impact is offset by an adjustment made to OCI, a component of equity, not through the income statement. The end result is that our GAAP equity, which includes OCI, AOCI, is essentially neutral despite the volatility in reported net income. The impact of this accounting geography is greater than in the past because of our non-yen business that came to us with the Star and Edison acquisition.
The remaining $300 million of the $1.8 billion of realized losses came from net losses of $291 million from product-related hedging activities and $128 million of impairments and credit losses, partly offset by net gains from general portfolio activities. Book value per share on a GAAP basis amounted to $70.80 at the end of the first quarter, and this compares to $69.07 at year-end. Our current and historical values all reflect the new DAC accounting change or standard. At the end of the first quarter, gross and realized losses on general account fixed maturities were $2.7 billion, down from $4.3 billion at year-end, and we were in a net unrealized gain position of $13 billion. Book value per share, excluding total accumulated other comprehensive income, declined $2.17 from year-end and amounted to $55.85 at the end of the first quarter.
Turning to our capital position. First, I will focus on the insurance companies. We continue to manage these entities to capital levels consistent with we believe are AA standards. As of year-end, Prudential Insurance reported an RBC ratio of 481%, with total adjusted capital or TAC of $12 billion on a statutory basis. We don't do a quarterly bottoms-up calculation of RBC. I can tell you that the key drivers of statutory capital have not materially changed since year-end. We have not yet taken a dividend from Prudential Insurance so far this year. Our Japanese insurance companies will soon report solvency margins as of their March fiscal year-end based on the new calculation method, which is now effective.
As a result of the merger of the Star and Edison companies into Gibraltar as of January 1st, Gibraltar's solvency margin will reflect the absorption of the acquired companies. While the calculations are not final, we estimate that both Prudential of Japan and Gibraltar will report solvency margins in the 700% range. These solvency margins are strong in relation to our targets and will continue to position our companies as well-capitalized and financially secure insurers. Looking at the overall capital position for the financial services business, we calculate our on-balance sheet capital capacity by comparing the statutory capital position in Prudential Insurance that I mentioned a moment ago to a 400 RBC ratio benchmark. Then add capital capacity at the parent and other subsidiaries. As of year-end, we estimated that our on-balance sheet capital capacity was about $4 billion to $4.5 billion.
It has not changed materially through the end of this quarter. We also estimated that as of year-end, about half of the $4 billion to $4.5 billion of capital capacity was readily deployable. This proportion has not changed substantially through the end of the first quarter either. Considering the impact of our results, the capital we've deployed in our businesses, and the $250 million we returned to shareholders through our share repurchase program. In the aggregate, we have repurchased $1,250,000 under the current $1.5 billion authorization, which extends through June of 2012. Turning to the cash position at the parent company, cash and short-term investments at the parent, net of outstanding commercial paper, amounted to $3 billion at the end of the quarter. We continue to target maintaining a $1 billion cushion at the parent company.
The excess of our cash position over this target is available to repay maturing debt, fund operating needs and expenses obviously, and to be redeployed over time. Mark will cover our businesses in detail.
Thank you, Rich and John, and good morning, good afternoon, or good evening. I'll start with our U.S. businesses. Our annuity business reported adjusted operating income of $421 million for the first quarter, compared to $274 million a year ago. The reserve true-ups and DAC unlocking that Rich mentioned, had a net favorable impact of $196 million on current quarter results. This includes a benefit of $136 million from the release of a portion of our reserves for guaranteed minimum death and income benefits, and a further benefit of $60 million from reduced amortization of deferred policy acquisition and other costs. In both cases, reflecting favorable market performance. Results for the year-ago quarter included a net benefit of $58 million from a favorable DAC unlocking and reserve true-ups, also largely driven by favorable markets.
Stripping out the unlockings and true-ups, annuity results were $225 million for the current quarter compared to $216 million a year-ago, for an increase of $9 million. This increase represents the net effect of growth in our fees, partly offset by a higher level of base DAC amortization and by higher expenses in the current quarter. Policy charges and fee income in the quarter increased $51 million or 12% from a year-ago, reflecting an increase of $10 billion in average variable annuity separate account values, driven by $11.6 billion in net sales over the past year. The benefit of higher fees in the current quarter was partly offset by a higher base level of DAC amortization.
