保德信金融集團 (PRU) 2015 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the first-quarter 2015 earnings teleconference.

(Operator Instructions)

As a reminder, today's conference is being recorded. I would now like to turn the conference over to Mark Finkelstein. Please go ahead.

Thank you, Cynthia. Good morning, and thank you for joining our call. Representing Prudential on today's call are John Strangfeld, CEO; Mark Grier, Vice Chairman; Charlie Lowery, Head of International Businesses; Steve Pelletier, Head of Domestic Businesses; Rob Falzon, Chief Financial Officer; and Rob Axel, Controller and Principle Accounting Officer. We will start with prepared comments by John, Mark, and Rob and then we will answer your questions.

Today's presentation may include forward-looking statements. It is possible that actual results may differ materially from the predictions we may take today.

In addition, this presentation may include references to non-GAAP measures. For a reconciliation of such measures to the comparable GAAP measures and a discussion of factors that could cause actual results to differ materially from those in the forward-looking statements, please see the section titled forward-looking statements and non-GAAP measure of our earnings press release, which can be found on our website at www.investor. Prudential.com. John, I'll hand it over to you.

Thank you, Mark. Good morning everyone, and thank you for joining us. I am pleased to say we reported strong first-quarter results and are off to a solid start for the year. Overall, for the quarter of -- first quarter 2015 we produced an 8% increase in adjusted operating income per share, excluding market-driven and discrete items. This, in turn, meant that we achieved an annualized return on equity in excess of 16% for the period.

The core fundamentals across our businesses and diversification in our earnings are key strengths, and have helped us mitigate certain market headwinds, such as translating our Japanese yen-based earnings at a less favorable currency rate and the impact of lower new money yields. We also benefited from stronger than expected investment returns on non-coupon investments and other positive factors in the first quarter.

Mark and Rob will walk through the specifics of our key drivers, results, and capital position. I would highlight a few particularly noteworthy items.

First, balancing the mix of our life insurance and longevity businesses benefited us in the quarter. As we have seen in prior first quarters, we experienced less favorable than average mortality in our Individual Life and Group Life businesses. However, this was largely offset by positive case experience in our Retirement business, mainly due to experience in our newer PRT business.

Our Asset Management business generated very strong third-party net flows in both the institutional and retail businesses. The strength of our platform and continuing strong investment performance has enabled us to capitalize on the recent money in motion dynamics that have impacted the money management industry.

In the Annuities business, we are seeing solid results from our product diversification strategy, with 36% of our new businesses quarter representing sales of products entirely invested in fixed income strategies or that did not include living benefit guarantee. We also experienced a very good disability benefit ratio in our Group Insurance business, reflecting the continuing effects of our repricing actions and improvements to claim handling procedures. And while we can expect experience to vary from one quarter to another, we are pleased with the progress that the Group Insurance business has made.

The fundamentals of our Life Planner business remain solid. The business produce 5% constant currency earnings and sales growth over the prior year, driven in part by a 4% increase in our Life Planner count. In Japan, we had the highest Life Planner recruitment total in a decade, as we are benefiting from the steps we took in the first half of 2014 to promote more Life Planner growth.

And finally, Gibraltar produced 8% constant currency sales growth over the first quarter of 2014, driven by increases across each distribution channel. Furthermore, we are also pleased to see the stabilization we are seeing in our Life Consultant account.

Overall, we continue to benefit from a strong balance sheet that has supported our steady dividend and share repurchase program, and provides us with the capital flexibility to opportunistically pursue organic and inorganic growth opportunities as they emerge. Looking ahead, we continue to invest in our businesses and infrastructure to support and enhance our effectiveness and the value we deliver to stakeholders. With that, I will hand it over to Mark.

Thank you, John. Good morning, good afternoon, or good evening. Thanks for joining us on the earnings call today. I will take you through our results and then I'll turn it over to Rob Falzon, who will cover our capital and liquidity picture.

I'll start with an overview of our financial results for the quarter shown on Slide 2. On a reported basis, common stock earnings per share amounted to $2.79 for the first quarter, based on after-tax adjusted operating income. This compares to EPS of $2.40 a year ago. After adjusting for market-driven and discrete items in both the current quarter and the year-ago quarter, EPS was up by 8%, amounting to $2.65 compared to $2.46 a year ago.

Looking across our businesses, here are some highlights of this comparison, and I'll mention four favorable items. First, higher fees reflecting growth in account values in our Annuities business and greater assets under management in our Asset Management business. Second, a greater contribution from pension risk transfer business, with case experience more favorable than our average expectations. Third, improved Group Insurance underwriting margins, driven by more favorable disability results. And, fourth, in International Insurance continued growth on a constant currency basis in our Life Planner operation.

These benefits were partially offset by three things. One, lower contribution from net investment results, with concerns on non-coupon investments above our average expectations but below the exceptionally strong level of the year-ago quarter. Two, higher net expenses in several businesses. And three, less favorable currency exchange rates in International Insurance.

I would also note the decreased corporate income tax rates in Japan, including a recently enacted reduction, drove a lower effective tax rate in the current quarter. On a GAAP basis, including amounts categorized as realized investment gains, we reported net income of just over $2 billion for the current quarter, about $700 million above our after-tax adjusted operating income, reflecting mark-to-market on derivatives, hedging, and general portfolio activities.

