May 2, 2013
Executives
Eric Durant John Robert Strangfeld - Chairman, Chief Executive Officer, President and Member of Executive Committee Mark B. Grier - Vice Chairman Robert Michael Falzon - Chief Financial Officer and Executive Vice President Edward P.
Baird - Executive Vice President and Chief Operating Officer of International Businesses Charles Frederick Lowrey - Head of Asset Management Business, Executive Vice President, Chief Operating Officer of US Businesses, Chief Executive Officer of Prudential Investment Management, President of Prudential Investment Management and Executive Vice President of Prudential Financial & Prudential Insurance
Analysts
Christopher Giovanni - Goldman Sachs Group Inc., Research Division John M. Nadel - Sterne Agee & Leach Inc., Research Division Jamminder S.
Bhullar - JP Morgan Chase & Co, Research Division Thomas G. Gallagher - Crédit Suisse AG, Research Division Suneet L.
Kamath - UBS Investment Bank, Research Division Eric N. Berg - RBC Capital Markets, LLC, Research Division Nigel P.
Dally - Morgan Stanley, Research Division A. Mark Finkelstein - Evercore Partners Inc., Research Division
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2013 Earnings Teleconference. [Operator Instructions] And 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.
Eric Durant
Thank you, Cynthia. Good morning.
To say the least, we know that you have been running a gauntlet of earnings calls today, so special thanks for joining our call. We actually delayed the beginning of this call to accommodate those of you who have been otherwise engaged.
Representing Prudential on today's call are John Strangfeld, CEO; Mark Grier, Vice Chairman; Ed Baird, Head of International; Charlie Lowrey, Head of Domestic Businesses; Rob Falzon, Chief Financial Officer; and Peter Sayre, Controller and Principal Accounting Officer. Our presenters today will be referring to slides.
If you would like to follow along, they can be found on our Investor Relations website at www.investor.prudential.com. 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 2013, 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 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 press release contains information about our definition of adjusted operating income.
The comparable GAAP presentation and the reconciliation between the 2 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.
John?
John Robert Strangfeld
Thank you, Eric. Good morning, everyone.
Thank you for joining us. Before we discuss specifics in the quarter, I'd like to kick things off with a few words: first, regarding our results; and second, regarding the visual aids Eric mentioned that we've added to enhance the discussion.
So let's begin with the results. We're very pleased with the results for the first quarter, and we believe we're off to a good start to achieve our goals for 2013.
The building blocks supporting our enhanced performance are solidly in place and, in particular, we're encouraged by the visibility results from a number of initiatives we've implemented over the last few years. Retirement, U.S.
Individual Life and International Insurance all contributed significantly to our results for the quarter. Now we're mindful that one quarter does not a year make, and that we did benefit from a generally favorable market conditions and mortality in the quarter.
That said, solid fundamentals largely account for the promising start to the year. Of course, challenges remain, and we'll continue to focus upon the delivery of business results that drive financial performance that support our goals.
In sum, a great start. As for the new slides, as Eric mentioned, these are available on Prudential's Investor Relations website.
They have been provided to enhance our discussion with you. We appreciate that noise in the numbers, as well as developments like new product introductions or prices changes can sometimes make it difficult to interpret what's going on.
We hope these visual aids will help clarify underlying trends and results and business drivers, and that's the basic intention of them. In a moment, Mark Grier will take you through our results for the quarter, then Rob Falzon, our new Chief Financial Officer, will cover our capital and liquidity picture.
And then I'll sum up very briefly and move on to the Q&A. So with that, Mark, over to you.
Mark B. Grier
Thanks, John. Good morning, good afternoon or good evening, depending on where you are.
I'll add my thanks to joining us. And as both John and Eric mentioned, I'll be referring to slides that are in the deck to which you have access through our Investor Relations website.
I'll start with Slide 2, an overview of our financial results for the quarter. On a reported basis, common stock earnings per share amounted to $2.28 for the first quarter, based on after-tax adjusted operating income of the Financial Services businesses.
This compares to EPS of $1.61 a year ago. After adjusting for market-driven and discrete items in both the current quarter and the year-ago quarter, EPS was up 49%, amounting to $2.13 compared to $1.43.
This increase is largely the result of underlying organic growth in our U.S. businesses over the past year; the first full quarter contribution from the pension risk transfer business we put on the books in the fourth quarter; the initial contribution from the in-force Individual Life Insurance business we acquired from The Hartford in January; continued growth of our International Insurance business; and finally, a more favorable claims experience across several businesses.
On a GAAP basis, we reported a net loss of $721 million for the current quarter. This reflects the accounting impact of foreign currency remeasurement of non-yen liabilities on the books of our Japanese insurance companies.
Book value per share, excluding accumulated other comprehensive income or AOCI, amounted to $55.94 at the end of the first quarter, down $1.92 from year end on a reported basis. If you adjust for the foreign currency remeasurement of non-yen liabilities, in other words, if we didn't have the geography mismatch where the offsetting gains on the assets are included in AOCI rather than net income, book value would be up $1.50 per share since year end after payment of our first quarterly dividend of $0.40 per share.
And if you add the numbers shown on Slide 2, at the bottom, you would arrive at a book value of $59.74, adjusting book value for the total impact of the FX revaluation. As we've told you, we won't consider ourselves to have achieved our ROE goal based on printing a result that is largely driven by reducing the denominator due to foreign currency remeasurement.
If you adjust for that, our annualized ROE for the first quarter would be 15.6% based on adjusted operating income as reported. Slide 3 shows a rundown of the short list of market-driven and discrete items included in our results for the quarter.
In the Annuities business, the equity market increases in the quarter caused us to release a portion of our reserve for guaranteed minimum death and income benefits and led to a favorable DAC unlocking, resulting in a benefit totaling $0.08 per share. In Individual Life, we absorbed integration costs of about $0.01 per share related to The Hartford Life acquisition.
