保德信金融集團 (PRU) 2002 Q4 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by. We appreciate your patience today, and we come to the Prudential fourth quarter 2002 earnings conference call. Now at this point all phone lines are muted or in a listen-only mode. However, later in the conference there will be opportunities for questions and the instructions will be given at that time. Should you require assistance during today's earnings call, you may reach an AT&T operator by pressing zero then star on your phone keypad. Today's call is being recorded for replay purposes, and that information will be given out at the conclusion of today's earnings conference.

With that being said, here with our opening remarks is Prudential's Head of Investor Relations, Mr. Eric Durant. Please go ahead, sir.

Good morning. Thank you for joining us. Sorry to keep you waiting.

Our presenters today are Art Ryan, Prudential's CEO and Mark Grier, Vice Chairman and Head of Financial Management. Also with us today are Richard Carbone, Chief Financial Officer, and Buddy Piszel, Controller. Art?

Good morning and thank you very much for joining us today. Mark will be giving you a full review of our financial results, so I'll be brief.

With the fourth quarter Prudential completed our first year as a public company. Our earnings per share for the year based on after tax adjusted operating income was within our originally targeted range despite a much more difficult market environment than we anticipated. Just as importantly, we believe many of our businesses made significant progress toward our goals during the year.

First let's look at our large domestic life insurance business. Our individual life business has made great strides. For the full year adjusted operating income increased by nearly 60%. Our new universal and term products are selling well. Our captive agency force has stabilized and productivity has continued to improve.

We also made progress in third party sales of life insurance, which increased by 29%. And that excludes COLI sales. For the year, return on equity in this business was approximately 10%, not very far from our objective. Please bear in mind that all the return on equities that I will talk about in each of the businesses are based on unlevered equity.

Our group insurance business also improved. Its profitability more than doubled for the year from the depressed level of 2001 and nearly recovered to the record level of 2000. During the year we rated nearly one-half of our life cases and our benefits ratio improved. We're working hard to improve this key measure even further.

In disability we continued to benefit from selectivity in our pursuit of new business as well as excellent claims management. This business already produces return on equity in the target range of 10 to 12%.

Last year was a very difficult year for annuity writers, and our business did lose money. Still, our sales increased by 44% in total, reaching two billion for the year, and our sales through third parties showed particular improvement. We are very optimistic that our acquisition of American Scandia, which we expect to close during the second quarter, will take us to a new level in this business. Last week David Odenath, who currently heads Prudential's annuity business, was named to lead the combined business.

Difficult market conditions have already produced some tough sledding for the asset management business in which we have a significant presence. The results of our investment management and other asset management segments declined for the year, but only by 6%. These businesses continued to produce good return on equity. Last year was approximately 15%. And as market conditions improve, we expect to see our AUM and earnings increase.

Our best performing businesses continued to be our Prudential International Insurance Companies, as well as Gibraltar Life, which we acquired in 2001. Each continues to produce excellent results with return on equities in excess of 20%. These businesses have helped to mitigate the effects of weak security markets in our domestic businesses.

As you can see from this brief summary, most of our businesses are already performing at a high level or are making discernible progress toward our goals. There are two where we have made progress but are not yet at levels that are satisfactory.

The first is our financial advisory business, principally the private client group of Prudential Securities. This business reduced its pretax loss by nearly $100 million to 41 million last year largely through expense cuts. And we continue to hammer away to get it to acceptable levels of profitability.

The second is our property and casualty business. As you know, we are evaluating our options for this business, but we have nothing new to report to you today. However, I am quite mindful of the commitment we've made to share our plans for this business with you, and we hope to do so before very long.

Turning now to two broad themes that also distinguish Prudential's first year as a public company; namely expense management and capital management. On the expense front, we more than achieved our goals as our three operating divisions reduced expenses by more than $300 million for the year. We see additional opportunities to manage towards a lower cost structure. Our goal for the next two years remains $300 million in additional cost savings, and we hope to achieve more than one-half of that in 2003.

Effective capital management, we believe, begins with a superior balance sheet and a superior capital position. We have both, and we intend to maintain them. As a result, we have the ability to pursue acquisitions opportunistically that fit our current business mix and pencil out. Our acquisition of Gibraltar has produced 20% return on equity from day one.

Similarly, we believe that American Scandia will produce appropriate mid-teens returns with limited risk. And as I mentioned earlier, this acquisition will dramatically strengthen Prudential's competitive position in that business.

We also continue to believe that share repurchases are an appropriate way to return excess capital to shareholders. We began share repurchases last May, and through year end we repurchased approximately 800 million in common stock. In the fourth quarter we repurchased 8.2 million shares at a total cost of approximately $250 million. We continue to believe that repurchase of roughly 250 million per quarter is a realistic base case for Prudential.