While favorable markets have driven improvements in our amortization factors since our negative unlocking in the third quarter of last year, we are still amortizing DAC at a more rapid pace than a year-ago. In addition, current quarter expenses were higher than a year-ago, partly as a result of business development costs and spending on initiatives. Our gross variable annuity sales for the quarter were just under $5 billion. This compares to the record high $6.8 billion we recorded a year-ago, when new business was bolstered by sales in advance of the repricing of our annuity product in early 2011. We are comfortable with our sales level, which has remained in a band of roughly $4.5 billion-$5 billion over each of the past four quarters.
While several other companies have recently begun to embrace product-based risk management strategies, our Highest Daily Protected Value feature, coupled with auto rebalancing tailored to each customer's account, has a proven track record of more than five years with clients and their advisors. The popularity of our HD products has driven a continuing improvement in our risk profile. At the end of the first quarter, about 83% of our account values with living benefits had the auto rebalancing feature. This compares to 78% a year ago and just under 70% two years ago. The auto rebalancing feature performed very well over the most recent market cycle.
In the third quarter of last year, when the S&P declined 14%, roughly $17 billion of client funds were moved by our algorithm to the safety of fixed income investments, mainly investment-grade bond funds with relatively short duration, protecting account values from severe market declines. Through the end of the first quarter, over $13 billion of these funds were returned to client-selected investments, allowing participation in equity market increases. The retirement segment reported adjusted operating income of $156 million for the current quarter, compared to $172 million a year ago. The decrease reflected a lower contribution from investment results as the impact of lower reinvestment yields over the course of the past year was partly offset by crediting rate reductions we implemented on our full service stable value business in January of this year. Excuse me.
The benefit to current quarter results from higher fees reflecting account value growth and institutional investment products, was essentially offset by a lower contribution of about $10 million from mortality driven case experience on our traditional retirement products. Total retirement gross deposits and sales were $9 billion for the quarter. This compares to $10.6 billion a year ago. Full service retirement gross deposits and sales were $4.6 billion for the quarter, roughly in line with a year ago. We continue to see limited activity in the mid to large case market, which is our major focus, we are maintaining pricing discipline in a highly competitive environment. Two large case lapses totaling $1.5 billion contributed to net outflows for our full service business of about $2.5 billion for the quarter. Standalone institutional gross sales amounted to $4.4 billion in the current quarter, compared to $5.8 billion a year ago.
During the year ago quarter, the remainder of 2011, we experienced exceptionally strong flows of stable value wrap products sold to plan sponsors on a standalone basis as clients added substantial funds to wrap programs established earlier. Sales of these products amounted to $3.5 billion in the current quarter compared to $5.3 billion a year ago. Current quarter sales also included a nearly $700 million longevity reinsurance case in the emerging defined benefit pension risk transfer market, where we are developing innovative solutions to help plan sponsors and benefit providers manage the risks of defined benefit pension plans. Overall net additions for the retirement business were about $400 million for the quarter, account values stood at a record high $240 billion at the end of the quarter, up 12% from a year ago.
The asset management business reported adjusted operating income of $121 million for the current quarter, compared to $154 million a year-ago. While most of the segment's earnings come from asset management fees, the decline in earnings in relation to the year-ago quarter was mainly driven by a decrease of about $35 million in the contribution from ITSICM. As Rich mentioned, results from incentive, transaction, strategic investing and commercial mortgage activities, which fluctuate and are partly driven by changing valuations and the timing of transactions. The current quarter reflects declines in the value of several investments, mainly co-investments in real estate funds we manage, while results for the year-ago quarter benefited from gains of about $15 million from sales of foreclosed properties.
The lower contribution from ITSICM activities, together with higher expenses in the current quarter, more than offset the benefit of higher asset management fees in the quarter, driven by growth in assets under management. Excuse me. The segment's assets under management reached a record high $637 billion as of the end of the quarter, up $68 billion or 12% from a year-earlier. The increase in assets under management reflected cumulative market appreciation and positive net flows in each of the past four quarters. Adjusted operating income for our individual life insurance business was $112 million for the current quarter, compared to $98 million a year-ago. Mortality experience for the current quarter was slightly less favorable than our average expectations, but improved in relation to the year-ago quarter, driving the increase in results.