In International Insurance, a gain in Gibraltar Life from the sale through our consortium of the last part of our investment in China Pacific Group resulted in a benefit of $0.09 per share. This has been quite a successful investment for us.
From the time of our initial investment in 2006 through its conclusion in the current quarter, we realized a total of about $525 million on an initial investment of $75 million. Lastly, within corporate and other results, we recorded a charge of $0.01 per share to write off bond issuance costs on high coupon debt that we plan to redeem prior to maturity.
In total, the items I mentioned had a net favorable impact of $0.15 per share on current quarter results. Removing the benefit of market-driven and discrete items from adjusted operating income and increasing the ROE denominator to add back foreign currency remeasurement would produce an annualized ROE of 14.7% for the quarter.
Slide 4 shows 2 views of our ROE trend. The blue bars are as reported based on adjusted operating income and with equity, excluding AOCI.
And you can see some variability that results from the impact of market-driven and discrete items on the AOI numerator and foreign currency remeasurement on the denominator. You can see a trend that's more closely aligned with our business results in the green bars, where we've removed the impact of market-driven and discrete items from the numerator and removed the effect of foreign currency remeasurement from the denominator.
On this basis, annualized ROE for the current quarter was 14.7%, as I mentioned, compared to 10.2% a year ago. On a GAAP basis, results for the Financial Services business in the first quarter include amounts characterized as net realized investment losses of $3 billion pretax, comprised of the items you see here on Slide 5.
Foreign currency remeasurement losses primarily represent changes in the value of non-yen liabilities relating to products denominated in U.S. dollars and other currencies on the books of our Japanese companies whose functional currency for accounting purposes is the yen.
The weakening of the yen during the quarter required us to record an accounting loss in the income statement because it would take more yen to pay off these liabilities. We consider this loss noneconomic because the liabilities are matched with assets in the currencies in which they will be settled.
And the loss in the income statement is offset in AOCI, a component of equity but outside of the income statement. The remainder of the $3 billion of net pretax realized losses included mark-to-market driven losses of $412 million from product-related embedded derivatives and hedging activities and $87 million of impairments and credit losses on investments.
Moving to our business results and to Slide 6. I'll start with U.S.
Retirement Solutions and Investment Management division. This slide shows a view of the results of these businesses and the adjustments that we would make for market-driven and discrete items to get a view of underlying performance relative to a year ago.
Slide 7 highlights the Annuity business. After adjusting for the unlockings I mentioned earlier, which were mainly driven by favorable market performance relative to our assumptions in both periods, Annuity results were $310 million for the quarter, up $85 million from a year ago.
Slide 8 is a view of the trend of earnings for the Annuities business. Most of the earnings come from base contract charges linked to account values.
And when we remove the impact of unlockings and other one-off items we've disclosed, what remains is an earnings trend that reflects our account value growth. Account values amounted to $143 billion at the end of the quarter, up 15% from a year ago.
The increase was driven by $11 billion of net flows over the past year together with market appreciation, and produced a 16% increase in policy charges and fees. Results also benefited from a reduced drag from distribution and other costs, which rose less rapidly than account values or revenues.
On Slide 9, our gross annuity sales for the quarter were $4.2 billion, down from $5 billion a year ago. The lower level of current quarter sales reflects actions we've taken to adapt our products to the current environment.
In late February, we launched our current living benefit feature called HDI 2.1. This update limited the 5% roll-up period for protected withdrawal value to a maximum of 10 years and reduced payout rates at various age bands while retaining rider fees at 100 basis points for individual contracts and 110 basis points for spousal contracts and continuing our highest daily value proposition, backed by auto rebalancing tailored to the risk profile of each individual contract.
This product update continues a series of actions we've taken to maintain appropriate return prospects and improve our risk profile. Over the past year, we've increased rider fees, raised the minimum issue age for living benefits and reduced payout rates.
In addition, we've withdrawn our X shares or bonus product and suspended acceptance of subsequent premiums on generations of products offered before 2011. While it's reasonable to assume that a portion of our first quarter sales represented accelerated purchases due to the change over to HDI 2.1, we believe our new product continues to offer a solid value proposition in an attractive market.
Slide 10 highlights the Retirement business. The Retirement business reported adjusted operating income of $228 million for the current quarter compared to $156 million a year ago.
Current quarter results benefited by about $70 million from greater contributions from net investment results and from case experience, largely representing the first full quarter of results from the 2 major pension risk transfer transactions that we closed late last year. A benefit of roughly $10 million from higher fees, driven by account value growth, was essentially offset by higher expenses as we continue to invest in this business.
On Slide 11, total Retirement gross deposits and sales were $9.5 billion for the quarter compared to $9 billion a year ago. Full service gross deposits and sales were $5.7 billion for the quarter, including 5 large case sales of $100 million or more, up from $4.6 billion a year ago.
Stand-alone institutional gross sales amounted to $3.8 billion in the current quarter compared to $4.4 billion a year ago. Current quarter sales included $3.7 billion of stable value wrap products sold to plan sponsors and fund managers, while the year-ago quarter included $3.5 billion of those sales and a $700 million longevity reinsurance case.
Total retirement net flows for the current quarter amounted to $2.5 billion, and account values stood at a record high $299 billion at the end of the quarter, up $60 billion from a year ago, including about $33 billion from the pension risk transfer transactions late last year. Slide 12 highlights Asset Management.
The Asset Management business reported adjusted operating income of $175 million for the current quarter compared to $128 million a year ago. While most of the segment's results come from Asset Management fees, the contribution from what we call other related revenues, which encompasses results from incentive, transaction, strategic investing and commercial mortgage activities, is inherently volatile.
