Take our seats. We're going to start our next presenter. Our next presentation is from John Strangfeld, Chairman and CEO of Prudential Financial. Pru is differentiated among life companies on our coverage list with half of earnings from international and a meaningful asset management business. Pru has also said that their long-term targets will require capital management, so it's telling the market that it doesn't plan to accumulate excess capital on the balance sheet. With that, I'd like to hand it over to John to hear about the outlook for Pru. John?
Thank you, Eric.
Welcome.
Thank you. Good morning, everyone.
Good morning.
Pleased to see you. I mentioned to Bob that I was pleased to see Bob precede me because I knew that assured we would have a packed house, and it's good to be here. What I'd like to do this morning is to begin with some high-level comments about Prudential and then take you through some specific areas of high priority focus areas or detail in terms of our strategic positioning. As we all know, the market conditions remain challenging, but our business momentum, I think as you can see, remains very strong. We ended 2011 a stronger company with strong fundamentals, and we believe very good prospects. Our performance, the way we think about it, is that it's driven by strong individual businesses, an attractive mix of businesses, financial strength, and then our leadership talent.
We're very keen on leadership talent being a big driver of our success. In terms of where we are today, our business mix is by design. It's not an aggregation of historical decisions, and we feel very good. I think we're one slide ahead here, Eric. Yeah, thank you. It's not a product of historical decisions. It's actually by conscious design. As we'll show in a slide in a moment, we've gone through a lot of change in the composition of our capital and how it's allocated, both by geography as well as by line of business. We think what this results in is a very attractive portfolio in terms of strong cash generative ability, a nice blend of growth and stability, and an ability to weather adverse financial environments.
Clearly, as an institution, we take risks, that's by design, and we take them with care, we actively manage them, and we diversify those risks. The challenging markets that we face both in this economy and other parts of the world, in our mind, has actually been, in many respects, an enhancer to our business prospects because many individuals are looking for ways for themselves to manage risk better. Our value proposition has become very compelling in that environment. When you combine our value propositions with our consistency and commitment to our businesses, our financial strength, and our brand, it has resulted in strong momentum in our business, even in markets that have not been that strong themselves. We're well-served to grow in our businesses, and particularly in the U.S. and Japan, which are the two largest financial services businesses in the country.
Our strong cash flows support flexible capital management, which I'll elaborate on a little bit later, and they enable us to take a balanced approach between investing in our business and returning capital to our investors. Finally, it's about our management team. For those of you who know us or meet with us more frequently, you know it's about a team. It's not a hero system. We're very proud of both the individual people and how they choose to work with one another. Our aspiration is to be perceived by the marketplace, both our investors and our regulators and our shareholders, as being one of the finest management teams in financial services. We're spending a lot of time in making sure that that is the highest possible priority.
As for capital, this next slide gives you a little bit of a sense for the transformation of our business since 2002. You can see large increases in capital committed to International Insurance and Annuities. Most of these increases were funded with capital previously attributed to corporate and other, and that would include amounts that were associated with businesses that we've since divested. We've divested quite a number of businesses over this timeframe, including our investment in Wachovia Securities. The last bar reflects the Star and Edison acquisitions. International Insurance now has about 44% of our equity, slightly more than our U.S. Retirement Solutions and Investment Management division. This has been a very purposeful redeployment of capital to position us in good markets with good business models. Following up on my comments about mix, here's a more granular view of our equity in our businesses.
International Insurance is now our largest business as measured by equity, accounting for roughly $14 billion or 44% of our equity. Annuities represents about $7 billion or 23% of our attributed equity. At the bottom of the pie, you can see that individual life and group insurance, our U.S. businesses in the insurance area, together represent just under $5 billion or about 15% of our equity. We think this is an attractive and balanced picture. This slide gives you a little sense for the ratings. It gives you a barometer for the vitality of our business and validate the notion that we're a leading player in the markets in which we have chosen to compete. What I'd like to do is skip beyond this and talk a little bit more specifically about a couple of the businesses. In particular, I'd like to move to our International Insurance businesses.