And finally, our earnings guidance for 2003. We continue to expect our common stock EPS based on after tax adjusted operating income to fall within a range of $2.50 to $2.65. This includes the benefits we expect from our agreement to acquire American Scandia and assumes continuation of all of Prudential's existing businesses and appreciation in the S&P index of 8% for the year.

Again I want to thank you for being with us, and I'll turn it over to Mark Grier.

Thanks, Art. Before I start, I'd like to ask Eric to share with you the necessary qualifier on the remarks that we're making.

I was so excited to be here, I forgot to read the forward-looking statement. In order to help you understand Prudential and its results, we will make some forward-looking statements. 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 seconds titled forward-looking statements of our earnings press release and our annual report on Form 10-K for the year ended December 31st, 2001. Mark?

Thanks, Eric. Good morning, everyone. Thanks for joining us on the call today. I will start with an overview of the fourth quarter results for our Financial Services Businesses.

In the fourth quarter our adjusted operating income amounted to 43 cents per share of common stock, compared to 23 cents per share in the year ago quarter. Adjusted operating income is before realized investment gains and losses, before results from discontinued operations and divested businesses, before sales practices, remedies and costs and before demutualization expenses which we incurred in the year ago quarter.

For the year 2002, adjusted operating income amounted to $2.12 per share of common stock compared to $1.42 per share of common stock for 2001.

Beginning with the insurance division, the insurance division had adjusted operating income of $107 million in the fourth quarter compared to 71 million in the year ago quarter. The individual life and annuity segment had adjusted operating income of $85 million for the quarter compared to $53 million in the year ago quarter. The segments $32 million increase was driven by an increase in earnings from our individual life insurance business.

In our individual annuity business, lower asset values compared to last year's fourth quarter drove down fees, partly offsetting the improved life results.

In the individual life insurance business, the year ago quarter included $78 million of implementation costs associated with our expense reduction program. Also in that quarter we released $7 million of reserves related to the September 11th terrorist attacks. Absent those two items, individual life adjusted operating income was down $32 million from last year's fourth quarter as a result of an unfavorable mortality fluctuation.

In each of the first three quarters of 2002 our results benefited from more favorable mortality net of reinsurance in comparison to the year earlier period. However, mortality is subject to fluctuations from quarter to quarter, and in this year's fourth quarter it was unfavorable. With about double the number of claims over $1 million that we would generally expect on average. This mortality fluctuation amounted to a negative of about $50 million in comparison to the year ago quarter. More than offsetting the benefit of lower expenses in the current quarter's results.

By the way, we've looked carefully at the quarter's claims and found nothing to indicate that the mortality fluctuation is anything other than a random event.

Sales, based on first year premiums and excluding COli increased 18% to $77 million in the current quarter. The universal life products that we introduced in late 2001 and our term products, which we repriced around the same time and updated this past September, continue to be well received in the market. Our universal life products contributed $27 million to this quarter's sales and term sales totaling $17 million registered their second consecutive 55% increase over the year ago quarter. The strong sales results from these products more than offset a decline in variable life sales which continue to be negatively affected by equity market conditions. COLi sales of $15 million in the current quarter brought our sales total to 92 million, a 12% increase over last year's fourth quarter on an all in basis.

We finished the year with just under 4,400 Prudential life insurance agents, almost exactly where we started year, which is quite a milestone in that it marks the first year we've enjoyed a stable captive agent force after many years of decline. Agent productivity reached $40,000 for the year 2002, up from $35,000 in 2001 and consistent with our objective to develop a more cost effective captive distribution channel.

Our third party sales, other than COLI, are up $10 million from the year ago quarter and $16 million or 29% for the full year. Our term and universal life products have performed well in this channel, which contributed 25% of our total non-COLI sales from 2002, up from 21% a year earlier.

The group insurance segment reported adjusted operating income of $52 million in the current quarter compared with $21 million in the year ago quarter. The major contributors to the increase were more favorable claims experience in the current quarter and lower expenses.

At the beginning of 2002, we began to review pricing and implement rate increases where appropriate on our group life business. Through the end of 2002, this process covered nearly half of the business in force we had at the beginning of the year and nearly all the remainder will be covered during 2003. Our ability to increase rates on existing business and to sell new business at rates that we believe would offer attractive returns has been limited by a highly competitive market. As a result of the competitive conditions we've encountered, our rate increases are being implemented on a selective basis. This strategy has allowed us to retain profitable business, and our life persistency was just under 95% for the year. We continue to believe that our repricing and pricing discipline in writing new business will allow us to achieve gradual improvement in our loss ratios.

The property and casualty insurance segment reported a loss on an adjusted operating income basis of $30 million in the fourth quarter compared to a loss of $3 million in the year ago quarter. This quarter's loss resulted from a $33 million goodwill write-off and this business has no remaining goodwill. We are continuing to re-underwrite, increase rates, cancel and non-renew the unprofitable property and casualty business as permitted contractually and by regulation. But this business will continue to affect the segment's results as it runs off.