These activities contributed $40 million to current quarter earnings, an increase of $26 million from a year ago, driven largely by performance-based fees associated with public equity and fixed income funds we manage and also improved commercial mortgage results. The remainder of the increase in results came from higher Asset Management fees, driven by growth in assets under management.
The segment's assets under management reached a record-high $840 billion at the end of the quarter, up 15% from a year ago. Slide 13 shows U.S.
Individual Life and Group Insurance division results. Here the results adjusted for The Hartford integration costs.
The next slide highlights the Individual Life business. After adjusting for integration costs, Individual Life reported earnings of $145 million for the current quarter, up $33 million from a year ago.
The in-force block of business we acquired from The Hartford contributed about $32 million. While the business integration is off to a good start, these early results reflect only modest initial realization of cost synergies.
We expect a total of about $130 million of integration costs over a period of 2 to 3 years, including about $50 million this year to achieve targeted annual cost savings of about $90 million after the business integration is completed. Excluding the Hartford business, Individual Life results were essentially unchanged from a year ago.
The benefit of more favorable mortality experience on the legacy Prudential business was essentially offset by a lower contribution from net investment results and by higher distribution costs, reflecting the expansion of our third-party distribution system with the acquisition, as well as higher sales in the current quarter. On Slide 15, Individual Life sales based on annualized new business premiums amounted to $216 million for the current quarter, including $63 million from the third-party distribution partners that came to us with The Hartford acquisition.
This compares to total sales of $79 million a year ago. The current quarter sales level was mainly driven by the strong competitive position of our universal life products, coupled with our growing footprint in banks and wirehouses, which was significantly enhanced by The Hartford's strength in those channels.
We continue to focus on appropriate returns on these products, and we implemented price increases both in the fourth quarter of last year and in February of this year. Slide 16 highlights Group Insurance.
The Group Insurance business reported adjusted operating income of $9 million in the current quarter compared to a loss of $40 million a year ago. Claims experience was more favorable in the current quarter, both in Group Life and Group Disability.
Slide 17 shows the earnings trend in Group Insurance. Fluctuations in claims experience and expenses have affected the pattern of Group Insurance results.
Our Group Life claims experience in the year-ago quarter was the most unfavorable of the past 5 years, and the return to more typical levels thereafter and through the current quarter confirmed our analysis that revealed no systemic or systematic issues. Group Disability results, while improved from a year ago, continue to be a drag on segment earnings.
The actions we are taking to address this performance include pricing discipline on new cases, repricing of cases that are up for renewal and enhancement of claims management, which contributed to increased claims termination and an 8-percentage-point improvement in the benefit ratio from a year ago. Slide 18 shows the results of our International Insurance business, adjusting for the China Pacific gain in the current quarter and for integration costs.
Slide 19 highlights the Life Planner operation. Our Life Planner business reported adjusted operating income of $422 million for the quarter, up $40 million from a year ago.
Foreign currency exchange rates, which reflect our hedging of yen income at JPY 80 this year versus JPY 85 last year, contributed $14 million to the increase in earnings. The remainder of the increase was driven by continued business growth.
On a constant dollar basis, insurance revenues, including premiums, policy charges and fees, were up 12% from a year ago in the Life Planner business. Slide 20 highlights Gibraltar and other operations.
After adjusting for market-driven and discrete items, including integration costs, Gibraltar Life reported earnings of $392 million for the current quarter, up by $120 million from a year ago. The current quarter benefited from a greater contribution from investment results, driven partly by non-coupon investments, which produced about $25 million higher income than the average of the past 4 quarters.
Current quarter results reflected about $50 million of cost savings achieved, thus far, from the Star/Edison business integration compared to about $30 million in the year-ago quarter. The current quarter also benefited from a more favorable level of policy benefits, with a mortality contribution of about $10 million above the average of the past 4 quarters.
The remainder of the increase reflected continued business growth and a $6 million benefit from foreign currency exchange rates. Turning to Slide 21.
International Insurance sales on a constant dollar basis were $860 million for the current quarter compared to $850 million a year ago. Market developments and pricing actions we've taken have produced some volatility in the quarterly pattern of sales.
The first and second quarters of last year reflected surges in sales in Japan from our cancer whole life product in anticipation of a tax law change and in our U.S. dollar whole life and retirement income products from purchases in advance of price increases we implemented.
In the third and fourth quarters, we experienced a surge in bank channel sales of our single premium yen-based whole life insurance product, reflecting competitor actions earlier in the year, which limited the alternatives available to bank customers who had substantial funds to invest in life insurance products. In order to limit our concentration in this product and maintain appropriate returns, we implemented crediting rate reductions and reduced commission rates effective in January of this year.
Excluding the products I mentioned, you can see a sales increase in the red portion of the bars of just over 30% from a year ago, driven by life insurance protection products. Turning now to sales by channel and starting with the Life Planner channel.
Life Planner sales were $372 million in the current quarter compared to $391 million a year ago. The variability in the quarterly pattern here comes from the cancer whole life and U.S.
dollar products that I just mentioned. Sales of these products in the current quarter were $82 million below the year-ago level, more than offsetting the $56 million increase in sales of other products in Japan and a $7 million increase in sales outside of Japan.
Slide 23 shows sales in Gibraltar. Sales from Gibraltar Life were $488 million in the current quarter compared to $459 million a year ago.
Current quarter sales include $110 million from the bank channel yen-based single premium product, mainly representing residual sales before the repricing and up $33 million from a year ago. Sales of cancer whole life and U.S.
dollar whole life and retirement income products were down $81 million from a year ago, reflecting the tax law and pricing changes that I mentioned. Sales of other products in Gibraltar's portfolio were up $77 million from a year ago, driven largely by life insurance protection products sold by life consultants and in the bank channel.
