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

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

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.

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?

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.

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…

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…

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 Instructions] Our first question will come from the line of Chris Giovanni with Goldman Sachs.

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?

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.

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?

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.

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.

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?

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.

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?

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.

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?

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.

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.

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?

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?

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.

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?

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…

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?

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.

And our next question comes from the line of Suneet Kamath with UBS.

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.

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.

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?

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.

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.

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 next question comes from the line of Eric Berg with RBC Capital Markets.

Actually my questions at this point have been all asked and answered, so thank you very much.

Next will go to the line of Nigel Dally with Morgan Stanley.

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?

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.

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?

Let's ask Ed.

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.

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.

And we have time for one final question, that will be from the line of Mark Finkelstein with Evercore Partners.

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?

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.

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?

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.

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?

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.

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