Book value per share, excluding accumulated other comprehensive income, or ALCI, and after adjusting the numbers to remove the impact of foreign currency exchange rate remeasurement, amounted to $69.01 at the end of the first quarter, up $4.26 from year end. The increase for the quarter was mainly driven by our net income per share of $4.37 less our quarterly dividend of $0.58.

The impact of equity coming over to the Class A common stock from the restructuring of our former Closed Block business that we completed at the beginning of January amounting to $1.35 per share was partly offset by refinements in the cumulative impact of foreign currency exchange rate remeasurement as we move to the new reporting structure in Japan. The remaining remeasurement balance of $4.4 billion at March 31 will decrease over time as the non-yen assets in Japan, which were in an unrealized gain position at year end, are sold or mature.

Annualized ROE for the quarter, based on after-tax adjusted income excluding market-driven and discrete items, and based on book value excluding LOCI and the impact of foreign currency remeasurement, was 16.1%. This ROE reflects strong underlying business performance bolstered by a net benefit that we would estimate at about 130 basis points from net favorable variances in comparison to our average quarterly expectations in a number of areas.

These include returns on non-coupon investments, pension risk transfer case experience in Individual Life mortality, the seasonal revenue pattern in our International Insurance Life Planner business and items that affected corporate and other results for the quarter. I'll discuss these items in more detail in reviewing our business results.

Turning to slide 3. We have only two market-driven and discrete items included in our results for the quarter with a net benefit to reported results of $0.14 per share.

In the Annuities business, we adjusted DACE and released reserves for guaranteed minimum death and income benefits to reflect market performance, including out performance of our separate account funds, resulting in a benefit of $0.15 per share. And in Individual Life, we absorbed integration costs of about $0.01 per share related to the Hartford Life acquisition. During the year-ago quarter, market-driven and discrete items produced a net charge of $0.06 per share.

Moving to Slide 4. On a GAAP basis our net income of $2 billion in the current quarter includes amounts characterized as net realized investment gains of $1.1 billion on a pre-tax basis, comprised of the items you see on this slide. Mark-to-market gains on derivatives, mainly related to management of asset and liability durations and largely driven by changes in the level of interest rates, had a positive impact of $565 million for the quarter.

Product-related embedded derivatives in hedging activity had a positive impact of $265 million, as the application of credit spreads to our gross GAAP liability for variable annuity living benefits more than offset the impact of the decline in interest rates during the quarter. General portfolio activities resulted in net pre-tax gains of $227 million.

Foreign currency remeasurement resulted in a pre-tax gain of $25 million for the quarter, reflecting our mitigation of the income statement impact from this item as a result of the new reporting structure we implemented in Japan. And finally, impairments and credit losses on investments were $31 million for the quarter.

Moving to our business results, and starting on Slide 5, I'll discuss the comparative results, excluding the market-driven and discrete items I mentioned earlier. Slide 5 highlights individual Annuities. Annuities results were $423 million for the quarter, up $14 million from a year ago.

Slide 6 presents a view of our trend in earnings and return on assets. Most of our operating earnings in the Annuities business come from base contract charges linked to daily account values. The earnings increase of about 3% is essentially in line with the growth of average account values from a year ago.

Return on assets, or ROA, in the Annuity business for the quarter was 107 basis points, equal to the year-ago level and higher than the last few quarters. The expense level in the first quarter has historically been below the average rate for the year, contributing to the higher ROAN.

Slide 7 covers our Annuity sales. Our gross Annuity sales for the quarter were $2.2 billion, essentially unchanged from a year ago, but with a change in mix reflecting steps we have taken to diversify the risk exposures associated with our product guarantees to support return prospects through changing market conditions and to more broadly meet the needs of the retirement market.

A modest decline in sales of our highest daily income, or HDI guaranteed lifetime income withdrawal product, was largely offset by greater contributions from two other products. Our Prudential defined income, or PDI product, which directs a client's entire investment to a separate account fixed income portfolio that we manage. And we also had increased sales of variable annuities without living benefit guarantees.

Slide 8 highlights the Retirement business. Earnings for the Retirement business amounted to $284 million for the current quarter compared to $364 million a year ago. The decrease was largely driven by a $95 million lower contribution from net investment results.

While current quarter returns from non-coupon investments were about $15 million above our average expectations, results for the year-ago quarter benefited from exceptionally high returns in these asset classes, largely driven by performance from private equity funds, with a contribution that was about $80 million above average expectations. Fixed income returns were also lower in the current quarter.

The lower contribution from net investment results, along with higher expenses in the current quarter, were partly offset by a greater contribution from case experience on pension risk transfer business, which was about $45 million above our average quarterly expectations. We would estimate that about one-third of this represents the impact of historical mortality patterns, which typically favor the first quarter for this business.

Turning to Slide 9. Total Retirement gross deposits and sales were $7.3 billion for the current quarter compared to $10.3 billion a year ago.

Full service gross deposits and sales, shown in the dark blue bars, were $6.3 billion for the quarter. This compares to $8.6 billion a year ago, which included a major case win of $2.6 billion.

Standalone institutional gross sales were about $1 billion in the current quarter, down from $1.7 billion a year ago. Sales of stable value wrap products, which amounted to $1.4 billion a year ago, were insignificant in the current quarter.

The decrease in sales of these products was partially offset by a pension risk transfer case of about $660 million that funded in the current quarter. As we have commented in the past, sales of both full-service and institutional Retirement products can fluctuate meaningfully on a quarterly basis.