Our International Insurance strategy is highly focused. We concentrate on a limited number of countries. Our view here has primarily been focused on deepening our footprint in a limited number of areas where we already have a presence, and then complement that selectively with some country additions from time to time. We have two models in terms of distribution for proprietary distribution. First is what we call the life planner model, which originated in Japan, which is a very careful, very time-consuming process of selection. We usually select three or four out of every 100 candidates to be a member of our life planner force. These are superbly effective, highly professional individuals, and we spend that much time on it because it pays very big dividends later with high productivity and high retention.
You can see that reflected in our superior sales results and in the high persistency of our in-force business. We target the affluent segments of the marketplace to take best advantage of the quality of these life planners. Our historical focus is, and remains true today, is on traditional protection products. That's key to our margins, it's key to our consistency of earnings, and we start with a very simple concept, but it's needs-based sales done in a highly effective way. We have complemented in recent years with a second proprietary distribution, namely the life advisor sales force that serves the more broad-based market, middle market.
This began when we acquired Gibraltar Life a number of years ago, and we've acquired a series of companies since. Most recently, our Star and Edison acquisitions are becoming a part of Gibraltar, have become a part of Gibraltar as well, actually as effective in January of this year, in the sense of the legal merger of these entities. We see tremendous opportunities in Gibraltar, both through further penetration into affinity channels, which has been big areas of focuses in this business for some time, and also through the expansion of bank distribution and independent agency. You can see in our results very strong progress in those business areas. This has been a very promising, and the promises have been backed up with the realities of performance, very promising area for us.
I should also mention that retirement needs is an area that's getting growing emphasis in our business in Japan as well. As our customers age, they are very interested in finding ways of managing the different risks in life as they get older. I can tell you as an example, in POJ, roughly 40% of our new business is with our existing customer base, which gives you a sense for both the client satisfaction and also as they evolve in their needs, their proclivity to turn to us to address their needs. If we think more broadly about Japan, we want to just acknowledge that this is a marketplace we've been in for a long time, and we feel very good about that. I think we're on the next slide here. Thank you. I can't multitask. This is why Eric's doing the clicker and I'm doing the speaking.
We just have to sync up a little. Japan is clearly a very major economy. It's by far the second-largest financial services marketplace in the world. This is a tremendous market, we believe, for both traditional life insurance products as well as retirement products. There are over $10 trillion of household funds in low-yielding deposits. That's the world's largest pool of such assets, larger than the U.S. This is also an environment that is risk-averse and has strong savings inclinations, and therefore, their needs support our beliefs that we can grow and prosper in a market environment like this. It's an aging population that also has changing needs with increased responsibility, though on their own self-sufficiency in terms of financial security, and that, in turn, favors us as well. Okay, next slide. Our international insurance business, this is the annualized new business premiums.
You can see the progress that we've made here is extraordinary. We're very proud of this. It's our highest ever level of new business premium in 2011. It does include $700 of the $3 billion that you see here. It does include $728 million. This is the initial contribution from the acquired businesses of Star and Edison. On a same store basis, these results are also strong. They're up 24% year-on-year. There's a lot of factors behind this, including our success I've mentioned in recent success in the bank channel. Our international insurance businesses have delivered a combination of strong growth and excellent returns. Our success in international insurance, especially in Japan, is predicated on these very high-value business models, distribution models, and very careful execution.
We're feeling very good about where we stand with that vis-a-vis the Star and Edison acquisitions in that same context. This is a story we're very proud of. I'm happy to answer more on this in the Q&A, let me now then switch over to a few minutes on our U.S. businesses. This first slide shows our industry standing in variable annuities as of the third quarter. As you can see, we're second in both assets and in sales, with $4.5 billion in advisor-sold VA sales. On the left, you can see three companies that were very big in what they have on their books but are absent from the sales results in the third quarter. That's Hartford, Hancock, and ING. On the right, you can see emerging participants who don't have the legacy of a big in-force book Nationwide, Transamerica, Allianz.
We expect to see some shuffling with respect to the annuity marketplace for a whole variety of reasons. We're comfortable with the turbulence in market share. We're going to price for returns that we think are appropriate. We're not trying to maximize market share. We think this is an attractive area, and an area that we can continue to prosper in. We're going to continue to execute our strategies around wholesaling and distribution in the ways we always have. If you look at our distribution mix, this has evolved materially just in the last three years. As significant as our level of sales are, is their spread among the channels. The independent bank channel is the largest channel for the VA industry. We have long been the leader in that channel.