As we have previously announced, we are exploring options relating to the property and casualty insurance business, including the sale of all or part of the business.

Turning now to the investment division, the investment division reported adjusted operating income of $36 million in the fourth quarter, up $32 million from the year ago quarter. The investment management segment had adjusted operating income of $27 million in the current quarter, up $8 million from the year ago quarter. The segment's earnings benefited from lower expenses, which included employee termination costs in the year ago quarter. The lower expenses more than offset the decline in our asset-based fees, which came primarily from market value declines in the equity assets we manage.

The financial advisory segment, which is primarily our domestic securities business, had a loss of $28 million for the quarter compared to a $39 million loss in the year ago quarter. The segment's results for the year ago quarter included $20 million that Prudential Securities earned as a co-manager in our IPO. This income was offset by a corresponding charge in our corporate and other operations.

Stripping out the IPO income, the segment's loss narrowed by $31 million as our cost reduction measures more than offset declines in this segment's transaction-based and other revenues.

The division's two other segments, retirement and other asset management, reported adjusted operating income of $37 million in the current quarter compared to $24 million in the year ago quarter. The increase came mainly from an uptick in results from our guaranteed products business.

Turning to the international insurance and investments division, the international insurance and investments division had adjusted operating income of $174 million in the fourth quarter, up $21 million from the year ago quarter. The international insurance segment reported adjusted operating income of $180 million for the current quarter compared to $173 million for the year ago quarter. The segment's results included adjusted operating income of $71 million from Gibraltar Life in the current quarter, about equal to the year ago quarter if we strip out a $6 million surrender gain in last year's fourth quarter.

In the current quarter, Gibraltar provide $11 million of increased reserves that resulted from stronger persistency than we had anticipated at this stage of its operation. This is actually good news. Gibraltar has retained policyholders that we expected to lose, which will boost earnings in future periods. Additionally, policy benefits were higher than what we experienced in the first nine months of 2002.

Adjusted operating income from our international insurance businesses other than Gibraltar Life increased $14 million from the year ago quarter. The current quarter's results benefited $12 million from a true up of capitalized costs associated with new sales, but also reflected a negative impact of about $8 million from currency exchange rates. Excluding the true op and currency fluctuations, these operations would have registered an 11% increase in adjusted operating income.

On a constant dollar basis, new annualized premiums from sales in Japan were $145 million in the current quarter compared to $141 million in the year ago quarter. Sales from Gibraltar Life increased 15% to $62 million.

Sales in Japan from our Prudential of Japan life planner sales force were $83 million in the current quarter, down slightly from the year ago quarter, which benefited from the close of a sales convention qualification period. Sales from other countries of $53 million in the current quarter, unchanged from the year ago quarter, brought the current quarter's total sales to just under $200 million.

Our life planner force stood at about 4,500 life planners at the end of year, up about 10% from 4,100 a year earlier. This is in addition to nearly 5,200 Gibraltar Life advisors, down from 6,100 a year earlier, reflecting actions we've taken to make this distribution force more cost effective.

The international investment segment reported losses of $6 million in the current quarter and $19 million in the year ago quarter. The reduction in the loss came mainly from lower expenses.

In November, we announced the discontinuation of our European retail securities brokerage activities. And the results of these activities are now reported in discontinued operations for all periods.

Looking at corporate and other, corporate and other operations resulted in adjusted operating income of $7 million in the fourth quarter. This compares to a loss on an adjusted operating income basis of $12 million in the year ago quarter. Stripping out the $20 million charge that offsets Prudential Securities' income from our IPO in 2001, this quarter's results were just about equal to last year's fourth quarter. Current quarter results benefited from a $18 million increase in adjusted operating income from our real estate and relocation business and lower general and administrative expenses. However, we incurred expenses of about $45 million in the current quarter for supplemental benefits to policyholders as the market downturn in 2002 and our policyholder dividends scale reductions triggered our obligations under previous contractual settlements which we retained within corporate and other obligations.

The current quarter's after tax adjusted operating income for the Financial Services Businesses included a benefit of about $13 million from the reduction of our effective tax rate, from 34.5% to 33.6%. This resulted from the distinction of our European retail securities brokerage activity.

I'd like to turn to several items outside of adjusted operating income that are included in net income of the Financial Services Businesses. Realized investment losses for the Financial Services Businesses net of related adjustments amounted to $278 million in the current quarter compared to 132 million in last year's fourth quarter. The realized losses in the current quarter included losses of $385 million from impairments and sales of credit impaired securities. These realized losses reflect our aggressiveness in dealing with exposures to impaired credits. We don't allow impaired credits to sit on our balance sheet. This discipline is evident in our gross unrealized losses on fixed maturities, which stood at only $348 million at December 3st, 2002, or three-tenths of 1% of the Financial Services Business's overall investment portfolio. We believe that stacks up favorably among our peers. These losses are partly offset by realized gains from fixed maturities, including private bond prepayment.