Institutional standalone net outflows for the quarter were $2.5 billion. Net outflows of about $1.3 billion of stable value wrap business and roughly $1 billion of ongoing attrition of our jumbo pension risk transfer cases, together with runoff of legacy business, more than offset our new sales during the quarter. Total Retirement account values amounted to $365 billion at the end of the quarter, up $37 billion, or 11% from a year earlier, reflecting net flows of about $25 billion, largely driven by pension risk transfer business and favorable market performance.

Slide 10 highlights the Asset Management business. The Asset Management business reported adjusted operating income of $205 million for the current quarter compared to $193 million a year ago.

While most of the segment's results come from Asset Management fees, the increase from a year ago was driven by a $15 million greater contribution from incentive, transaction, strategic investing, and commercial mortgage activities. This contribution, which amounted to $47 million for the current quarter, is inherently variable since it reflects changing valuations and the timing of transactions.

Current quarter revenues for the Asset Management business were up 10% from a year ago, largely reflecting higher Asset Management fees driven by a 10% increase in unaffiliated third-party institutional and retail assets under management, which totalled $469 billion at the end of the quarter. Net inflows for the current quarter were very strong at $7.7 billion, about equally divided between institutional and retail business. The benefit of Asset Management revenue growth was largely offset by higher expenses, including roughly $15 million divided about equally between investments that we have made in the business to build teams and infrastructure to expand our product and distribution capabilities, and higher upfront commissions associated with the $4 billion of retail asset inflows in the quarter.

Slide 11 highlights our US Individual Life business. Individual Life earnings were $125 million for the current quarter compared to $133 million a year ago. The decrease in earnings was driven by less favorable claims experience in the current quarter.

Contribution to current quarter results from mortality experience, including related amortization and reserve updates, was about $35 million less favorable than our average expectations. This compares to a mortality contribution about $25 million less favorable than our average expectations a year ago on the same basis.

Historically the first quarter has tended to reflect a lower contribution from mortality experience than an average for the year. Individual Life mortality has been more favorable than our average expectations for the preceding three quarters and for the full years 2014 and 2013. Lower expenses in the current quarter, including net recoveries of about $10 million from servicing legacy participating business which we would consider to be unusually favorable, largely offset a lower contribution from investment results.

Slide 12 shows Individual Life sales based on annualized new business premiums, which amounted to $124 million for the current quarter, essentially unchanged from a year ago. Variable life sales, shown in the green bars, increased by $9 million, reflecting feature enhancements we introduced in May and September of last year to broaden the appeal of our products.

Term insurance sales, in the grey bars, are up $7 million from a year ago, benefiting from pricing changes we made last August to enhance our competitive position where we see opportunities to offer attractive value propositions with appropriate expected returns. The increased sales of variable life and term were largely offset by lower universal life sales, which benefited a year ago from residual sales of legacy Hartford products.

Slide 13 highlights the Group Insurance business. Group Insurance earnings amounted to $30 million in the current quarter compared to $6 million a year ago. The increase reflected a substantial improvement in group disability claims experience and lower expenses in the current quarter, partially offset by less favorable group life claims experience.

Slide 14 presents our earnings trend for Group Insurance and benefit ratios for group life and group disability. In group disability, favorable current quarter experience driven by fewer new claims and a greater benefit from claims resolutions produced a 72.2% benefits ratio, the lowest in recent years.

This compares to a ratio of over 100% a year ago, reflecting an adverse fluctuation in long-term disability claims. While we've taken steps to improve results, including pricing adjustments and enhancement to our claims management processes, we continue to expect that claims experience will vary from one quarter to another. The group life benefits ratio was slightly above our expected range and up from a year ago, reflecting a higher average new claim size, which more than offset a lower claim count.

Moving now to International Insurance. Slide 15 highlights our Life Planner operations. Our Life Planner business reported earnings of $439 million for the quarter, essentially unchanged from a year ago. Results benefited from continued business growth with insurance revenues, including premiums, policy charges, and fees, up 8% from a year ago on a constant dollar basis.

The benefits are results from continued business growth was partially offset by higher expenses, driven by a range of items, including technology costs and non-deferrable [distribution] costs. Mortality experience was largely unchanged from the year-ago quarter, with a contribution to current quarter results about $15 million greater than our average expectations. Foreign currency exchange rates, which reflect our hedging of yen income at JPY91 in 2015 versus JPY82 a year ago had a negative impact of $17 million on earnings in comparison to a year ago.

Slide 16 shows the quarterly pattern of earnings for our Life Planner operations over the last six quarters. Looking at the trend, you can see the seasonality pattern that favors the first quarter, which results from a concentration of annual mode premium revenues. We would estimate that this benefited current quarter earnings by about $30 million in relation to a quarterly average.

Slide 17 highlights Gibraltar Life and other operations. Gibraltar Life reported earnings of $395 million for the current quarter compared to $418 million a year ago. The current quarter benefited from a greater contribution from net investment results than a year ago, including about $40 million of returns that we would consider to be above our average expectations on non-coupon investments.

The greater contribution to earnings from net investment results was largely offset by higher net expenses in the current quarter, including technology costs and a benefit in the year-ago quarter from fixed asset sales. Mortality experience was also about $15 million below our average expectations in the current quarter. In addition, foreign currency exchange rates had a negative impact of $19 million in the comparison of results to a year ago.