Slide 24 shows corporate and other results. After adjusting for the write-off of bond issue costs in the current quarter, the corporate and other loss was reduced by $23 million from a year ago, driven by lower expenses.
Now I'll turn it over to Rob.
Robert Michael Falzon
Thanks, Mark. Turning to Slide 25, you'll see a summary of some key items under the heading of Financial Strength and Flexibility.
First, I'll focus on our insurance companies. We are continuing to manage these companies to capital levels consistent with what we believe are AA standards.
As of year end, Prudential Insurance reported an RBC ratio of 456%, with total adjusted capital, or TAC, of $12.7 billion. The GM and Verizon transactions did not have a major impact on RBC because the day one gains under statutory accounting largely offset the risk charges associated with that business.
While we don't perform a quarterly bottoms-up RBC calculation, we estimate that our RBC ratio is above our 400% target at Prudential Insurance after giving effects to The Hartford transaction and other activities since year end. Our Japanese insurance companies will soon report solid key margins as of their March 31 fiscal year end.
While the calculations are not yet final, we expect Prudential of Japan and Gibraltar Life to report strong solvency margins relative to their targets. Looking at the overall capital position of the Financial Services business, we calculate our on balance sheet capital capacity for Financial Services business by comparing the statutory capital position in Prudential Insurance to a 400% RBC ratio threshold and then add capital capacity held at the parent company and other subsidiaries.
As of year end, we estimated that our on balance sheet capital capacity was roughly $3 billion before funding The Hartford Life acquisition. We'd also estimated that about $1.5 billion to $2 billion of this amount was readily deployable.
Based on results for this quarter, including the closing of The Hartford Life acquisition and our first quarterly common stock dividend of $0.40 per share or about $200 million, we estimate that our on balance sheet capital capacity has not changed materially since year end and that nearly half of the $3 billion is readily deployable. Bear in mind that noneconomic GAAP items, such as the foreign currency remeasurement, don't affect our capital capacity.
There were no share repurchases during the first quarter. We continue to target about $250 million of additional repurchases under the $1 billion authorization, which extends through June 30 of this year.
The additional repurchases would bring the total under our existing authorization to about $400 million. Turning to the cash position at the parent company.
Cash and short-term investments at the parent company, net of outstanding commercial paper, amounted to about $6.6 billion as of the end of the first quarter. The cash in excess of our targeted $1.2 billion liquidity cushion is available for deployment such as to redeem high coupon debt prior of maturity, to repay maturing date and to fund operating needs.
Specifically, we have called approximately $450 million of senior debt, with an average coupon of 6%, and we intend to call our $920 million 9% junior subordinated notes in the second quarter. These actions, along with the issuance of $1.2 billion of hybrids during the first quarter, are consistent with our plans to reduce leverage.
Now I'll turn it back over to John.
John Robert Strangfeld
Thanks, Rob. So I'll very briefly summarize with 5 points.
We had a strong first quarter, and we're off to a good start for the year. Earnings improvements were broadly based and were supported by strong sales and flows.
The landmark pension risk transfer transactions we completed in last year's fourth quarter contributed to record quarterly results in our Retirement business. The Individual Life Insurance business of Hartford that we acquired in January is contributing to results in line with expectations.
And finally, International Insurance performed exceptionally well, with record earnings and strong sales across multiple distribution channels. With that, we welcome your questions.
Operator
[Operator Instructions] Our first question will come from the line of Chris Giovanni with Goldman Sachs.
Christopher Giovanni - Goldman Sachs Group Inc., Research Division
I guess, first question, just on share repurchases. So you still have the $250 million authorization out there that you've intended to complete by the end of 2Q.
Just wondering if that's still the case or has anything changed either from regulatory uncertainty or additional M&A that should lead us to believe that you won't get that done this quarter?
Mark B. Grier
Yes, this is Mark. That is still the case.
When we discussed The Hartford acquisition and share repurchases, we indicated at that time that we anticipated using $250 million more of our share repurchase authorization in the first half, and we still expect to do that.
Christopher Giovanni - Goldman Sachs Group Inc., Research Division
Okay. And then just on The Hartford Life, the transaction there, I just want to make sure I have pieces here that you pointed to us.
You paid $600 million for it. I guess, you had the $32 million or so contribution this quarter.
So if we annualized, we'd be talking at $100-and-so-odd million of annual earnings, and that's before the $90 million of cost saves post integration. Are those pieces correct?
John Robert Strangfeld
Yes, they are. Don't forget that there was about $9 million of that synergy was in the first quarter.
But those numbers are correct, yes.
Mark B. Grier
Just maybe one small qualifier. Capital in the Individual Insurance business actually went up by $700 million for the quarter, and the $600 million was the ceding commission.
There's a little bit of other stuff going on in there, but you got the gist of it.
Christopher Giovanni - Goldman Sachs Group Inc., Research Division
Okay. And then just one quick one, just for John.
I mean, you've laid out the '13 to '14 ROE target for this year. And I think in the past, you said you're not going to stop there.
So curious if you still believe you can generate returns in excess of that 13% to 14% or has anything changed that could maybe cap your returns in that 13% to 14% range?
John Robert Strangfeld
Well, let me offer a couple of observations, one as it relates to the current year and the other relates to going forward. On the one hand, we would caution you about annualizing Q1 results.
On the other hand, I'd also would say, though, that Q1 gives us confidence in our ability to achieve our 13% to 14% objective. So I think that's how I'd look at it in terms of the current year.
In terms of long term, we actually think 13% to 14% is the right and proper place for our line of business, with our mix of business and it creates the right balance between strong and differentiated returns and also achieving growth in investing in the business. So I think that's actually a representative place that we would think as not only attainable but sustainable over the long term.
Operator
Our next question comes from the line of John Nadel with Sterne Agee.