Non-investment grade fixed maturities comprised about 7.5% of the financial service's businesses fixed maturity portfolio at December 31st, 2002, down slightly from a year earlier. Net income for the current quarter also includes a pretax loss of $88 million from divested businesses and past sales practices. We recorded a reserve of about $80 million in the current quarter under a stop loss agreement we entered into in 2000 when we sold our commercial property and casualty business to Everest Re. The $80 million represents half of our maximum exposure under the agreement, which is 160 million. The charge is essentially our share of Everest's addition to its reserves relating large only to asbestosis claims.

Finally, net income includes an after tax loss of $58 million from discontinued operations, reflecting our exit from retail stock brokerage activities in Europe.

Briefly discussing the closed block business, starting at the demutualization date and going forward, the results of the closed block business are associated with the Class B stock which we sold in a private placement. The closed block business reported a $186 million loss from operations before income taxes for the fourth quarter of 2002 compared to a loss of $236 million for the year ago quarter. We measure results for the closed block business only based on GAAP rather than adjusted operating income. The decrease in the loss reflected a reduction in realized investment losses of the closed block business and a reduction in the policyholder dividend scale offset by lower investment income.

Turning back to the Financial Services Businesses, I'd like to wrap up with an overview of our results for our first full year as a public company. Pretax adjusted operating income of the Financial Services Business increased $431 million to $1.8 billion in 2002. Results for 2001 absorbed implementation costs of about $180 million for our expense reduction program while in 2002 our businesses had similar costs of about $90 million.

Our three operating divisions realized cost savings in excess of $300 million from this program in 2002. Both the costs and the savings from this program had the greatest impact on the individual life insurance business where we built a more cost effective captive distribution channel. That business reported adjusted operating income of $432 million in 2002, up from $159 million in 2001.

In our group insurance business, where we focused on improvement and returns and maintaining pricing discipline in the competitive market of 2002, adjusted operating income increased by $85 million to $155 million. Our annuity business absorbed DAC charges totaling about $140 million in the second and third quarters of 2002 due to the difficult equity market conditions despite a return to profitability in the fourth quarter, the annuity business reported a $42 million loss for the year on adjusted operating income basis.

Including our property and casualty business, which is marginally profitable in 2002, the insurance division reported adjusted operating income of $555 million for the year compared with $545 million in 2001. Our 2002 results reflected a full year's contribution from Gibraltar Life which we acquired in April of 2001. Gibraltar Life's adjusted operating income of $378 million in 2002 compared to $262 million for its initial eight months of operations in 2001.

Our International Insurance operations, other than Gibraltar Life, continued their strong performance in 2002 with adjusted operating income of $375 million, representing a $30 million increase from 2001. Excluding the negative impact of currency fluctuations, these operations would have reported a 20% increase in adjusted operating income for the year. Including our international investment operations, the international insurance and investments division reported adjusted operating income of $747 million for 2002 compared with $570 million in 2001.

Our investment division reported adjusted operating income of $284 million in 2002, an increase of 114 million from 2001. The financial advisory segment suffered the effect of the year's difficult equity market conditions, but our cost reduction measures allowed us to reduce the segment's loss by nearly $100 million to $41 million for the year.

Rounding out the annual results for our Financial Services Businesses, our corporate and other operations contributed adjusted operating income of $194 million in 2002, representing an increase of 130 million from 2001 and reflecting income on the capital we transferred from our former traditional participating products segment at the time of our demutualization. We ended the year with a more favorable expense structure, improved distribution channels, and a strong balance sheet, all positioning us well for 2003.

Thank you for your interest in Prudential. Now we look forward to hearing your questions.

Certainly, and thank you, sir. Ladies and gentlemen, at this time we invite you to queue up for any questions or comments that you may have. And you may do so just by pressing the one on your phone keypad. Now, you will hear a tone indicating that you've been placed in queue. And just as a note, you may remove yourself from the queue by pressing the pounds key.

Now, ladies and gentlemen, if you tried to queue up before this announcement, we ask that you requeue by pressing the one on your touch-tone phone at this time. Once again, to ask a question, press the one on phone keypad.

Representing Goldman Sachs, our first question comes from the line of Joan Zief. Please go ahead.

Thank you. Good morning. Just a few questions.

The first question relates to buy backs. You indicated that 250 was a base number that you were looking for. If it turns out that the ability to redeploy the capital under the property/casualty company or to hit your return targets on Pru Securities looks like it's going to be pushed out further in time because of the environment, given the price of the stock would be willing to maybe accelerate your annual buy back program to more in the first half of the year?

That's my first question. My second question is if you do ends up having to sell Pru auto and home in pieces, as you indicated as an option, does that change again what your expectation for capital redeployment would be?