Turning to slide 18. Overall, International Insurance sales on a constant dollar basis were $780 million for the current quarter, up $47 million, or 6% from a year ago. Slide 18 is a product view of our sales.

The sales increase was driven by death protection products, shown in the dark blue bars, partly offset by lower sales of Retirement products in the light blue bars. Death protection products, including term insurance and whole life, represented about 60% of current quarter sales, largely consistent with the preceding quarter, but up from just over 50% a year ago. The change in mix reflected higher death protection sales across our distribution channels, both in Japan and other countries, and a commission rate change that elevated Retirement sales in Japan in the year-ago quarter.

Slide 19 breaks out Life Planner sales. Life Planner sales were $366 million in the current quarter, up $17 million, or 5% from a year ago. Sales by our Life Planners in Japan were $245 million in the current quarter compared to $249 million a year ago.

As shown in the light blue bars, sales of Retirement products decreased by $38 million to $73 million for the current quarter, reflecting elevated sales in the year-ago quarter driven by the change in commission rates that I mentioned. This decrease was largely offset by an increase of death protection product sales, including term insurance, shown in the dark blue bars. Sales outside of Japan, in the green bars, were up $21 million from a year, ago mainly driven by increases in Brazil and Korea.

Slide 20 shows Gibraltar Life sales. Sales from Gibraltar Life were $414 million in the current quarter, up $30 million, or 8% from a year ago, with increases in each of the three distribution channels.

Life consultant sales, shown in the dark blue bars, increased by $4 million, or 2% from a year ago, as higher productivity, measured by policies sold per agent per month, more than offset a decrease of about 160, or 2% in life consultant count. The count has largely stabilized over the past few quarters, and the decline reflects our continuing active management of the sales force, including minimum production requirements together with selectivity in recruiting.

Sales through the bank channel, shown in the light blue bars, amounted to $171 million for the current quarter, up $21 million, or 14% from a year ago. The increase was driven mainly by greater sales of recurring premium whole life insurance. These products are particularly attractive to clients focused on the increased inheritance tax in Japan, since their structure enables use of annual gift tax exemptions to efficiently transfer estate wealth.

Sales through independent agents, shown in the grey bars, amounted to $68 million in the current quarter. The $5 million increase from a year ago was driven by greater sales of fixed annuity and death protection products.

Slide 21 shows the results of corporate and other operations. Corporate and other operations reported a loss of $253 million for the current quarter compared to a $342 million loss a year ago.

The reduction in the loss reflects lower net expenses and a greater contribution from investment income in the current quarter. While expenses in corporate and other are inherently variable, the current quarter level is below our recent average partly due to a benefit of roughly $20 million from fixed asset sales.

The contribution from investment income in the current quarter includes about $30 million of returns on assets that were previously associated with our former Closed Block business, and initially transferred to corporate and other when we completed the restructuring of that business at the beginning of this year. We would expect the vast majority of these assets to be utilized or deployed in the relative near term. Now I'll hand it over to Rob.

Thanks, Mark. I am going to give you an update on some key items under the heading of financial strengths and flexibility. Starting on slide 22. We continue to manage our insurance companies to levels of capital that we believe are consistent with AA standards.

For Prudential Insurance, we manage to a 400% RBC ratio. As of year end, Prudential Insurance reported an RBC ratio of 498% with total adjusted capital, or TAC, of $15 billion. While we don't perform a quarterly bottoms-up RBC calculation, we estimate that our RBC ratio as of the end of the first quarter is well above our 400% target.

In Japan, Prudential of Japan and Gibraltar Life reported strong solvency margins of 909% and 898% as of their -- December 31, 2014, which is their most recent reporting date. These are comfortably above our 600% to 700% targets.

Our Japanese companies will soon report solvency margins as of their March 31, 2015 fiscal year end. While calculations are not yet final, we expect that we will continue to be in a strong position relative to our targets.

Looking at our overall capital position on Slide 23, we calculate our on-balance sheet capital capacity by comparing the statutory capital position of Prudential Insurance to our 400% target RBC ratio and then add capital capacity held in our other operations, including in Japan and at the parent company. As of year end, we estimated our available on-balance sheet capital capacity at approximately $2 billion on a net basis.

This represented about $4 billion of gross capital capacity less $2 billion to pay down debt in order to arrive at our long-term targeted financial leverage ratio of 25%. During the first quarter, our estimated gross on-balance sheet capital capacity increased from about $4 billion to over $4.5 billion.

On a net basis, after earmarking roughly $2 billion for debt pay-downs to arrive at our targeted 25% financial leverage ratio, capital capacity at the end of the first quarter increased to over $2.5 billion. The increase in our net capital capacity during the quarter was the result of capital generated by our businesses and the benefit of about $500 million after tax from our Japan capital hedge, including about $300 million from cash settlements and $200 million from hedges that were locked in.

These contributors to our capital capacity more than offset a modest net negative decline from interest rates in the quarter and about $500 million of shareholder distributions, including $250 million of share repurchases and our quarterly dividend of $0.58 per share. The fair value of the Japan capital hedge, after subtracting the first-quarter settlements and lock-ins, would be about $2 billion as of the end of the quarter.

