There are some numbers in the presentations of the business heads. After all, both Kurashige-san and John Hanrahan are actuaries, and they can't help themselves. But their presentations are a little bit higher-level, more strategic than financial. So to pull it all together financially, the last presentation will be that of Ken Tanji, who is the Chief Financial Officer of the International Insurance division. And Ken will be the one who will address most of your questions on our financial performance. You can see that we plan 3 Q&As. We also plan a couple of breaks. There are facilities here. There are little stick figures on the doors. I'll give you a hint. One is for the boys and one is for the girls. That will be a little bit of a test, perhaps, to tell which is which. If you make a mistake, you'll know the moment you open the door. We expect to break around noon, and we are offering lunch, a buffet lunch. I can tell you that the amount of time it will take to get from here back to the Grand Hyatt, where Mit will be presenting, shouldn't be more than about 15 minutes. So if you'd like to stay for lunch, I think you would have time and we would certainly enjoy seeing as many of you there as are able to make it. So that's my nickel, and I'm delighted to hand the baton to Ed Baird.Edward P. Baird Thank you, Eric. Good morning, and welcome. This is an interesting year for the Prudential. It's our 25th year here in Japan. And as Eric has outlined, you will hear from the heads of all 3 of the businesses as well our country leader, Kurashige-san. When Prudential started here 25 years ago, it had a single business and a single business model, POJ, with the Life Planner model, which you will hear an updated description of by John Hanrahan. Since then, obviously, the Prudential presence here has grown tremendously, and the models have evolved substantially, and you'll hear a lot of the details on that. So I'm not talk about that. I'm going to talk about what might be less obvious but I think what is critical to understanding the one thing in common that these businesses have that is visible, and that is the extraordinary success that they all share. And I think the reason, among others, that they share that success is that surprisingly, the strategic fundamentals upon which POJ was based and upon which it still operates today are the same strategic principles that we have used in founding and operating these other companies and businesses, in spite of what appear to be substantially different features. So what I hope to do in the next few minutes is just give you an inside look at what those strategic principles are so that as you hear each of the business models described to you and their performances, you might recognize some of the underlying strategic similarities that cause us to be different and, I believe, better than many of the competitors here in this country.
So let me start by taking you back, if you will, 25 years ago to understand exactly what the strategic thinking was in creating the POJ Life Planner model. At that time, 14 people, led by Kiyo Sakaguchi, met here to start this business. They saw an opportunity which I think was not at all obvious, and that opportunity was to come to a country, which was already the most heavily insured country in the world on a per-capita basis, and start an insurance company, in spite of the fact that it had some of the largest insurance companies with some of the largest sales forces in the world. That took a certain degree of strategic insight and courage, and it leads to one of the first principles upon which POJ was founded and which we have carried into all of our subsequent businesses, and that was a recognition that to even get started, let alone survive and succeed, they would have to create a business model that was fundamentally different and better. In order to translate that, he had to come up with a value proposition that would make that a reality. And he built it around 3 concepts: quality products, quality people, quality service. Those are very simple concepts. Virtually any company can say it and indeed many do say it. But he actually made it happen in ways that many of you are familiar with. So the particular features he focused on in terms of the quality people was he looked at the nature of the market here and determined what would he need to do to be meaningfully different and better around people? So he hired people who had never been in the business, who were exclusively college graduates, only males to differentiate from the marketplace which was largely part-time females selling to friends and neighbors. And he focused on needs-based analysis because he recognized that in this country, while it clearly wasn't underinsured, it was under-serviced. And so if he was going to deliver superior service, he would need superior people to do that. So it was quality people delivering quality service and with a quality product.
I'll draw your attention to what is not in that statement, and that is the word price. At no point did he view price as a basis for competition. Quite the contrary. His vision was that he would achieve a premium price by offering a premium offer at premium value proposition to the customer. That principle applies to all of our businesses. He was an actuary, and that wasn't an accident. In fact, coincidentally, I am told that he was the first Japanese national to earn an FSA in America. So from day one, he was very focused on profitability and expense management. Those qualities are embedded and encoded in the DNA of that organization. And like all of these principles that I'm briefly summarizing, they have been transferred to the DNA and to the strategic underpinnings of all of these other companies which on the surface can look so different. So that was and remains the core fundamental business for POJ. Now it evolved over time. After all, these Life Planners are 20, 25 years older. So they have focused initially on Death Protection, but as John will make clear, they have subsequently evolved the needs they address in their customers to include Retirement and Accident & Health. And indeed, he will show you some details to show that it is a build-on, not a substitution.I'll make the point about death protection particularly strong, because that is, as anyone in the business will tell you, the toughest sale to make, death protection, in contrast to a savings-oriented product, where the focus can be more on the crediting rate, the price, and the beneficiary is the purchaser, particularly if it's going to be held only until that individual needs the savings not for the true death protection. What makes pure death protection so hard to sell is because the only benefit that goes to the purchaser is the peace of mind that goes with the purchase. But the economic benefit obviously goes to the beneficiary. That's a very difficult sale to make. And you will notice that new entrants to the business and companies that don't have strong sales organizations tend to lean to the savings end of the spectrum, not to the pure death protection. What our organizations have evolved to do is the full spectrum. Go after that savings side, but always focus on the tough part. The part that others cannot do, will not do. That is the foundation, that's the death protection part of the business. So that was and remains the foundation for POJ.