While mortality experience fluctuates from one quarter to another, cumulative experience for the past four quarters has been essentially in line with our expectations. Individual life sales based on annualized new business premiums amounted to $79 million for the current quarter, up from $65 million a year-ago. The increase was driven by third-party sales and reflects our improved relative competitive position in the universal life market and growth in term insurance sales through intermediaries working with financial institutions. The group insurance business reported a loss of $38 million in the current quarter compared to adjusted operating income of $39 million a year-ago. An adverse fluctuation in group life claims experience, less favorable group disability underwriting results, and higher expenses, each contributed to the earnings decline.
The current quarter group life benefits ratio of 95.4% represents our most unfavorable experience in the last five years and immediately follows a fourth quarter benefits ratio of 86%, our most favorable experience in the past five years. As a frame of reference, we regard group life benefits ratios of between 88% and 92% to be roughly the expected range. The unfavorable group life experience in the current quarter was mainly driven by larger average claim size in relation to our average historical experience. Claims severity can fluctuate from one quarter to another, and no particular block of business was found to be the main driver of the fluctuation this quarter. We would not consider the experience of this quarter to be sufficient to support any conclusions as to group life results going forward.
In group disability, we are continuing to see an elevated incidence of new claims. The benefit to results from claim terminations was below the level of a year ago. Group insurance sales for the quarter were $313 million, including $211 million for group life. This compares to a total of $500 million a year ago, including a major case win that contributed about $180 million. More than three-quarters of our group life sales in the current quarter were voluntary, representing coverage purchased by employees or association members rather than employer-paid insurance. Turning now to our international businesses. Gibraltar Life's adjusted operating income was $224 million in the current quarter, compared to $328 million a year ago. As Rich mentioned, Gibraltar's current quarter results absorbed $57 million of integration costs for the Star and Edison acquisitions.
We continue to expect about $500 million of integration costs over a five-year period, including roughly $200 million in 2012, to achieve targeted annual cost savings of about $250 million after the business integration is completed. Results for the year ago quarter included income of $153 million from the partial sale of our indirect investment in China Pacific Insurance (Group) Co., Ltd. by The Carlyle Group Consortium. A year ago results absorbed $47 million of Star and Edison transaction and integration costs. Excluding the transaction and integration costs and the year ago China Pacific gain, Gibraltar's adjusted operating income was up $59 million from a year ago. This increase reflects business growth and cost savings from business integration synergies, partly offset by a less favorable level of policy benefits.
Foreign currency exchange rates, including the impact of our hedging program, contributed $10 million to the increase in earnings from a year ago. We are benefiting from business growth across all of our channels, captive agents, banks, and independent agencies. We now call Gibraltar's captive agents Life Consultants after combining the Star and Edison and Gibraltar sales forces when we merged the entities on January 1st of this year. This growth is being driven by both protection and retirement products and includes a full quarter contribution from the Star and Edison businesses, which are now included within Gibraltar. Results for the year ago quarter included the initial month of operations of Star and Edison. Current quarter results reflect about $30 million of cost savings achieved thus far as a result of the business integration, which is well on track.
These savings were driven largely by consolidation of field offices, integration of systems platforms, and reduction of support staff. The benefits from business growth and cost savings were partly offset by a less favorable level of policy benefits in the current quarter, which we estimate to be a negative of about $30 million in the comparison. This reflects less favorable mortality in relation to strong year ago quarter experience and a lower contribution from accident and health products. Our Life Planner business reported adjusted operating income of $382 million for the current quarter, compared to $300 million a year ago. Results for the year ago quarter included a charge of $19 million for the estimated impact of the March 2011 earthquake and tsunami disaster in Japan. Excluding this charge, results were up $63 million from a year ago. Current quarter results benefited from continued business growth.
On a constant dollar basis, insurance revenues, including premiums, policy charges, and fees, were up 9% from a year ago. A more favorable level of policy benefits in the current quarter, which we estimate to be a positive of about $20 million in the comparison including mortality and reserve true-ups, also contributed to the earnings increase. In addition, foreign currency exchange rates contributed $12 million to the increase in earnings from a year ago. International insurance sales on a constant dollar basis reached a record high of $819 million for the first quarter, compared to $660 million a year ago. Our current quarter sales reflect expanding distribution, the attractiveness of our products in the protection and retirement markets, and a few factors relating to market developments and updating of our product portfolio. Gibraltar Life sales were $439 million in the current quarter, up $76 million from a year ago.