And my third question is related to distribution relationships with the Scandia distribution. Can you give us any insights if you're making any inroads there and if you anticipate that that will be an important distribution channel for you going into the ends of 2003 and 2004?

Joan, this is Art. Let me try part of it, and then I'll have Mark answer parts of it, as well.

Obviously we have not closed the deal with American Scandia, so it is premature, if you will, for us to announce any particular change in any arrangement, but certainly we are looking forward to building on their distribution capability, both with the annuity product as well as other products. And we still remain confident. I would remind you, however, that we did price the deal at a very, very attractive return in terms of the discount to book. And so, while increased sales are always important, the financial returns are heavily skewed toward the pricing of the deal.

In terms of capital, as I've mentioned in the past, we review this every quarter with the Board of Directors. And so, anything that we talk about generally has our best guess as to what might go forward. And we look at it on a regular basis. And so, when I use the phrase "best case," that's where I think we are today. And we will regularly review it with the board in terms of whether we should make any changes. But in terms of the specifics that you raised, let me have Mark add to that.

Well, as you know, as we've discussed, capital redeployment is a strategic multi-year process for us. And I don't see anything happening with respect to short-term timing that would derail the expectations that Art has talked about.

Well, let me ask you to talk about that a little bit more. You say that you don't see anything that changes your expectation. The world has kind of changed here in the last month.

Are you still, then, telling us that you're pretty confident that you can hit, say, an 8 to 10% return on the Pru Securities by the end of the year and you're still confident that the auto and home business will be either sold or something done with that so that you're still on target for your ROE assumptions?

Well, as you know, Joan, I can't, and I tried to say in my remarks, at this point it's not possible for me to talk about the situation in property and casualty other than to say that my commitments haven't changed and I will be continuing to evaluate that. And hopefully we'll be able to report back to you in some reasonable time frame.

In terms of the aggregate of Prudential Securities, we continue to make improvements, especially through expense reductions. We certainly are hopeful of achieving the targets that we've set. We did put some expectations in terms around market conditions and the like. And while January certainly hasn't been one that I would rack up as one of my favorite months, it might be a little early for me to comment other than what I've said for the whole year.

So, the answer to your question is yes, we continue to look and expect to achieve the targets that I've set out. And also are included in the -- I'll use the word reaffirming in the past month of the guidance. As you probably heard at the beginning, last month I said -- or two months ago I think I said that our 2003 guidance would be in the 250 to 265 which includes American Scandia and I restate that this morning.

Okay, thank you.

Just quickly on one thing, you asked about the property and casualty being sold in pieces. The business is already structured in several different legal entities and we would not change our expectations based on whether those legal entities sell separately or together.

Great. Thank you.

And thank you very much, Ms. Zief. Next, representing Salomon Smith Barney we have a question from Colin Devine. Please go ahead.

Thank you very much. I was wondering if you could talk a little bit more about what's happening in international, particularly with Gibraltar, where it stands right now in terms of laps activity and if your growth rate for Gibraltar has changed at all going forward? It's been my understanding that things have stabilized and rather than a runoff lock, there may be some upside to that.

Thinks are modestly better. Part of the financial attractiveness I spoke of is due to changing the crediting rates, which tends to drive a shock lapse that can lasts for up to two years. The lapse ratio is better, which of course would indicate that the earnings will improve going forward. I do not yet put this in the category of the kind of growth rate assumptions we assume in our more traditional international life where we've been growing at 15 to 20%. But yes, I am cautiously optimistic that the lapse ratio, the retention of agents and basically what we're doing there is certainly superior to our traditional competitors in Japan. So, yeah, I'd have to say cautiously optimistic is the way I'd put it.

One quick follow-up. The sales practices charge certainly brings back probably for both of us a few nightmares. Can you just give us a little bit of an explanation as to what that was about?

Yeah. As you remember, over the years this was a multibillion dollar reserve. And as we complete and close down especially some of the things like the opt out cases as well as now the final documentation, as wells as a number of clean-up activities, it required a modest charge that we put in the sales practice line. So, that's really the result of it. But we now have virtually every opt out case.

Excuse me. My colleague's pointing to me.

We have one remaining opt out case. And we would expect to handle that in some reasonable period of time. So, after four or five years, it is a clean-up. And the remaining opt out case is a small case.

Thank you very much.

And thank you, Mr. Devine. Next representing J.P. Morgan we go to the line of Michelle Jordano. Please go ahead.

Good morning. Couple of questions.

First, on the adverse mortality in your life business, could you discuss what your reinsurance coverage is? Secondly, Mark, you talked about the $45 million of supplemental benefits for policyholders in the corporate and other. Could you give us a little more color on that? How many policies are affected with the terms of the agreement and what triggers these types of expenses?

And then, third, I recognize that there's a lot of moving parts in the corporate and other. But is there anything you can do to sort of smooth out those results going forward?