Turning to the cash position at the parent company. Cash and short-term investments, net of outstanding commercial paper, amounted to about $3.7 billion as of the end of the first quarter. The cash in excess of our targeted $1.3 billion liquidity cushion is available to repay maturing operating debt, to fund operating needs, and to deploy over time for strategic and capital management purposes. Now I'll turn it back over to John.

Thank you, Rob. Thank you, Mark. Now we'd like to open it up for questions.

Thank you.

(Operator Instructions)

Our first question comes from the line of Jimmy Bueller with JPMorgan. Your line is open.

Hi. I had a couple of questions on your International business. Gibraltar, your sales were up a lot. And I think in the bank channel you have had success selling more 10-pay premium products.

So we have seen some other companies back out of the bank channel. So what type of returns are you getting on bank channel sales in the current interest rate environment?

And then, secondly, on the Life Planner account, it was up 2% sequentially this quarter. So is something changing in the business, or was this an aberration this quarter? Because that seems stronger than it's been in the recent past.

Sure. Let me take those in order, Jimmy. And let me start by making some overall comments about sort of the rate environment and how we approach pricing. And then I will get into the bank channel, and then I will answer your second question.

My first comment is an important one, and that is, we have expected profitability targets for each of our products. Margins may vary, or hurdle rates may vary on specific products, but every product has to stand on its own merit.

We don't have loss leader products in any sense. As a result, we continue to examine our product line line-up and its profitability, adjusting pricing when necessary to reflect lower rate levels.

And we also reduce commissions or discontinue sales of certain products that can't meet profit expectations. As an example, Gibraltar Life stopped selling a six-year single premium endowment product effective at the end of this quarter, just because we thought we should eliminate it from the product line-up.

So in terms of an overall framework with which we think about profitability, we really have three different aspects to it, you can think of three circles. And we have talked about this before.

First, you have the customer need. And you have to provide products to fulfill those needs. Secondly, you have product profitability, and each product, again, has to stand on its own relative to the hurdle rate we have established for it. Third, you have business mix, which is how much of any given product do we want to sell relative to return and to risk.

So if we think about that relative to the bank strategy, what I would say is that we have a very differentiated strategy relative to others. When we first acquired Star/Edison there were over 100 banks in total, but consistent with what we have done in the independent agency channel, or even with the number of life consultants we have, we reduced the number of relationships, focusing on quality product and service, and focusing on fit with our partners.

We now have about 60 partners that currently offer our products, and we have sold through over 90% of them this past quarter. So three points of differentiation that affect the profitability of our product within the bank segment.

First is that we provide exceptional service to our banking partners. We cover the banks with over 200 [secondees] that come from Life Planners. This will get to the other comment in a minute about Life Planners.

We don't necessarily have to have the lowest price. We have to have a reasonable price on our product, but we don't have to have the lowest price because we are not spreadsheeted. We are thought of in a different way, and that is the relationship we have with the banks and the service we provide to them.

That leads to the second point, which is our focus on death protection. So the majority of our sales include mortality and expense margins. In other words, 70% of our first quarter sales had an M&E component to it.

Additionally, we have a high proportion of [recurring] premium insurance products as opposed to just having savings products. Two-thirds of the recurring premium insurance products are 10-pay and longer. They're just not 3-pay accelerated to a single premium.

In terms of single premium, the single premium annuity in life products we do sell through the channel are repriced twice a month, taking into account current interest rates, and most have MVA features. So we feel very good about the differentiated strategy we employ, the mix of products we sell and the resultant profitability of the business. So that hopefully answers your first question.

Yes.

Now, in terms of the second question, in terms of LP count and why it was up so much. You may recall that last year we said that we had a very high number of Life Planners that moved over to become sales managers and they transferred over in April of 2014.

That has led directly to higher recruiting. Now, it takes a while for those sales managers to get up to speed, to train, to start looking for recruiting. But what we said back then in the second quarter call was that we would expect to see a larger number of LPs come on board at the end of the year or the beginning of this year.

So there really a couple of things happening. There is much higher recruiting that's taking place as a result of the higher number of sales managers, but there is also fewer terminations, given the amount of business that we're doing.

Now, in terms of the overall LP count, what we can say is that if you look over a five-year period, you really see a lower growth rate than this quarter. So if you were to average out the LP count in Japan, it's really, over five years been sort of 1% to 2%.

We have had some quarters that are flat. Maybe some that are a little negative if we've transferred a lot of LPs over to SMs. In general -- and some higher as a result of that. But in general it's sort of 1% to 2%.

If you look at the Life Planner business as a whole within PII, you'll see that the Life Planner growth over five years has been sort of 2% to 3% because you have a higher growth rate in places like Brazil, and perhaps some others. That's generally what you would expect.

So this is higher than we would normally expect. But you'd expect some aberration quarter to quarter, depending upon the dynamics of how many people we have transferred and what's going on.

Okay. And then lastly, if I could ask about your DAX rate overall. I think you had spoken about 27%-ish or so previously.

But the DAX rate was 25.6% this quarter. What drove that, and what is your expectation for the year?

Jimmy, it's Rob Falzon. The primary driver to the difference between the tax rate we gave at guidance, which was actually just a little under 27%, and the number that you are seeing in our first-quarter results was the decreases in taxes in Japan.

When we blend that into our overall tax rate as a result of the earnings that we keep there versus repatriating, we wind up with the delta that you have seen. And that number, the 25.6%, is a number that we think is sustainable for the year.

Okay. Thank you.

Thank you. Our next question comes from the line of Nigel Dally with Morgan Stanley. Your line is open.