Bank channel sales contributed $50 million of the increase, driven primarily by protection products. Our single premium whole life products, which have been popular in the bank channel, gained momentum as a major Japanese competitor limited its sales of yen-based single premium whole life products through banks. The remainder of the increase, or $26 million, came from the Life Consultant channel, mainly driven by greater sales of our U.S. dollar retirement income products. Sales from the independent agency channel amounted to $76 million for the current quarter, unchanged from a year ago. Strong current quarter sales of cancer whole life products in the business market in anticipation of a tax law change were largely offset by our discontinuation of certain products that were popular in this channel as part of our integration of the product portfolios.
Life Planner sales were $380 million in the current quarter, up $83 million from a year ago. Sales by Life Planners in Japan were up $76 million, including about $50 million from U.S. dollar and Japanese yen-based retirement income products. Our yen-based retirement income products are gaining popularity in the business market for use in benefit plans, contributing to sales growth. The remainder of the sales increase in Japan came mainly from cancer whole life products, which are also popular in the business market served by our Life Planners. Similarly to Gibraltar Life, sales of these products in the current quarter reflected purchases in advance of an expected tax law change. Life Planner sales outside of Japan were up $7 million or 9% from a year ago.
In March, we announced reductions in crediting rates for Gibraltar Life's U.S. dollar denominated products, effective April 1st, and in early April, we advised our Life Planners of similar pricing changes on Prudential of Japan's U.S. dollar products to be effective in June. While we cannot estimate the near term impact of these pricing adjustments, it is reasonable to assume some degree of sales acceleration into the first half of this year due to repricing activity. Corporate and other operations reported a loss of $363 million for the current quarter, compared to a $269 million loss a year ago. The increased loss in the current quarter came mainly from higher interest costs, reflecting a greater level of capital debt, reflecting our deployment of debt proceeds in our businesses.
A charge of about $20 million in the current quarter to increase our reserves for our estimate of unreported death claims based on application of matching criteria to the Social Security death file, a lower pension credit, and higher expenses, including nonlinear items such as corporate advertising. To sum up, our U.S. retirement solutions and asset management businesses are continuing to benefit from growth in account values and assets under management, driven by solid net flows, ending the quarter with record high account values in annuities and retirement, and record high assets under management in the asset management business. While business fundamentals remain strong, the comparison of results to a year ago reflects items that can vary from one quarter to another, such as investment valuations and transactions in asset management, which were a lower contributor in the current quarter.
Results from our U.S. protection businesses were negatively affected in the quarterly comparison by an adverse fluctuation in group life claims experience and less favorable group disability results. Our international businesses are performing well, benefiting from expanding distribution across multiple channels and cost savings from business integration synergies well in line with our targets. Thank you for your interest in Prudential, and now we look forward to hearing your questions.
Thank you. Ladies and gentlemen, if you wish to ask a question, please press star followed by one on your touchtone phone. You will hear a tone indicating that you have been placed in queue. You may remove yourself from queue by pressing the pound key. If you are using a speakerphone, please pick up your handset before pressing the numbers. Once again, it's star and then one for your questions or comments. Our first question will come from the line of Chris Giovanni with Goldman Sachs. Please go ahead.
Good morning. Wanted to see, I guess, firstly, about regulation. In particular, curious on the status of deregistering as your savings and loan to not automatically qualify for Volcker. What are you learning from the processes we're seeing around Met in terms of the challenges in dealing with some of the regulators? Lastly, how are you positioning around potential for non-bank SIFI?
Yeah, this is Mark. Quickly on the first one, we're absolutely on track with respect to the transactions and processes associated with de-thrifting, which isn't actually a word. We anticipate the completion of that process on schedule this summer. In terms of the lessons from watching what's happened to MetLife, I don't want to comment specifically on line items, and there's been a lot of discussion picking at the different parts of the framework and the way questions get asked.
I just emphasize that our view all along has been that the basic banking type approach to balance sheet and stress tests will not be appropriate to apply to an insurance business for a variety of reasons related to the nature of assets and liabilities and the way in which risk is actually realized, and also I'd add the long duration nature of both sides of the balance sheet. I think if we're learning a lesson, it's that hypothesis is right, that basic framework doesn't work very well. You wind up with the need to make a lot of exceptions and explain a lot of things that just don't make sense because there's an application of the basic rules of the road that just don't fit very well with respect to the insurance business model versus the bank business model.