You can see on the pie chart on the left that that independent channel represented 57% of our sales in 2008. Because we've made a lot of progress in the other channels, although the independent channels continue to grow, we now have an even more attractive balance and mix of our businesses we think is very attractive on a go-forward basis. The risk profile of our annuity business is also steadily improving. This is because the percentage of the balances with risk mitigation included in the product design is rapidly increasing. The blue segments that you see here, which represent the percentages of our account values with living benefit guarantees that have the auto rebalancing feature, the built-in risk mitigation algorithm, is now up to 64% of our book.
When you combine that with the fact that 22% of our book have no living benefit guarantees, which is what's shown in red here, you can see that 86% of our overall annuity portfolio is either protected with auto rebalancing or doesn't have a living benefit guarantee. On the other hand, the green bars represent the 14% of the account balances that do not have a risk mitigation feature in there. When we're thinking in terms of the improving risk profile, you can see that as we've grown and evolved our business, we've also actually done a lot of risk mitigation that's done a great deal of taking the statistical tail out of the experience. We think this is a very important part of our story.
Moving on to our retirement businesses, which we've historically focused on, has been full service retirement, which is represented in the blue portion of the bars. In this business, we provide the full range of products and services to retirement plans, especially defined contribution plans. Prudential Retirement also conducts our institutional investment products activities, including GICs, funding agreements, structured settlements, and the like. In the last two years, we've had great success selling synthetic GICs, which we call investment-only stable value products, as we've been able to fill the void created by the withdrawal of a number of competitors, particularly from the banking arena. We also see meaningful opportunities for new institutional business that deals with pension risk transfer. This is situations where corporations seek to offload defined benefit pension risks that they've historically managed for themselves.
We've had some encouraging signs of activity in this area in 2011 with three longevity reinsurance transactions for pension plans in the U.K., and a pension plan buyout of a specially designed group annuity, the first of its kind in the U.S. We think this is an area that's hard to predict in terms of the speed with which it will come about, but it's inevitable, and we think we're very well positioned in terms of skill set, financial strength, and brand to be a very active participant in this area.
In terms of flows, while flows in the full service retirement business have not been as strong as in previous years, the institutional investment product side has kicked up dramatically over the last couple of years as we tapped into the opportunity to increase sales of products that provide attractive returns, such as the investment-only stable value that I mentioned a few minutes ago. Now I'd like to turn briefly to asset management. We compete here on the basis of experience, our good investment track records, and the breadth of our capabilities, which are quite a bit wider than a lot of asset management firms of a comparable size. We have a significant commitment in investing in private markets, such as commercial real estate and private debt, where we often co-invest alongside of clients. This activity makes access to capital for co-investing one of the ways in which we compete.
Our brand, our reputation, our scale, and our commitment to asset management are all important parts of our success, we do view this as a business, not a department. It's run that way, thought of that way, and its business activity reflects it. If we look at the assets under management, we have in total about $900 billion of assets under management at the end of 2011. That's a new milestone for us. We're active in all major asset classes, the biggest one is fixed income, which is 52% of this company's AUM. Of that total AUM, $620 billion is managed by our asset management business here in the U.S. As I say, that's a business, it's not a department. This is what it looks like in terms of the client composition.
You can see that institutional customers account for 43% of the AUM, and retail customers account for 19%, and they would represent an even larger percentage of the revenue base. For any asset management business, a powerful indicator of performance and prospects are flows. We've had very significant institutional asset flows for many years. These flows, especially from pension fund clients, who in some instances are combining our asset management services with risk management solutions, have driven sustained growth in our asset management fee base. We've also had significant flows from retail investors in recent years, given the strong investment performance of our funds. Turning to individual and group insurance in the U.S., we focused on two principles here.