John M. Nadel - Sterne Agee & Leach Inc., Research Division
A question on integration costs as it relates to Gibraltar. They were pretty light this quarter.
I'm just wondering whether that's a matter of timing or if we should infer that maybe total integration costs are going to ultimately come in below your original expectations?
Edward P. Baird
John, it's Ed Baird. It's a matter of timing.
I think it's too soon to conclude just from this quarter that. If we think at some point that it's going to be even lower than the $450 million, we'll let you know.
But it would be premature to signal that.
Mark B. Grier
Remember, we ratcheted that down once already.
John M. Nadel - Sterne Agee & Leach Inc., Research Division
I do, I remember. And maybe just -- maybe a broader, a bigger picture question for you on Japan.
So we're seeing now an environment where currency has moved significantly. Risk assets in Japan are in vogue again.
Monetary policy is aggressive. Short term, this is obviously driven JGB yields down.
I'm just curious if the combination of all of these factors is leading you or management to make any shifts in your strategy or day-to-day operations in what is clearly a very important market for you?
Robert Michael Falzon
In terms of basic strategy, no, no shift. As you know, our primary focus has always been on death protection and recurring premium.
And in those areas, we're not seeing any material movement. The one area in which you are seeing changes, and it's reflected in this quarter, is on the more volatile single premium bank channel sales, which, as you know, made major movement in the third and fourth quarter of last year.
We quickly took action, as Mark mentioned, in terms of reducing both the crediting rates, which were already pretty low. We were at 1.0 during that period of time, which I think you'll find was conservative.
And we took it even lower down to 80 bps. We reduced the commission.
We put in caps, et cetera. So that's why you see the kind of material drop in those sales because they are more reflective of some of the factors you described, in particular, interest rates.
But the vast majority of our business is unaffected by that. And again, as you know, that carries through into our earnings because 80% of our earnings comes from mortality and expenses.
So shifting investments really only affects the Gibraltar book. And the reason that, that book has influenced from investments is simply because that got to reset on the crediting rates.
So the bulk of our earnings continue to come from M&E and it's not being fully affected by this. So bottom line, no change in strategy.
John M. Nadel - Sterne Agee & Leach Inc., Research Division
And just a real quick one for John or Mark. Any updated thoughts as it relates to federal regulation?
I know the Financial Stability Oversight Council indicated they expect to make decisions on non-bank SIFIs soon. I was wondering if you have any additional color you might be able to provide based on your discussions and interactions.
Mark B. Grier
This is Mark. Calendar-wise, we're getting a sense that we should be expecting some conclusions from FSOC, which, remember, would result in a round of review and discussion with us and then back to FSOC again.
I would add calendar-wise, we're also anticipating developments on the International side as the FSB considers G-SIFIs and, as a subset of that, considers the globally systemic important insurance companies. And timing of that may also be within the next few months.
Let me just comment on a couple of things, one, to reinforce that our engagement with FSOC has been very high-quality. We've had a chance to respond to the data request but also respond to the data request with substantive context as we view it.
We continue to believe that we don't meet the standard qualitatively to be designated systemically important. Beyond the process, which, again, has been high-quality, the SIFI issue tends to cascade pretty quickly down through capital and solvency standards to the question of scaling capital and ultimately to the question of whether or not we would be inappropriately constrained with respect to the management of capital as a SIFI.
And I want to just make 2 points about this. One is that we are engaged in discussions with various regulators about appropriate capital standards.
And I think we're being heard with respect to the concerns that Prudential, as well as others in the industry, are expressing about the inappropriate application of bank-centric capital models to insurance companies. And we have a chance to talk about why and how we think the approach to capital insolvency should be different, reflecting the intrinsic characteristics of insurance relative to banking.
The second point to make is that we're spending a lot of time trying to explain why our GAAP balance sheet is not a very good representation of solvency and risk. And it kind of comes down to that as a starting point, focusing on things like separate accounts and participating policies, that the nature of reserving activities and the nature and real guts of product design as it impacts liquidity, are very much in front of us as we talk to the regulators.
And we feel like right now like the level of engagement is pretty good. And the opportunity that we have to have a high-quality discussion around capital and solvency thought of in the context of a company like Prudential, I think right now is appropriate and favorable.
Operator
Our next question comes from the line of Jimmy Bhullar with JPMorgan.
Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division
I had a couple of questions, the first one on the GM and the Verizon pension closeout transactions. It seems like they contributed around $70 million to earnings, so I just want to get an idea if that's a normal run rate.
And if you annualize that, if it is the normal run rate the tax affected and look at, I assume, 5% to 6% capital or around 6% or so capital on the assets, it seems like the transactions are generating a low teens, 10%, 11% type ROE. So I just wanted your views on that?
And then secondly, on the full service pension business, you had pretty strong flow this quarter, I think, partly because of a large case wins, but you've been cautious on the business in the past. Wondering if you're a little bit more optimistic on trends there or is it just an anomaly that the results are good?
Charles Frederick Lowrey
Okay. Jimmy, this is Charlie.
I'll take those in order. First, on the PRT front, I think your math is generally accurate.
These are closed box. There's no new premium coming into either GM or Verizon.
So you look at this on that basis and you can annualize, plus or minus, a little bit. So I think that's about accurate.
We haven't said the amount of capital we have associated with the business, but I think you're reasonably in the ballpark. And what we've said is that the returns would be consistent with the returns that we expect for the entire business.
So John and Mark have said that this is sort of what we expect, a 13% to 14% return this year, and we have said that these transactions are consistent with that. So I think that's what we'd say about the first question.
In terms of the full service business, we did have positive flows. You're right, there were some larger cases.
We continue to be very disciplined about the business that we take on and the pricing of that business as we have for the past few years. We will continue with that discipline, so I don't think you're going to see a breakout quarter happen anytime soon.