We have filed comments in response to the Fed's NPR consistent with that statement and consistent with what we've said all along, which is it's more important that we get this right than that we fight over the labels that get put on one company or another. I continue to believe that that's true. We've provided a pretty thoughtful discussion of the way in which we think the right framework differs from the pure cookie cutter banking type framework in looking at businesses like ours. Again, I would say if anything, we're learning that
It really is true that it doesn't work very well. Finally, on the question of non-bank SIFI, we're part of the process with respect to commenting on the letter. We continue to attempt to engage with respect to opportunities to educate and discuss our business models and the way in which risk comes true for us, and as a result of that, how we think we should be looking at solvency and stress test type questions. I expect that we'll have the opportunity as we go through the process to discuss both the issue around whether or not we should be designated as a SIFI, and within that context, how we should be approached in terms of understanding the solvency measures and criteria.
Okay, just quickly on variable annuities. In the past, you've had an appetite and I guess some success around acquiring certain blocks of business from Allstate and Skandia. It seems like every month someone wants to get out of this business. Curious if you would be willing to acquire something in the VA space.
I would say that with our Highest Daily value strategy, that we are very comfortable with that and would not be especially domestically interested in acquiring any other VA block of business.
Thanks so much.
We certainly wouldn't be looking for standalone books. This is Mark. Just to elaborate a little bit. I guess if there was something incidental to a very compelling story, we'd have to think about it, we're certainly not in the market to buy variable annuity books.
Thank you. Our next question comes from the line of Mark Finkelstein with Evercore Partners. Your line is open.
Good morning. On capital management, maybe I'll ask the question this way. John, in your opening remarks, you reiterated the 13%-14% ROE target as achievable in 2013. Within that was obviously a contribution from capital deployment. I guess my question is, has there been any change in the pace or quantity of capital deployment in relation to those original expectations?
Mark, let me answer that question more broadly, then I'll come to the capital piece of it, because I think it is important to elaborate on why and how we have the conviction we do about our ROE aspirations. Capital is certainly one of the elements. When we've talked about this in the past, we've been very consistent in saying there's really three things that are going to enable us to achieve our goals for ROE expansion. One is the superior business mix and the strong performance of our high ROE businesses. Second is the deal-related synergies from Star and Edison, and the third is the capital management. Let me, by expanding slightly, let me just hit each of those three briefly, particularly in the context of where we are and where we are this quarter. The superior business mix thesis holds.
If you look at our international businesses, which now represent nearly 50% of our earnings, they had strong performance and exceptional fundamentals. If you think about our asset management businesses, we're feeling very good about that business as well. The variable component of revenue was less strong this quarter than it's sometimes been, and that will fluctuate. In terms of the overall vital signs, investment performance, asset flows, and revenue growth of base level fees, that business is doing very well, and we have no difference change in our thinking regarding the prospects or the return potential in that business. Annuities, life, retirement, they're strong as well. Group clearly has been unhelpful in its performance in recent times, and we recognize that. We have to keep in mind that business is the smallest of our reporting segments.
It represents, in a good year, 5%-7% of our earnings. While we're very intent on fixing it, and I don't mean to minimize it at all, it's not driving our overall business mix element of the achievement of our ROE. The second piece, which I'll hit much more briefly, is Star and Edison. You've heard from our comments that that's an important part of our attaining our ROE aspiration, and that holds absolutely true as well. The third piece that you specifically surfaced, Mark, is the capital management piece, and that's a combination of investing in our businesses, opportunistic M&A, also opportunistic divestitures, which you've seen us do as well, as well as returning cash to our shareholders as well. It's a blend, and we continue to view it that way.
When I think of the overall picture then taking an expansive approach to your question between the business mix, the deal-related synergies on Star and Edison, and the strong capital management, all three of those remain essential elements to what we aspire to do, and we're holding the course with our expectations and aspirations.
Okay. Maybe just one quick follow-up for Rich. Rich, I was a little surprised that the readily deployable capital component didn't increase, and I thought you did a transaction earlier in the first quarter around RMBS that may have moved some money from capital capacity to readily deployable. Am I wrong about that, or why didn't readily deployable capital go up?
That was the REMIC transaction only added to operating debt, it's going to be used to fund the operating needs throughout the year. It didn't add to capital debt. It was operating debt.
Okay. All right. Thank you.
Thank you. Our next question comes from the line of Thomas Gallagher with Credit Suisse. Your line is open.