One is to write only business that produces good returns on capital, and we're in an industry in the U.S. that's got excess capital, and we want to make sure that we're not getting drawn into pricing levels that are unattractive relative to our return aspirations. We also want to make sure we focus on products that we believe we'll feel good about having written in the years ahead, meaning we've ignored opportunities to pursue in stranger-originated life insurance and other business driven by premium financing. One of the things we like about our U.S. individual life insurance business is it's largely uncorrelated to the U.S. equity markets. Not perfectly so, because there is some Variable Life book. By and large, this is a business that produces very stable earnings and strong cash flows, and therefore it plays a very valuable role in our overall portfolio.
On the group insurance side, clearly one of the effects of the recession has been that companies are focusing on stretching their benefit dollars, and this in turn, creates an opportunity for us to be offering more voluntary benefits through the work site to employees. This has led to a big uptick for us in what we call Optional Life sales, and we think this is a business that offers an attractive complement of work site opportunities versus sales across the kitchen table, if you will. Disability is a relatively small part of our group insurance business. It has struggled in recent periods, we believe because of the weak economy, although pricing actions and focusing on claims management will, we believe, improve this performance. Where are we in terms of the U.S. business overall? In 2011, we see underlying earnings growth in almost all of our businesses.
The solid performance of retirement, asset management, and individual life is reflected in the results. One comment on annuities, what is dragging down the earnings is unlockings of deferred policy acquisitions and other costs and reserves for guaranteed minimum death and income benefits. When you look at the earnings excluding those disclosed items, as I just mentioned, you see a very attractive picture, which is what's portrayed in the darker blue numbers. All in all, solid performance from our U.S. businesses with earnings well distributed among a variety of businesses and a variety of risk profiles. Summing it up, we have a business that has solid financial prospects in a variety of financial conditions. We can do very well in many different ways. Our businesses are leaders in their chosen markets, as evidenced by strong sales and flows that you see reflected in our results.
Our capital, liquidity, and investment portfolio support our businesses enable us to pursue new opportunities, such as the Star and Edison examples. Our financial strength is in good shape and supported by very strong risk management. In financial services, we think the talent's the biggest source of differentiation, and we expect to do a superior job in talent management and be recognized for the caliber of our people. We, in terms of aspirations in November, we stated our ROE objective for 2013 of 13%-14%. We expect to achieve this. We hope to see you as you see ourselves, as a company very well positioned, able to produce strong financial results and supported by strong fundamentals that assures the sustainability of those results over time. With that as the intro, I'm very happy to open it up to questions or comments that people may have.
Okay.
Ed.
John, I'd like to lead off with a question. You mentioned up front about the good cash earnings profile of your businesses, and I'm wondering if you could talk about what challenges, if any, do you face in getting capital out of Japan, and specifically with the very strong sales that you've had recently, how is that challenge more or less than what it's been historically?
I'd basically say, I think this is a manageable challenge, meaning if our businesses are performing well, our companies in Japan are very well capitalized. We make sure that they compare very favorably to the Japan comparables, because that's important in terms of the positioning of it. These would be the sales results. That does not impair the ability to ultimately have capital migration, the reflecting of strong performance. There's certainly capital required to support growth levels, and particularly if the growth levels are higher than we expect. On the other hand, in terms of our ability over time to have the capital made available for alternative applications, we think that's doable.
With respect of your ROE target, the 13%-14%, when you look at it represents a step up from 2012 levels. Assuming that the equity markets cooperate, generally in line with your broader assumptions, can you maybe elaborate a bit what gives us that step up as we move into next year?
Well, if you look at 2011, our ROE was in the 11%-11.5% range. You're correct. This achievement by 2013 of 13% is a material step up. I'd identify three things that are the primary things that account for that. One is Star Edison. Having that business successfully up and integrated and delivering on the synergies that we envisioned upon the time we embarked upon this deal. In 2013 is when we expect to see that manifest itself. The second is the continuing strong performance of our businesses, particularly our highest ROE businesses, which also in many cases tend to be our highest growth activities. The third is active capital management. Those three components are the components that really drive our ability to support the aspiration we have for the 13%-14% over that timeframe.
You're correct in identifying that this is something we actually identified over a year ago as an aspiration. We're sticking with it. We think that our business mix is a big part of our ability to achieve this. The underlying performances of those businesses that make up the mix.