And then fourth, what are you doing to reduce disruption at Pru Securities given all of the press about a pending merger or joint venture with Wachovia?

This is Art Ryan. Let me just try a few, and then I'll have Mark answer a couple of the others. Obviously the difficulties in the securities markets are not limited to Prudential Securities, especially in the retail brokerage business where you see the difficulties are fairly widespread given the absence of investor activity. Most of the impact on business and earnings there is less on asset levels and more on activity. I have consistently, and the folks who are directly responsible, talked about the importants of that distribution channel to us, but also recognize that we have to produce acceptable level of returns. So, at the moment we continue to offer programs like our master share program, as well as to reinforce the importance of the distribution channel, but to be perfectly honest in the communication that we have to produce acceptable returns.

So, I would summarize and say those are the principal things that we do and will continue to do.

Let me answer the other three questions. You asked about our mortality experience in individual life.

As I mentioned in my remarks, we had about twice as many, actually just more than twice as many large claims in the quarter than we would have anticipated. These were policies that were not reinsured. Generally these were older policies.

And in terms of current reinsurance, we are reinsuring about 80% of our new mortality risk, and we evaluate this constantly based on the relationship between the cost of retaining the risk and the capital requirements versus reinsurance opportunities. So, this particular collection of policies were older policies and not reinsured. And there were some, for example, accidents in there involving fairly young policyholders in their 40s. A skiing accidents and a dune buggy accidents. We have been through this carefully and do believe it's a fluctuation that's just part of the being in the business.

On the supplemental benefits, this is a cost to us that reflects an obligation that we have under our sales practices settlement with respect to maintaining policies in the face of either declining dividends or declining markets values. I can't tell you off the top of my head how many policies are involved. The charge was evident in the fourth quarter because that's when we cut the dividend and we adjust the policy values accordingly, and that obligation falls in corporate and other.

You also asked about smoothing corporation and other. We are working hard on expense issues in corporate and other and legacy assets that are maintained in corporate and other. Those are the two principal sources of the music that you see in that account. And we will continue to press forward on cutting expenses as well as addressing allocation issues and continue to press forward on the asset side to reduce the legacy assets which will both free up capital and result in a more predictable pattern of revenue recognition in corporate and other.

Follow up with one other thing. Could you talk about what kind of acquisition opportunities you're seeing right now?

This is Art Ryan. You know, there are lots of things that come up in the market relative to acquisition opportunities. Obviously the dramatic change that we've seen in market levels have produced more opportunities rather than less. If you look at our pattern of acquisitions, I think it reflects my approach to it. And that is it has to add to our existing book of business. It has to add to our ability to produce 12% return on equity in 2005.

So, in the overwhelming majority of cases, they're opportunistic. Whether you look at the larger ones like Gibraltar or American Scandia, pretty hard to predict what's going to come on, but there are more opportunities. But we will look at them in the discipline I described. We're not looking to expand outside of our businesses, and we certainly recognize that our number one objective is the return on equity target. And they will drive our decisions on capital acquisition -- excuse me -- on acquisitions.

Thank you.

And thank you very much, Ms. Jordano. Banc of Americas, Jason Zucker has our next question. Please go ahead.

Thank you. In the stat supplement you disclose attributed equity by a major business segment, and I was hoping that you could just be a little bit more specific and tell me the attributed equity associated with the property and casualty segment and also the attributed equity associated with the financial advisory segment?

We're looking in the book right now, Jason.

Jason, this is Eric. What I would like to do is give you the required equity, as we call it, for full year 2002. So, the required equity for full year 2002 in property and casualty was a billion five.

Okay.

And the financial advisory segment again for full year 2002, the required equity was a billion three.

Okay. And I suppose when you say "full year," you do mean year end, or you don't?

I mean the average for the full year, for all of 2002. So, if you wanted to calculate an ROE, take the previous year's earnings and divide by the figures I gave you.

Could you also just give me ending for both of those, as well?

I'd rather not because they move around so much on a day-to-day basis. We haven't given that out before, and I'd rather not do it. I don't think it would have been dramatically different.

Okay. That's great. Thank you.

Thank you very much, Mr. Zucker. Next representing Bear Stearns we go to the line of Andrew Kligerman. Please go ahead, sir.

Good morning. A few questions.

Property/casualty, is it an option for you to run off your P&C businesses, most notably the New Jersey auto business?

That's question one. Number two, I guess the New York Post this morning, some think it's the paper of record, starts out with a sentence saying that Pru Securities employees are bracing themselves for an expected merger with Wachovia Corp. And I know you can't comment there, but I'd like to get a sense of what kinds, but I'd like to get a sense of what kinds of bells and whistles you have in place to keep your brokers in place and where the broker count went sequentially from 3Q to 4Q.