Hi. First question I had was on Gibraltar. John, I know you had mentioned the benefit ratio went up on a year-over-year basis. Even when we look at the last several quarters, the benefit ratio relative to total revenues in Gibraltar was fairly elevated. Just curious, is there anything unusual in that number that we should think about? Is there seasonality at all, product mix shift? Anything you can elaborate just in terms of that one particular metric, because I know DAC amortization was higher, but this is not DAC amortization I'm referring to.
Tom, this is Ed. There's an element of all of the above, as you would imagine. There's always seasonality as a factor. Yes, you're right. It's product mix that's a factor, and there's probably more of that going on now than usual because you have the Star and Edison Life Consultants moving away from their old company products to the Gibraltar products. You have a lot of that, and then you have the normal fluctuation that takes place on a book this size. When we filter through all of those moving factors, we don't see anything going on there that's of the slightest concern to us, frankly. It's a very steady book of business, very consistent profitability, very comfortable with what's going on, particularly in light of the magnitude of change that's taking place. This is actually very minor.
Got it. Thanks, Ed. Just as a follow-up, are all of the bank sales done through Gibraltar, or do some of those come through POJ?
They're all done through Gibraltar, Tom.
Okay.
POJ is not involved at all. The way it works, just to take you inside the structure of it, we actually have a third company, which you're probably familiar with, we call Prudential Gibraltar Financial, but it's part of the Gibraltar segment, so it operates as a separate company. All of our new business on banks is being done through that company, but it's all reported through Gibraltar. It's a Gibraltar subsidiary. POJ never has done any bank business. The reason that it may even be a question in your mind is that we have taken, and consistently have taken, Life Planners out of the POJ organization and have transferred them over to Gibraltar to be seconded to the banks. That's the only connection between POJ and any of the bank business.
Got it. Just looking at the supplement, it looks like sales are now half bank, half Gibraltar. That would be the split. I guess just on a related note, is there any meaningful mix shift going on in terms of more retirement-oriented products versus mortality within Gibraltar?
Not so much within Gibraltar. That is a steady trend kind of across the board that you're referencing, and it's one of the reasons you see the average premium going up. I'd say it's more a phenomenon driving the sales inside POJ, which as you see, have for several years now, in particular in this quarter, grown very steadily. It's not so much the growth in headcount, which as you see remains relatively small, yet you hit double digit growth in sales. That's coming from the double digit growth in the average premium. In the Gibraltar side of it tends to be more on the traditional protection side, particularly over in the Teachers Association, which represents about half of it. Inside the bank channel, you get a mix of both protection and retirement. You get a combination of the two.
The bank channel does remain about 80% insurance, very small portion of other products, either A&H or annuity.
Okay, that's helpful. Thanks.
Sure.
Thank you. Our next question comes from the line of Randy Binner with FBR. Your line is open.
Hey, thanks. I'd like to talk about the losses in disability and hoping you can share with us kind of some sense of what is driving the higher loss results in the last couple of quarters, if it's frequency, severity, case size, just to give some sense of kind of what's gone wrong in the underwriting there.
Sure. No, happy to do that. Let me provide some overall context to the disability as well, and I'll talk a little bit about life because I think they're very different issues. Over the past couple of years, the disability ratio has been moving up. Let me give you some context of previous years, because the disability ratio was 86%, 87%, and 89% in 2007, 2008, and 2009 respectively. In 2010, it did jump to 95%. We started to look at it then, but thought that in part it was due to the economy. By the beginning of 2010, this was clearly on people's radar screens, or by 2011, excuse me, by the beginning of 2011. By June of 2011, we had hired a consultant to review the pricing, the processes, the procedures, and in fact, we're raising pricing.
The first point I want to make is that I don't want people to think that we woke up yesterday and were surprised by the benefit ratio. We've had our eye on this for a while. Now, I do think we can contribute part of this to the economy, but that explanation is obviously getting a little bit long in the tooth. To get to part of your question, we're continuing to experience some of the same issues we've described before, especially on the long-term disability side, which is higher severity, higher incidence, and lower terminations. The terminations that are occurring are for lower amounts, resulting in smaller reserve releases. What we've concluded is that we can't expect these results to self-correct totally on an improving economy. We have been and remained in the process of repricing the book.