Great, thanks. Good morning. A couple of questions on capital. First, you commented that declining interesting rates were only a slight negative to available capital. Does that imply that the rates and (inaudible) rates that we have seen thus far this quarter will only be a slight positive? And then on the Japan capital hedge, what should we expect with regards to further gains over the remainder of the year, assuming no major changes in exchange rates from here?

Nigel, it's Rob again. So let me first use this as an opportunity on the interest rate question to talk a little bit more broadly on how we connect risks with the management of capital. And we have hit on this theme at both Investor Day and Financial Strength Symposium, but it's probably good to set the context.

First, our businesses and the capital that supports those business are sensitive to the markets. Our construct is a capital protection framework that we have spoken about before, and that's what we use to management the sensitivity.

We think about risks as being a spectrum between tail events and less severe scenarios, which we think about it as being in the, quote, body of the distribution of volatility. Our objective is to take off the table risks that are associated with tail events.

For less extreme market conditions, things in the body of the distribution, we hedge the vast majority of those risks, particularly in the equity and the interest rate worlds, and we think about those risks across our business units as they are netted at the enterprise level. In John's opening remarks, he observed that our longevity and mortality experiences in our different businesses largely offset each other.

With respect to interest rates, we have a similar phenomena in that our Annuities are exposed to declining rates but other parts of our businesses actually have exposure to rising rates, particularly a spike in interest rates. We calibrate our hedging in order to accept some level of volatility in our excess capital capacity.

It's necessary, because as we've described earlier and particularly on the fourth quarter call, the nature of these risks are non-linear. They change as markets move. And the available hedging instruments that we have sometimes don't track these movements well.

Additionally, the risks vary between businesses in any given period. The economics may get offset, but the accounting doesn't always reflect this.

And to the extent that we have capital being generated in one business and capital needed in another, that is not always fungible in a particular period. We have to wait for future periods in order to monetize those offsets.

We are constantly recalibrating our hedging to address the tail risk as markets move and as our capital capacity and leverage change. We have multiple tools for doing this to ensure that we remain within our risk tolerances.

Probably the one last thing I'd want to add on this is that in the normal course of our business we generate a substantial amount of excess capital from our businesses annually. It's why we have increased our guidance around free cash flow up to about 60% of AOI. If you look in the course of 2014 and this quarter, over 40% of our normalized operating income has been returned, or distributed in the form of dividends and share repurchases while reducing our debt by over $2 billion and funding our PRT and M&A pipeline.

With that as way of sort of context, let me talk specifically about the interest rate sensitivity in the quarter and comparing that to the first quarter and your question about what may happen when interest rates come up. First, vis-a-vis last quarter, the level of rate movement is about 0.5 what we saw in the fourth quarter of 2014, and recall that the sensitivity we had then was driven in large part by AAT, and within AAT there was a large component of that was driven by model refinements, not interest rate movements in and of themselves.

With respect to PRUCO RE specifically, it had less of an impact this quarter, and that's because as rates continued to decline, the option portion of our hedging becomes more meaningful. We become less sensitive to rate movements as rates decline.

So the converse of that is that as rates climb back up, we actually recapture some of that movement in rates. So it is not symmetric. It's actually somewhat asymmetric in terms of the trade-off between capital and the movement in interest rates.

The offset to what happens in PRUCO RE is in other businesses. There, as I noted before, many of which have some long sensitivity to interest rates.

And so the net capital capacity impact between what happens in the Annuity business and PRUCO RE and what happens in our other businesses that are manifested in PICA and other entities is actually relatively modest. And we look to monetize or to be able to offset those things as we are able to get dividends out of our subsidiaries.

In the case of PICA, by way of example, we filed for a $2 billion dividend, and we received regulatory approval for that dividend and expect that to come up in the course of the second quarter. And that will help us to then monetize the positive variance we had from interest rate movements in order to offset the negative variance that we had within PRUCO RE.

I think your last question was on FX and the equity hedge. We had about a $0.5 billion this quarter of increased capacity from that.

About $300 million of that was what was normally coming in the form of settlements during the period. Then there was about $200 million that resulted from an acceleration of our -- of locking in the settlements.

I would note that the capital capacity would have increased, even if we hadn't done this acceleration. That was more of a tactical initiative.

And the value of the hedges that we currently have in place, net of the $500 million that we have counted to our capital capacity this quarter, is still around $2 billion. On a pre-tax basis you will see around 10% or so of that still available to be monetized this year. And there's about 20% that's scheduled to be monetized next year. That's all assuming that exchange rates don't change from where they are today.

That's very helpful. Thank you.

Thank you. Our next question comes from the line of Erik Bass with Citigroup. Your line is open.

Hi. Thank you. Rob, just wanted to follow up on a couple of your comments on capital and kind of your willingness to accept some volatility there. I guess, first, how do you think about that volatility ahead of being subject to a potential balance sheet stress test from the Fed? And do you think that they would view kind of volatility the same way? And secondly, the $2.5 billion of kind of deployable excess capital, do you view that as all truly deployable, or does some of it need to be retained as a buffer in case markets move against you in the short term?

Eric, this is Mark. Let me start off with a comment on capital standards. As you know, we don't yet have capital standards where we're constructively engaged in the process of developing capital standards with the Federal Reserve domestically, but also as part of a number of moving parts on the international arena.