But I think this is representative of the way the business is hit. By that, I mean that there are, I think, more cases in the pipeline that we're seeing, and some of those are check bids in but some of them aren't.
And we see that we are receiving more RFPs that we think are actually real. So I think that's good news.
In addition, I think we have been investing in this business. And as a result of that, consultants are seeing that, and we are the recipient of more RFPs.
So I don't think, again, you'll see a breakout quarter happen anytime soon, but I think this is an indication of the investments we've made and the current market as we see it...
Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division
Is the standard fee reductions still ongoing or has that abated?
Charles Frederick Lowrey
I think that's abated. We don't see -- we still think that it is very competitive out there, but there seems to be some pricing stability in the marketplace.
And that's why we have been perhaps a little more successful in garnering some business. Because, as I said, we're going to maintain pricing discipline in this market.
And if that means we have negative flows for another quarter or 2 or for whatever period of time, we'll sustain that. But pricing discipline is paramount.
Operator
Our next question comes from the line of Tom Gallagher with Credit Suisse.
Thomas G. Gallagher - Crédit Suisse AG, Research Division
Just wanted to come back to follow up on John's question in terms of how you're thinking about capital. Rob, you had talked about capital adequacy and capacity having at least half of the $3 billion as being readily deployable.
And I know, Mark, you're thinking about things along the lines of moving the ball in the direction of sticking with regulatory capital. But just from a standpoint of trying to be pragmatic about what's likely to happen, the G-SIFI requirements are, I think, looking at consolidated financial statements.
That's clearly what the fed has been using for the banks. And so just thinking about the reality of consolidated financial statements and the technical problem of using statutory financials because they're not consolidated and they don't look at the holding company, isn't it highly likely that, that's what you're going to be dealing with, whether it's G-SIFI or whether it's nonbank SIFI?
And if so, have you started to do the work to evaluate capital adequacy along the lines of using GAAP financials and does that -- would that still generally be consistent with what your view of capital adequacy is today?
Mark B. Grier
There are a few things buried in there. You did make one point, although not quite directly that's important, which is that whether we're designated a SIFI or not, there is likely to be some group supervisory regime under which we fall.
And within that context, we'll have to think about consolidated capital standards in a way that we don't currently have to think about with respect to regulation. So part of that point is SIFI or not, this methodology question around the solvency approach is going to be important for us.
I think that the effort that we're making comes at this bottoms up in a sense that you described, which is focusing on the regulatory financial statements. And those, by the way, are intended to measure solvency.
So in a lot of respects, because that's the purpose of those financial statements, they do a much better job than GAAP does, and the extrapolation and the inferences that we can draw from what we see at the regulated insurance company level then moving up to other subsidiaries in the holding company. But coming at it the other way, the issues on the GAAP balance sheet are as I described.
It's not a very good economic portrayal in the line of sight to the capital of the company from various items that fall under this umbrella that we call the GAAP balance sheet varies all over the place. There are some things where our capital is directly on the hook as principal.
There are other things that are reflected on the GAAP balance sheet that have virtually no line of sight at all to the capital of the company. And so as we look at it from a GAAP perspective, I think the point on our side is to try to understand the reality of the economic risk picture as opposed to the accounting convention that puts it on the books.
So the answer is, yes, we've looked long and hard at all kinds of dimensions of GAAP and Basel. We've done a lot of work on understanding how we would interpret the economics of the GAAP balance sheet as it relates to risk and solvency.
And that's the substance of the conversations that we're having with various regulators at this point. By the way, just making a couple of sort of rough ballpark adjustments to the economics of our balance sheet would result in Tier 1 ratio of 15% to 20%, so we're very, very well-capitalized by most economic regulatory standards.
And that's why we continue to believe that as this is understood and as standards are set appropriately, companies like Prudential and others will be determined to be more than adequately capitalized. I'd add, by the way that, that the G-SIFI process has a couple of different dimensions: one is targeting either nontraditional insurance activities or noninsurance activities and trying to deal specifically analytically with those 2 aspects of our business lines; the second is a process that would take a considerable amount of time to sort out the identification and quantification of any ultimate so-called SIFI buffers.
In the international arena, it's called enhanced loss absorption. But that process would be long and very interactive from our point of view with the regulators.
Thomas G. Gallagher - Crédit Suisse AG, Research Division
That's helpful, Mark. So it sounds like even if as you all have interpreted capital adequacy through a Basel lens using GAAP, you would still feel comfortable with your $1.5 billion deployable capital, at least making the adjustments that you think are appropriate?
Mark B. Grier
Yes, I think to use Basel language, if you appropriately risk-weighted the balance sheet and really understood what was there, you would conclude that we're more than fine. Let me just add one other point though, which is that it's not just scaling, it isn't just whether there's more or less capital, it's the dynamic of how capital changes in a stress test and the particular overlay of long-duration assets and long-duration liabilities for companies like Prudential and others is a big challenge.
There's a lot of volatility in capital measures, as Basel would interpret them, that's not economic for us. So keep in mind, it isn't just scaling, part of it is workability and part of it is the appropriate suitability of measuring solvency and capital in the kind of businesses we're in.
Thomas G. Gallagher - Crédit Suisse AG, Research Division
Got it. And then just one last follow-up.
Just based on at least some of the articles that have been out there on G-SIFI, at least my interpretation of what's been out there and you had referenced it, too, with some of the nontraditional insurance activities, it sounds like the life industry is -- things are probably headed in a more negative direction for variable annuities, but things are probably headed in a more favorable direction on the way general account risk-weighted assets are going to be treated. Does that seem right directionally where things are going right now, whether it's G-SIFI or nonbank SIFI?