Obviously, that won't happen overnight as cases are either 2-3 years. It'll take a while for the lump essentially to move through the snake, but we've been working on this for a while. In addition, as John mentioned, we brought in Stephen Pelletier, one of our most experienced managers, to run the business. I think this says a lot about the seriousness with which we're taking the issue. We've asked Steve to come in and reexamine everything to see if we missed something. I hope you take away from this part of the explanation of our current performance is that we recognize that we have an issue and that we're dealing with it. Let me also talk about the life side of the business, which John touched on for a minute, because this is a very different part of the equation.
In this business, as you know, the benefit ratio tends to be seasonally weaker in the first quarter than in the fourth quarter. As Mark said, this was certainly true in this quarter, but to an even greater extent than we expect from a seasonal basis. We went from the benefit ratio in the fourth quarter that was the best in five years, to a benefit ratio in the first quarter that was the worst in five years. Clearly the composition of the block of business didn't change significantly in one quarter's time. Interestingly, over the longer term, the five-year average benefit ratio for this business was just over 89%. It's been reasonably steady over that five-year period, which is to say that when you look at the experience in the first quarter, which is primarily from an increase in severity, not in incidence.
By the way, we've actually had the actuaries scrub this data. We don't see anything that would lead us to believe that this is anything but a one-off quarter, which would not imply a continuation of elevated benefit levels. Having said that, we're doing a lot of introspection and have again asked Steve to look to make sure that no stone's unturned in terms of looking at all the issues and make sure that our premise is correct. That would be kind of the discussion of the two sides of the coin, if you will. I hope that answers your question.
Thank you very much. I have one quick follow-up. What kind of price increases would you expect to push through that block? If you've already started them, what's been the reaction of the market to the price increases?
Well, the price increases have been in the low double digit on average. You have some that are less than that, some that are more than that. I think from the market's perspective, I think you're seeing a lot of people increase prices. I think this is par for the course.
All right. Thank you for that.
Thank you. Our next question comes from the line of Jimmy Bhullar with JP Morgan. Your line is open.
Hi, thank you. Some of my questions were answered, but I had one on the ITSICM revenues in your asset management business. They were a little light this quarter. If you could just talk about what were some of the factors that caused that, whether by product or geography, and then also what your expectations are for that business if you've in fact had some losses in Europe, given what's going on in the European economy and in Asia.
Sure. Happy to do that. It was a tough quarter-over-quarter comparison on ITSICM, because last year we had a boost from gains on foreclosed real estate assets in the interim portfolio, which provide a significant amount of gains. This year, we had a drag from valuation declines on certain properties in funds, especially in Europe and Asia. That was the main cause and specific properties in a few funds. What I'd say, looking forward, is that economic conditions in Europe are affecting valuations of property, which may continue to affect ITSICM going forward. As John and Mark both have said, this is a volatile segment and it will go up and down.
We've reduced the size of the proprietary investing significantly, or strategic investing significantly over the past few years, there's still inherent volatility, and we still have some legacy investments that will go up and down. Having said that, the other thing I would mention is what John touched on originally, which is the quality of flows within the asset management segment. We experienced significant positive flows of $8.6 billion, $4.5 billion of which were institutional, and $3.2 billion which were retail. The interesting thing about the retail side was that it was about 50/50, fixed income and equity. I think what that reflects is, one, is very good investment performance, but two, our investment over the past few years in the retail business. That's led us to 12 consecutive quarters of record AUM and record asset management fees going forward.
I think for the business as a whole, it's doing reasonably well, I think it's fair to say that we'll experience and continue to experience a certain amount of volatility in ITSICM. Part of that could be because of what's going on in Europe. We'll just wait and see.
Okay. Then on the 401(k), the full service retirement business, your flows have not been that great for the last several quarters, actually. I think you mentioned on the call that you're seeing high competition in that market. Could you elaborate a little bit on what you're seeing there and what your views are for that business?
Sure, absolutely. On the full service side, we're still not seeing a lot of turnover, plan turnover. There's not a lot of plans out there, and we're still seeing a fair amount of price checking in the marketplace. We're starting to see a few more RFPs, but we're not sure whether the price checking are real. We'll wait and see on that. You can really categorize the negative net flows into four different categories. We look at this every single quarter and analyze it in detail what the negative flows have been. Let me give you some categories and some percentages. The first one would be M&A or bankruptcy. 50% of our outflows were because of M&A and bankruptcy, where we're just on the side of the acquiree, not the acquirer, and so you lose the plan.