The first major visible step in the evolution, of course, came 10 years ago, and again, this is an interesting year because this is the 10th year anniversary for the acquisition of Kyoei, now known as Gibraltar. Now on the surface, you could scarcely find a more different organization. Indeed, Kyoei was everything POJ prided itself on not being. It was a classic middle-market, traditional Japanese domestic sales organization, with one big problem: it was bankrupt. So when we acquired it, it would seem that there was no way to leverage what we had in terms of strategic principles or anything else. But what was recognized from the beginning was the opportunity to make this meaningfully different and better and to leverage the skills inside POJ. Now they already had one thing that was meaningfully different, and that was the Teachers Association, which at the time represented about half the business. It was a unique and exclusive right to have access on campus to roughly 1 million schoolteachers. But clearly, the bankruptcy indicated that, that had not been fully leveraged, and so the challenge was how do we make this better? So some of the same competencies, the strategic principles around quality people, which is the foundation, were brought over. In fact, the leadership came from POJ. So the first challenge was, how do you take 7,000 people in this bankrupt company, not try to make them clones of Life Planners, but to instill them with that same kind of focus around death protection and the skills and the competencies needed to have a value proposition, not based on a low price or a high crediting rate, but with the focus, rather, around the quality of the advice and the service and a competitive offering. And indeed, they did that. That's a slow and difficult task. It took several years. And in spite of a lot of recruiting, that 7,000-person sales force shrank over the next couple of years to about 4,500, and it slowly grew its way back to a little over 6,000 just prior to the recent acquisition. So even though it never grew back to the size of the sales force it had been, even over 10 years, its productivity, not to mention its profitability, grew enormously. An extremely successful organization by any measure. Now if you then look further, as recently as last year, that organization within 10 years went from a position of being bankrupt to the position where it could acquire 2 more companies, very similar to what they had been before, very similar to what Kyoei was. And interestingly and coincidentally, they had about 7,000 salespeople. So that company today is going through that same transformation process that was done with Kyoei. We have the confidence that we can do that. Part of it goes back to people and leadership. The leader of that whom you will hear from is Sato-san. Sato-san was one of the executives from Kyoei who partnered with the leaders who came from POJ to bring about that transformation in the sales organization. He then led the merger over the last year and became the President of the new organization, the new, as we call it, Big Gibraltar. So he has experienced from all ends that kind of transformation. So the focus there has been on taking the same strategic fundamentals of focusing on building the quality, delivering the quality service in such a way that, that value proposition to the customers, one that can demand that kind of pricing and, in turn, when combined with the productivity, delivers the profitability that today characterizes that organization.
The next step in evolution came about 5 years ago, and that was the development of the bank business. It's now legally a separate company. We call it Prudential Gibraltar Financial. It is operated as part of, from a reporting perspective, as part of Gibraltar. But it's operated as a separate company, run by Tanigawa-san, who will speak to you this morning.Now Tanigawa-san came from POJ. He was a Life Planner, a very successful one. He became a sales manager, an agency manager and then a regional sales vice president. So all of those principles of quality, of differentiation by being focused on having the best people of delivering service, not being dependent on price, he carried that over into the bank channel. The very first challenge there was how to catch up with companies that had been spending the last 5 years building banking relationships selling variable annuities, which we had abstained from doing because of their focus on profitability. And what he was able to do was to craft a value proposition that said, "We won't then send you just a product. We'll send you a product, and we'll send you a person. And that person will actually be a former POJ Life Planner, and among the very best in the industry." And as a result of that, he was able to create a relationship with the #1 mega-bank in Japan, the Bank of Tokyo-Mitsubishi, which at that point was representing virtually 100% of the sales. Even today, it has grown to the point where it's still 50% of the sales. One of the principles that, that emphasizes is we focus more on the quality and getting the penetration so we get the profitability, as opposed to having large numbers. Yes, do we want more banks? Sure, and that's growing. But having a quality relationship is a foundation to build upon profitably. Then the numbers will follow. So some of those same principles of how do we design a value proposition that's truly different and better, that's based not on price leadership, even in third party, where price or commissions or interest rates frequently drive the discussion and are the foundation of value proposition. Do we have to pay attention to that? Absolutely. We have to be in the game. But you will see in here, as you have already, details that show that's not the basis on which we compete. The fact that our regional founder was an actuary is not lost on the organization. The focus has always been to not be distracted or seduced by growth in the top line but see it rather more as a driver to get to growth in the bottom line. In a captive agency system, that can be controlled. In a the third-party system, that can be tougher to accomplish, but with the proper focus with the right value proposition, very doable. And even more recently, this has come about with an independent agent channel. Some of you will have noticed that we had started that just before we did the acquisition, which was ironic timing. We had just started a small independent agency channel. But there again, the value proposition was quite different. In an industry known for competing based on paying a higher commission, we stayed away from that. And the need -- the initial contacting conversation is focused around what is the vision that this independent agency has, and does it line up with what we have in mind? And to the extent that they want to focus on training and educating so that they can deal with the more complex products and a more challenging marketplace, then we have a basis for working. You will notice that we inherited 4,000 or 5,000 of these relationships. Today, that number is smaller. The number of bank relationships we inherited is smaller. The number of life consultants we acquired is smaller. That's because, just as with POJ, our initial focus is always going to be on quality. If we can get that foundation correct, then we are confident that over time, the numbers will come, but with a foundation that's based on profitability and a value proposition that's sustained. Read the rest of this transcript for free on seekingalpha.com