Mark B. Grier
Well, I guess, I'd be more comfortable with the second part of it, which is, I think, there is a growing acceptance that traditional insurance doesn't present systemic risks. There's still uncertainty around nontraditional insurance and variable annuities generally would fall into that category.
So that one, I'd be more uncertain about. I'm not quite sure where that's going.
And at the end of the day, that's a risk that depends on longevity and investment performance. And that looks to me like a lot of other risks that we take.
Operator
And our next question comes from the line of Suneet Kamath with UBS.
Suneet L. Kamath - UBS Investment Bank, Research Division
I just want to follow up on Tom's question on nonbank SIFI and this whole conversation. If I hear you talk about it, it seems like you're putting forth your arguments, you're getting feedback from FSOC.
And I guess my question is, is there anybody from the insurance world other than you guys and the other big competitors that are under the same consideration? Is there anybody else from the insurance industry that's got a seat on the table?
I'm thinking, I don't know if it's actuaries or NAIC regulators or just so there's a little bit of a third-party verification of some of the things that you're saying.
Mark B. Grier
Yes, a couple of things. One is that the industry groups like the ACLI are active.
The NAIC is active. We're aware of the involvement of consultants.
I'm not sure you would consider them to be aligned one way or another, but we're aware of the involvement of consultants and some of these examinations. And there have been some independent articles written recently by academics that are making the points that we try to make about the nature of our business and its connection to systemic risk.
So I think the body of work on this is piling up above and beyond the things that we're saying and the things that, as you mentioned, our other large competitors are saying. So it's accumulating out there.
And there's a fairly consistent theme, I believe, which is reinforcing the view that, as I said, we don't meet the quantitative standard to be deemed systemically important.
Suneet L. Kamath - UBS Investment Bank, Research Division
Got it. And then, I guess, maybe you used the word soon in terms of designation.
But in terms of the actual writing of the rules and I'm assuming that's going to be subject to commentary as well, I mean, what is your sense just in terms of when we might get some clarity on that? Is that a 2013 event in your mind or do you think it pushes into '14?
Mark B. Grier
I'm less sure about that. I think this will take some time to pursue a high-quality process to arrive at the right standards, and I can't really put a timeline on that.
Suneet L. Kamath - UBS Investment Bank, Research Division
Okay. And then my -- I just had a quick follow-up for Ed on the bank channel sales in Japan.
I haven't mapped the bank channel sales against the individual products, but my sense is that most of what has been sold through the banks is the single premium whole life product. And so with you guys deemphasizing that, I mean, it seems like you've invested a lot in the bank channel with the seconded life planners and all the stuff that you've talked about.
Do you still think that you can generate sales growth through the bank channel beyond -- once we get beyond this hump from the difficult comps in terms of protection life? Because it seems like they continue to want to sell whatever savings-oriented products or retirement-oriented products, and that was talking about maybe mutual fund products.
So I'm just wondering how big of a role the bank channels are going to play in your sales going forward.
Edward P. Baird
I can't make a forecast, but I can identify for you some of the factors that could support our perspective that there is continued growth opportunity here. One would be the number of distribution points.
As you know, in the last year, we have been growing the number of distribution points and also the quality. What I mean by that is we now have all 4 of the mega banks, and 2 of those were added within the last 12 months or so.
In addition, just a number of banks, meaning the extension beyond the mega banks into the regionals and into the local banks, we're now up to over 70 banks. So even without a change in strategy, just the extension of the footprint, I think we'll continue growth.
Secondly, we will, I believe, deepen the penetration in these points of distribution. So for example, even now out of the 73 or so banks we're in, only 65 of them are even selling anything.
So a number of them are still new, and we will gradually develop them. And then the biggest part is the point you're raising, which is the nature of the demand.
And I think it's logical to realize that in the evolution of this distribution, banks are going to concentrate in the early stages more in products that are similar to their depository products, so things like single premium, things that emphasize the savings component of it. But we see signs that with some of the more mature, more sophisticated banks, they realize the benefits to them, as well as to their customers, are gradually transitioning over into recurring premiums that focus more on the death protection.
I'm particularly optimistic about our ability to tap that segment, however big or rapidly it grows, because of our unique application of our Life Planners into the banks. Because we send in not just the product, but we send in at this stage over 170 of our Life Planners.
So these people are uniquely equipped in comparison to a bank teller to be able to sell a genuine death protection product as opposed to a traditional bank teller who is naturally going to focus primarily, if not exclusively, on the crediting rate that's embedded inside the product. So if you aggregate those 3, i.e., the growth and the number of distributions, secondly, the increase penetration, and then third, this gradual strategic shift, it gives me some basis for thinking that there will be steady growth in a more stable aspect.
But you will see continued volatility in the sales that are related to the more of the savings aspect of it, and that's the single premium. And I think our numbers are a good example of that.
In the fourth quarter last year, we were distributing through the bank channel over $500 million. And I think over 80% of that was single premium.
In this quarter, it's down to about $200 million and less than 60% of that is single premium. So there will be volatility, and that will mask what I think over time will be a gradual shift and a heavy emphasis on savings to more death protection.
Operator
Our next question comes from the line of Eric Berg with RBC Capital Markets.
Eric N. Berg - RBC Capital Markets, LLC, Research Division
Actually my questions at this point have been all asked and answered, so thank you very much.
Operator
Next will go to the line of Nigel Dally with Morgan Stanley.
Nigel P. Dally - Morgan Stanley, Research Division
So with Japan, looking at the impact of the yen, can we get an update as to where you stand with hedging. I think last quarter was 78% hedge for '14, 28% hedge for '15.
Can we get an update on those numbers and perhaps some color as to what yen rates you've locked in? Also, one of you competitors highlighted that movement in the yen led to escalated lapse activity on the foreign denominated products that provided a meaningful benefit to their earnings.