The second would be relationship changes, this is a smaller percentage, but where a plan sponsor, there's somebody new that comes in or a new consultant comes in, and they just want to make a change of some sort. The third is interesting. The third is pricing, and we talked about that. 60% of the cases we lost were below our target range or our target return that we would like. 60% and 50% add up to more than 110%, some of the M&A cases we lost, and I put this under the guise of better to be lucky than smart. Some of those cases were below our target rate of return. We really do look at that very carefully.
The fourth is, frankly, there are a few cases, these were less than a handful of cases, a small percentage, both in terms of number of cases and in terms of dollar amount, but there were a few cases we lost that we would rather have kept. At the end of the day, we ended up with a record AUM of $146 billion on the full service side. Part of that was due to market, we still feel pretty good about that. The other interesting point about the business in general is the change in business mix. We also had record AUM on the institutional investment side with almost $94 billion.
If you look at the mix, the IIP business went from 32% of the total of AUM a year ago to about 39% of the total AUM at the end of first quarter. With IIP, the growth came from both the investment-only stable value business as well as our pension risk transfer business, both of which we think are growth businesses with good rates of return going forward or target rates of return. We're quite pleased about the business. We're keeping the discipline on the full service side, and we think the change in mix of business is not all bad.
Okay, thank you.
Thank you. Our next question comes from the line of Suneet Kamath with Macquarie. Your line is open.
Thank you. I'd like to ask about your life, specifically universal life. What kind of target returns you're getting there? We're hearing some other carriers talk about pulling back because the market is commoditized and too competitive.
Right. I don't think we give target returns on any specific product. Don't forget that twice in 2009, we raised prices significantly. As a result, our sales, and I'll get the percentage a little bit wrong, but our sales plummeted in 2010 by about 30% or so. As a result of that, we haven't really changed our pricing, competitors have come back to us, if you will, in terms of pricing, which makes us relatively more competitive in terms of sales. We feel good about the returns we're getting, but it's not because we've had any recent price decreases in order to boost sales.
Thank you.
Thank you. We have time for one final question, and that will be from the line of Jay Gelb with Barclays. Your line is open.
Thank you. I had two questions. The first is on the run rate annualized results in the first quarter relative to guidance. If I take the $1.34, annualize that, then add in the annualized impact of the $0.17 impact of the ITSICM , I get to around $6. I realize there's some additional drag in the corporate line, but that still seems below sort of the 2012 guidance range. Am I missing anything else there? That's my first question. I have a follow-up.
Okay. Jay, this is John. Let me just maybe offer a couple observations. One is we made a decision back in 2009 to issue guidance once a year and then to either affirm it or to update it. We're going to stay the course with that approach. Having said that, while I'm not putting a specific number on it, I would say that we think that the current quarter is not fully reflective of either our earnings power or our business momentum. Just picking three things off of that. One is the group life experience that Charlie talked about. The second is the asset management variable revenue component, and the third is corporate and other, and a couple of things that Rich mentioned.
I think with just looking at those three specifically, I think it validates this concept that the current quarter is not reflective of either our earnings power or our momentum.
Okay. My second question has to do with variable annuity sales. It appears that you're comfortable remaining in that quarterly sales range of $4.5 billion-$5 billion. My sense was that that could come down over time because you didn't want it to be too large a percentage of the business. Maybe you can just clarify that. Thank you.
Yeah. I think what we look for in this business, as in other businesses, is sustainable, profitable growth and that the level of sales comes out of that. We don't target necessarily a level of sales. If we think we need to raise prices and the sales comes down a little bit, we will do that. What we look for is an acceptable rate of profitability and the amount of sales comes out of that function.
Understood. That run rate, $4.5 billion-$5 billion, is something we should keep in mind?
I would say again, that we'll look at the profitability of the product and the sales will come out of that. I don't want to predict any particular level of sales going forward one way or the other.
Understood. Thank you.
Thank you. Ladies and gentlemen, today's conference call will be available for replay after 1:30 P.M. Eastern today until midnight, May 10th. You may access the AT&T teleconference replay system by dialing 800-475-6701 and entering the access code of 225936. International participants may dial 320-365-3844. Those numbers once again, 1-800-475-6701 or 320-365-3844, and enter the access code of 225936. That does conclude your conference call for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.