And then fundamentally on your businesses, can you tell me what your maximum retention per life in the individual life businesses is in terms of mortality and what it was prior to demutualization? And lastly, in your group business, your benefits ratios were phenomenal. Is that reflective of your stronger underwriting guidelines? And are those ratios sustainable?

Andrew, this is Art Ryan. Let me take the group life.

I think what is better to look at, not unlike the discussions we did on individual life, is to look at the whole year, because you can have movements in quarters. And we saw an improvement for full year in group life the number in the fourth quarter is probably lower than a real run rate. I still think the number is in the 90% range, so we've seen improvement. So, I think the fourth quarter just happened to be almost the reverse of what we experience in the individual life. Don't take that as a prediction, but it just happened to be that way.

Keep it up.

I think it would be a little bit higher. But bottom line is we're very, very pleased with the improvement in that business. And it's high on my radar screen because of the difficulties we had a few years ago. And I think it's doing pretty darn well. Mark, do you want to answer the other ones?

Yeah. Let me start with the runoff of the P&C business. That's not a desirable option. I suppose it's not completely ridiculously out of the question, but it would be very low on our list of option also that we would like to pursue.

In terms of the brokers in PSI, we fell about about 200, from 4600 to 4400 in round numbers. This is a very difficult market. And you should understand that a lot of people are having a difficult time making a living in this market. That reduction was not all what we would consider to be core FAs, but we are mindful of creating an environment in which our FAs can be successful. And we're focused very seriously on the retention of FAs and making this a successful, profitable business.

This is Art again. Adding on, a couple of stats that are worth hearing about, one is our share of revenue in the industry remained constants assistant. And so, while some of our numbers were down, they reflect people leaving the industry tend to be in the lower quintiles. So, as an indication of overall industry, it remained the same. And our productivity is above a hundred percent of the [INAUDIBLE] ratio.

So, in general this is not a period of time where there's any joy, but we appear at least by those statistics to be holding our own.

You also asked by retention. Our current retention is $30 million. We would reinsure 80% of a deal, so we would have to get up to a pretty big risk before we would winds up with $30 million of risk on our own books. And the history of that is that we did reduce it somewhat around the time we went public. But I would say generally our history is to have had it in that neighborhood.

I see. So, Mark, you're saying your retention net could actually be as high as $30 million at risk?

Yeah.

Which would mean, I don't know, a 200 and something gross risk. Okay. Thank you.

If you reinsured it, yes.

Right.

Any follow-ups, Mr. Kligerman?

No, that was great. Thank up very much.

Well your welcome, sir. Thank you. And next representing Deutsche Banc we go to the line of Vanessa Wilson. Please go ahead.

Thank you.

Mark, you mentioned the severance cost in 2002. Could you give us a feel for the swing that that mood might see into 2003? And also, give us some guidance on the quarterly pattern that we can think about for the American Scandia earnings.

In terms of the quarterly pattern of Scandia earnings, it's early for that one.

Yeah, this is Art. We expect to close in the second quarter. And as I said, we have reflected I think in our earnings guidance the increase on our earnings, assuming a second quarter close. So, I could probably give you the indication of what we expect out of it for 2003.

And as you know, Vanessa, it's not our practice to give any quarterly guidance.

Our anticipated restructuring charges in '03 are fully reflected in the guidance that we've discussed. And you can relate that to the expense objectives that we've talked about. As a summary state statement net, we sort of are targeting roughly the same amount of expense cuts again. But the main point is that that's all reflected in guidance.

One final point. It's very surprising to me that your negotiations, if there are negotiations with Wachovia, are being so frequently and hotly reflected in the press. And I'm just curious. What is going on that so much of that information is leaking out and is being debated back and forth in many, many different sectors of the media?

Vanessa, this is Art. I haven't the faintest idea. As I said, I mean, I do believe that the media undoubtedly talks to a fair number of people and writes accordingly. But I know of nothing unusual that would cause things of that nature to occur.

Okay. Thank you.

And thank you very much, Ms. Wilson. Next question from Nigel Dally, Mr. Dally representing Morgan Stanley. Please go ahead.

Great, thank you. Just one question. In your guidance you've set an 8% market appreciation. I know it's hard to precisely predict, but I was hoping you could give us an update to how sensitive your earnings are to changes in that market and how this sensitivity will change after you close on American Scandia? Thanks.

Well, we've said over the past year or so that our sensitivity to the market is about $100 million per 10%. That's very rough. As you indicated, a lot of moving parts in this, including transaction volume and including the possibility of DAC write-offs. So, I would be reluctant to narrow in on any sort of a specific EPS number. But broadly speaking, that's the ballpark. It's about a hundred million.

That would go up somewhat, although because of the very low value of business acquired, which is the equivalent of DAC in the Scandia deal, we will not have the same earnings sensitivity there than we would have in a mature annuity book that would have been originated here.