And I think it's early to speculate on the context of stress tests and short-term volatility without the underpinning of the genuine view of capital. And as you know, the way we've talked about it and the points I made, for example, about margins and reserves on Investor Day, we take a longer-term view of the loss absorption capacity of the Company, which is in many respects a totally separate point from short-term accounting volatility.

And so I'd be thinking about the fact that loss absorption capacity and quarterly accounting volatility are very different points. The real constructive approach to solvency and stress testing will focus on loss absorption capacity in the assets that we have available to meet all of our obligations, however they are categorized as line items on the GAAP financials. I will ask Rob if he wants to add anything to that, and then let him take the second.

I would merely observe that we do look at tail events and we try to take that risk off the table, as I indicated. So while we don't have a construct in place, to the extent that that's stress testing as we anticipate, we will be looking at severe scenarios.

That's the risk that we try to address through our capital protection framework, that we don't tolerate and don't want to see that variability come in on a quarter-to-quarter basis. With regard to the variability quarter to quarter, yes, there will be some noise in our capital capacity as a result of interest rate movements. We would expect as interest rates move back up, that that will add to the capital capacity in the way that it has moderately trimmed our capital capacity in this quarter, as we described.

Thanks. That's helpful. One quick question on PRT. Can you give us a sense of how quickly the earnings and capital run off on the funded deals, and how much capital will be freed from prior deals in 2015?

Eric, this is Steve. I'll comment on the asset front. Generally speaking in PRT, on the funded side we experience about $700 million in runoff on a quarterly basis and on the longevity side, about $400 million.

And I don't have a specific forecast on what that would do to our capital capacity. Obviously, what happens is as those are running off the reserves in the pad that we have in those reserves runs off as well, and we will establish some level of increase in our capital capacity.

Got it. Thank you.

Thank you. Our next question comes from the line of Tom Gallagher with Credit Suisse. Your line is open.

Good morning. Rob, just to start out, a follow-up on the interest rate sensitivity to capital comments you made. Would that also be true if you look at through, say, year-end 2015, that your sensitivity would be less to further decline in rates, all else equal, relative to the way it played out last year?

So I assume, Tom, you are referring to the impact of AAT? I would make two observations. The first is that --

Sorry, Rob. AAT and the VA sensitivity, we will call it.

Yes, okay. The VA sensitivity, as I described, further declines in interest rates. That volatility is substantially muted to further declines in interest rates because of the impact of the -- of options in our hedging strategy. And so it is likely that what you'll see as you look forward is if interest rates were to move down further, you would see that the declines there would be more muted and would continue to be substantially offset by the gains that we would have in other parts of the enterprise, and we try to calibrate it just that way.

Outside of PRUCO RE with respect to the broader impact of AAT, I would reiterate what I said before, which is a substantial portion of our AAT increase during the course of last year was a result of model refinements. The actual impact from interest rates was a smaller component of that.

As we look forward, we would expect, therefore, that the impact from AAT would not be particularly draconian. That'll be function of actually where interest rates wind up at year end.

I think, as you know, there's a -- the way that formula works, there is a flooring mechanism, which is calibrated off the five-year. So as rates continue to decline, the impact from AAT actually gets moderated as those rates go down.

Right. Okay. Thanks. And of the remaining $2 billion Japan capital hedge, should we think about all of that over time being monetizable and into the excess capital bucket, or is there some portion of that that we should be thinking about that you'd need to hold against the risk in the Japan business? Whether that's because you have a contingency plan that if the yen were to strengthen again you would to use, or otherwise?

That $2 billion, the fair value of that will fluctuate as the currency exchange rate fluctuates, Tom. So to the extent that there is an appreciation of the yen, the $2 billion would be a lesser number on a go-forward basis. Putting that aside, which is that it will reflect where exchange rates are, it reflects where they are today, on an absolute basis, whatever that number is, it is completely available as capital to us and does not otherwise need to be held back for any reserves.

Got you. And last question. The comments made about the Closed Block, the $2.6 billion of assets that are currently in corporate other, would be utilized or deployed over the near term. Is that to reduce debt, commercial paper? Can you just clarify what that's going to be used for?

So that $2.6 billion will be redeployed out of corporate and other and, hence, why we've called out the gain in corporate other associated with it. The way in which it gets deployed was contemplated in the guidance that we established at the beginning of the year.

And so there is a range of things that we could do with that that vary between debt reduction and M&A and distributions to shareholders. So without being particularly specific about that, what I would note is how we deploy that will influence where we thought in the range of guidance we might come out. And the expectation is that that would be happening in -- that we get it out of corporate and other on a relatively rapid basis, meaning in the next quarter or two.

Rob, that's all factored into the excess capital guidance that you have given out, or is this somehow in addition?

No. That is factored in. The capital capacity that exists is factored in, and that is part of the $2 billion dividend that we will be getting out of the PICA that was approved by our regulators.

Thanks.

Thank you. Our next question comes from the line of Yaron Kinar with Deutsche Bank. Your line is open.

Good morning, everybody. Maybe shifting gears a little bit from the capital side.

I was curious to hear your thoughts and comments about the DOL proposal. I think one of our peers recently mentioned that VA sales to qualified plans could fall by up to 15% or 20% for the industry as a whole. So wanted to hear your thoughts on that and where you'd see (inaudible) fall in respect to that number.