Hoping you can comment on whether you've seen some dynamics to your results. And then just lastly on The Hartford Life transaction out of the $90 million of targeted synergies, can you provide some color as the timing of those saves?
Should it be relatively linear or is it weighted towards any particular year?
Robert Michael Falzon
Okay, Nigel, it's Rob Falzon. I think I'll take the first 2 of those, I think there were 2 there.
And then I'll turn over to Charlie to talk about The Hartford transaction piece of it. Let me step back and, I think, give you a holistic view of this, Nigel.
I think it's helpful to put it into the context from an FX standpoint. If you look at our International earnings, only about half of those earnings are yen denominated.
Remember, we've got operations in Korea. We've got other products that we sell out of Japan that are non-yen denominated.
If you ignore hedging, right, and you look at the yen-dollar forward rate, it's got about a 15% to 20% move from where our planned rate is off of 2012 and 2013. So if we weren't hedged, you would see that sort of order of magnitude of decline in our earnings as a result of applying that move in the FX rate against that percentage of our earnings.
But we do hedge. So first and foremost, to your direct question, we have our income hedges in place.
We're 100% hedged for the next 4 quarters. We are -- our policy is to 2/3 hedge the 4 quarters after that, and do the 1/3 hedge quarters sort of 9 through 13.
So if you look at our hedging, we're 100% for '13, we're 80% for 2014 and then we're around 35% or so for 2015. And we continue to roll into those hedges on a quarterly basis.
In addition to that, we have equity hedges, so we look at the economic value of our yen-based equity and we protect that through a series of equity hedges in order to insulate the long-term ROE that we're generating to our shareholders. And we look at that -- so we look at our FX exposure holistically.
We don't look at it opportunistically. In other words, we don't trade FX.
We'd rather insulate ourselves from the movements up or down in FX. I think that answered the first 2 questions, if I got them correctly.
Nigel P. Dally - Morgan Stanley, Research Division
Also just the impact of the movement in the yen in terms of a policyholder behavior. Did you see some escalated lapse activity on the back of the movement in the yen?
Robert Michael Falzon
Let's ask Ed.
Edward P. Baird
Sure. Nigel, there was some activity there, but it did not -- it was limited to the Aussie dollar not to the U.S.
dollar products. And in our case, it was not material to the quarter because it was essentially offset by some one-timers going the other way.
So net-net nothing there that you would need to adjust for in terms of extrapolating.
Charles Frederick Lowrey
Nigel, this as Charlie. In terms of the synergies, we expect them to feather in over a 3-year period.
It will be slightly back-loaded, but there will be some in the first year. But if you put in your models that they'll be more back-loaded than front-loaded, that's probably accurate.
Operator
And we have time for one final question, that will be from the line of Mark Finkelstein with Evercore Partners.
A. Mark Finkelstein - Evercore Partners Inc., Research Division
I was a little surprised that the balance sheet capital capacity of $3 billion didn't go down from year end, given the fact that you added $700 million of life capital, you had the ceding commission, you've had the dividend. Can you just help explain the sequential flatness, given all those factors?
Robert Michael Falzon
Yes, Mark, it's Rob again. It's actually pretty straightforward.
If you look at our earnings before the impact of NPR and FX remeasurement, recall that those things are noneconomic and, therefore, they do not affect our capital capacity. That essentially entirely offset the things that you were just identifying and we wound up about even with where -- at end of the quarter with where we ended up the year.
A. Mark Finkelstein - Evercore Partners Inc., Research Division
Okay. And then, I guess, just back to International.
Obviously, it was a very strong quarter. But I mean, even after adjusting for favorable mortality, investment gains, a little bit of seasonality and some of the identified items that you pointed out, I guess it was still a fairly good quarter above certainly our own expectations.
Should we be thinking about that level of earnings as a good run rate? Or is there another factors that influenced the quarter that we should be considering?
Edward P. Baird
Well, it was, as you said, a very strong quarter pretty much across the board. Beyond the identified normalizing factors, I think Mark has identified those that you might want to consider as you decide what to extrapolate going forward.
I mean, on the mortality side, there was an above-normal benefit there of about $15 million on the Life Planner, about $10 million on the Gibraltar. There was a seasonality factor that one could estimate at say $20 million for the first quarter.
And then the final one would be the one Mark mentioned on sort of the non-coupon investment at $25 million. But once you get past that, everything else is within the normal range and is benefiting from, frankly, just steady business growth.
So you take a look inside Gibraltar, where even with a drop of 2,000 down to 10,000 in the headcount, you see an increase in sales. And that's because the productivity increased by 25% and the average premium increased by about 9%.
And the reason I highlight that, to the spirit of your question of how to look forward, is this is exactly the transformation that we accomplished 10 years ago with Kyoei. And it's the key to what we're looking to do here.
And that is to bring down the headcount but increase the productivity. So in spite of the 16% drop in the headcount, you see a growth in the sales of about 15% with the life consultants.
So that's what gives me some confidence that there is -- as John pointed in his opening comments, there's very strong fundamentals here that I think are sustainable.
A. Mark Finkelstein - Evercore Partners Inc., Research Division
Okay. One final question, if I may.
Just on -- Mark, you made a comment about how you've limited excess contributions into the VAs, and I think you said -- I wondered if you said prior to '11 vintages. I'm curious actually why you didn't limit them in '11 and '12, and can we infer anything about kind of the comfort level in those vintages of product on the VA side?
Charles Frederick Lowrey
I'll take one, it's Charlie. We made the decision that prior to the HD series, we would limit the drop-ins, and it's pretty much as simple as that.
So we went back and looked at the drop-ins, looked at the economics of them and decided that, that was going to be cut off. So that was the thought process behind it.
We review that on a consistent basis, but that was the decision we made at that time.
Operator
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