I'm going to come in with another one then if you don't. You showed the chart of flows in full service and in institutional. The full service flows have been down, but the institutional flows are up a lot. Could you talk about the risk of writing that business in a very low interest rate environment? What type of withdrawal risk do you have if rates happen to go up a lot in that business specifically?
It's okay. I'd take that in two parts. Firstly, the moderate levels of flows in the full service reflect the fact that it's a fairly mature business in terms of full service retirement these days. There's not a lot of new plan formation taking place, and there's not as much RFP activity than there would've been, say, five years ago. There's just been less activity to partake in than was present for some time. We remain pretty vigilant on our pricing with regard to this business activity as well. That coupled with some unbundling, is another force at work in terms of that activity.
On the investment products, I think the best thing I can say, to your question is that we're very careful and very focused on asset liability matching, that we make sure that the assets and liabilities, duration and otherwise, are well matched up. I don't think we're taking a different type of risk in that particular business activity than we are in others, and that's certainly not accounting for the different result. The players who used to be more active in this space were the commercial banks and the investment banks. It had traditionally been in the insurance space, and then five, seven years ago framework, they became much more active. As they've faced their own capital issues, they've withdrawn from the space and have opened up return opportunities that hadn't been available for some time. This is not about taking excessive risk.
This is really about filling a market opportunity made possible by some of the landscape shifting in financial services. Yes.
Can you talk a little bit about which countries outside of Japan you'd be interested in expanding in and maybe just about the acquisition pipeline in the international space?
Okay. A couple of things I'd say. The first macro observation I'd make is M&A is nice to do, not have to do. We like our businesses. We like their organic performance. We know that acquisitions are both costly and intrusive. We do not believe the attainment of our return aspiration is dependent upon M&A. It is dependent upon capital deployment in one form or another, but not dependent upon M&A. We think of M&A as opportunistic, not essential in terms of our long-term results. Our historical pattern has typically been more about going deep within existing markets than it has been adding on new markets.
I don't mean to suggest it's all one or all the other, but if you look at the examples such as what we've done in Japan, going more deeply in an individual market provides more immediately realizable economic opportunities than it does going broad. We do know we need to do a bit of both. Going more specific to your question, when you look at our country mix, the two largest countries by far are Japan and the U.S. We don't mind that because, A, they're stable, and two, they're the two largest financial services marketplaces there are. If you look at our second tier of presence, meaning meaningful positions but not huge, you'd be talking about places like Korea, where we have a very important presence there, in Brazil, Taiwan, more modestly.
We have, if you go out into the longer term areas where we have presences today, but the fruits of that will be shown in later times are both the activities we have in both India and China. I would say we certainly are going to maintain our focus on insurance and retirement, U.S. and abroad. We're going to think of it opportunistically, and we will balance the opportunity to invest in opportunities that go more deeply in an existing country. From time to time, we'll look at other countries that we think match up with our long-term positioning. We're much more focused on Asia, and have some presences in Latin America. We have a very promising business in Brazil and in Argentina. We're not nearly as focused in Europe. We have a couple of small presences in Spain and Poland.
Our primary focus is on U.S., Asia as the largest segment of what we do.
Can you talk about the challenges of the sustained low interest rate environment, specifically as it relates to your VA business, the auto rebalancing, and how that could pose a challenge to achieving your ROE targets?
Well, I'd say that certainly low interest rates present some challenges to us, they probably present fewer challenges to us than they do many other players because of our business mix. Keeping in mind that almost half our earnings come out of Japan and the interest rates there are de minimis. It's not as though we have a new risk as it relates to those markets. The earnings we achieve in Japan are achieved without the benefit of substantial interest rates. You can take half the earnings off the table, basically, in that thought process. If you go through other parts of our business mix, we don't have a large block of Fixed Annuities, and some of our other insurance products are not as dependent on interest rates as the marketplace as a whole.
There are areas like annuities and certainly if the interest rate levels were different than we assumed when we priced our product at the beginning of 2011 versus where they wound up at the end. There's some effect there for sure. If you look at us in terms of interest rate sensitivity, I think in general, we have much less of it than you might assume because of the product mix I mentioned in the U.S. and because of the 50% almost of our earnings coming from an extraordinarily low interest rate environment already.
Okay, I think we'll have to cut it there.
I'm done? Okay.