Yaron, this is Steve Pelletier. Let me address your question. I'll address it more broadly, and then touch upon a few particular areas, including the Annuities business.

First off, just let me say right upfront that we certainly support a regulatory framework that helps ensure client confidence in the advice, the services, and the solutions they receive. We are reviewing the proposed regulation, and we will be participating in the industry commentary.

As it stands today, as it's written today, the proposed regulation would certainly have some industry-wide impacts of increased compliance costs, for starters. At the same time, though, we think that our business mix and the strength of our franchises position us pretty well for adopting to any changes that are brought about by this regulation.

Let me give examples of that in three areas of potential impact that are being widely discussed. First, IRA rollovers. As it stands today, the regulation could make that process more complicated.

But the IRA rollovers that we do directly with clients are a modest portion of our overall business mix. And if the these regulations do result in a higher retention of assets in DC plans, that would be a positive offset that we'd have in our Retirement business.

Second, speaking of Retirement, let me talk for a minute about DC record keeping. Our business in that space has a couple of key risk mitigants in regard to the proposed regulation.

Virtually all of our business is done with companies who have over 100 participants in their plan. That's not by accident, that's due to our mid-market focus in this business. And that segment, as you know, is relatively less affect by the proposals.

Also, we've always approached this business with an open architecture philosophy as it regards the investment platform. We certainly have participation of proprietary offerings on our platform, because we have high-quality proprietary offerings, but we don't rely on those offerings being predominant in the platform.

The third area of potential impact would be something that we'd experience jointly with our distribution partners in the annuities business, as you asked about. We have very strong distribution relationships and we have top-tier positions in every major distribution channel in the business.

We offer a range of products and solutions. And as John and Mark both mention in their opening comments, that diversified product range is really gaining traction in the business. And those solutions all come with a range of compensation options for the advisor, ranging from commission-based to fee-based.

I think we will need to do some work with our distribution partners to ensure continued availability of solutions to clients, but we do feel that all the factors I just mentioned give us the basis for doing that work with our partners to achieve the very important goal of ensuring that their clients have continued access to high-quality retirement income options, very much including the guaranteed lifetime income that is really distinctive to the annuities industry. And that we will be able to make these offerings available on terms that work for everybody, including of course the Prudential shareholder.

So a follow-up on that. As you're selling more of the non-living benefit guaranteed product, do you think that would come under greater pressure with this proposal? And also, could you maybe give us some quantification as to what percentage of your VA business is qualified versus -- is in qualified plans versus non-qualified, or what percentage is from a fee commission -- fee business versus a commission business?

About two-thirds of our business, Yaron, is done in qualified -- with qualified money. That's consistent with industry averages. And if you are talking about the compensation breakdown, about one-third is done on a purely commission -- sorry, about two-thirds is done on purely commission-based business and the remainder is done with a mix of commission-based and fee-based.

And then thoughts on living benefits (multiple speakers)

I think the living benefit strategy and looking to diversify our product range is a strategy that we would continue to maintain over time. I don't think that particular element would be specifically impacted by the regulatory change. Like I say, what we need to do is work with our distribution partners to ensure that we can make the adjustments necessary to provide continued availability of the full range of product sets to their clients.

Thank you for the comments.

Thank you. Cynthia, I think we will take one more question, please.

Thank you. And that will be from the line of Steve Schwartz with Raymond James. Your line is open.

Good morning, everybody. Just a quick couple. Mark, you talked about the adverse mortality in life, the $35 million, and it wasn't clear to me. Are you referencing the $35 million relative to a quarterly average, or were you referencing that $35 million relative to what would normally be adverse seasonality in the first quarter?

Steve, it's actually Rob. That quantification is against an average for the year. So it is not adjusted for seasonality.

Okay. Rob, would you happen to know if it were, what the effect would be?

No, I don't.

Okay. Something to get from Mark. And then just one more. Going back to the question of VA and the effective interest rates. Just want to make sure I understand what you are saying here. At lower rates, okay, the sensitivity is lower such that if rates were to go lower from here, it wouldn't be that big of a deal, and there are other areas in the business that would benefit, that would make up the difference?

They would directionally offset. They aren't perfectly hedged. But you see derivative marks going the other way from the specific impact of interest rates on the VA living benefit hedge.

Now, keep in mind, there are a lot of moving parts in that VA living benefit hedge. So you can't always look at that and make a linear connection to interest rates, either. But I think the answer to your question is there are directional offsets in other parts of the Company, as Rob referenced, that mitigate the impact of interest rates directly on the VA living benefit.

So to follow up from that, that would be at this level. But it didn't really, when you moved down from [2.6%] to [2.19%], or whatever we were?

You are talking about the fourth quarter movement?

Right. Yes, I am trying to compare the two.

Yes. As I mentioned, what happens is as rates get lower and we remove the tail risk associated with continued lower interest rates, the hedging strategy that we have kicks in such that we have a significantly more muted effect at current levels than we would have at levels that would have been mid-2% range.

But even in the fourth quarter - I don't have this number right in front of me, but there were gains on duration management derivatives of several hundred million dollars that went the other way from the move you're talking about. So the answer is, yes, there was some of that in the fourth quarter.

There were less other things that mitigated the overall impact, but there was a meaningful, meaning several hundred million dollars, going the other way in other derivative marks. You can find it if you go back and look, or call Mark, we will tell you the answer. I don't remember the exact number.

I will do that. Thank you, guys.

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