This is Eric, Nigel, I have to add a brief codicil to what Mark said just in case there's any doubt. The hundred million dollars is the decline in fee income that we would expect given a 10% decline. We have not factored into that estimate any DAC unlockings or the effect of market conditions on transactional levels in Pru Securities.

And to add to that, we've not factored in what we would do in terms of additional expense reductions as a result of those activities as well. But I think that's the guideline number that probably you can base some analysis off of, if that's okay.

Thank you.

Thank you very much, Mr. Dally. Representing Credit Suisse First Boston a question from Caitlin Long. Please go ahead.

Thanks. Good afternoon.

Can you just comment on your situation and discussions with Moody's? I know that they were zeroing in on the property/casualty and securities businesses. Do you have any idea for what their level of patience is as they go through their review?

And also, Eric, I just wanted to follow-up. I had written down from the investor that there were 1.6 billion of equity in Pru Securities. The difference in the number you gave us, was that international security equity, or was that a difference given the change in the segmentation?

No, the difference is international and the institution equity business. The 1.6 is totals. The 1.2 is private client. On Moody's --

I'm sorry. I thought Eric gave a 1.3 billion for financial advisory.

1.3. And the difference to the other numbers is the other business is incorporated into Prudential Securities. Institutional equity in trading and the international.

And how much was international roughly?

Probably half of that addition. I would say it's somewhere between 100 and 150.

Okay. Thanks. And then on Moody's?

As you indicated, they have told us that they believe that the situations with respect to the private client group and the properties property and casualty group are an influence on the ratings of not just PFI, but also holding company, and that as we resolve these issues they'll be considering that with respect to our outlook. We do have a positive outlook on the insurance company from both S&P and AM Best. And we are optimistic that as we make progress on the issues as Art described over the next few months we'll satisfy Moody's with respect to this, as well. So, the answer is they are patience patient but aware of the issue and anxious to have us resolve it.

Okay. Thanks.

Thank you very much, Ms. Long. We have time now for one final question. Thank you very much for your interest, ladies and gentlemen. Representing Lehman Brothers we go to the line of Eric Berg. Please go ahead.

Thanks and good afternoon. Art, I'm hoping you can answer a general question. We've asked a lot of detailed questions today. But my general question is this: Could you talk to the large number of people on this call who are probably not insurance specialists and answer the question why, even though the stock market rose in the December quarter, financial conditions were much better than they were in the September quarter, the ROE went in the wrong direction? It went down rather than improving despite all the positive developments that I think all of us would agree took place at the company.

Are you asking specifically about the fourth quarter, Eric?

Yes, yes. In other words

Oh, for insurance.

For the whole corporation the ROE went down in December versus September. The stock market rose. Why is it, as you think about all the different businesses of Prudential and what's going on broadly speaking at the company, despite all the positive developments, strong sales, agent productivity improving, stabilization of the agent count, more third party sales, why didn't the ROE companywide improve in December from September?

I think there are a couple of reasons. One obviously we had the write-off of the goodwill and in the property and casualty company. And by the way, that is the total goodwill in the property and casualty company. And that was 30-odd million dollars.

Second, we had some changes associated with Gibraltar. Part of it was quite positive by adding $11 million to the benefits, which we expect to see going forward.

Thirdly, you've got to remember in terms of even though we saw some stock market improvement, the relative levels versus fee income, especially on a year-over-year basis, are down substantially. So, I think if you take those things, you would not have seen a deterioration in ROE. And I think that pretty well covers it. But let me ask my colleagues if they want to add something else.

Well, two more things, Eric. One is the mortality experience in individual life that we talked about which was a downward blip for the quarter.

The seconds is that there are pricing schedules on our products, and there's not a direct translation from market movements into the financial statements every day. They price at quarter end, sometimes owe a monthly basis, sometimes they're average, sometimes they're this. So, that sensitivity is not as directly linked as you would see in one particular quarter. And the fact is now the market's gone up and back down. So, the broad direction will be right in terms of the relationship between our earnings and the market. But you won't necessarily see it, particularly when there are moves within a quarter.

So, again, within the quarter you have in summary the mortality changes, the goodwill write-off. Importantly, I believe, is the commitment that we gave to deliver in the range we initially stated, albeit at the low end. But we didn't change the range, and I think we were able to deliver against that. I would not interpret that as a, quote, trend line, but more a result of what happens in any given quarter as it relates to the mix of our businesses.

Thank you.

Thank you very much, Mr. Berg. And with that, Mr. Ryan and our host panel, I'll turn the call back to you.

Well, I think we're done.

Thank you very much for being with us. And we'll look forward to being with you again in three months' time. Take care.

Ladies and gentlemen, your host is making today's conference available for digitized replay for one week. It starts at 4:15 p.m. eastern standard time February 12th all the way through 11:59 p.m. February the 19th. Please access AT&T's executive replay service by dialing 800-475-6701. At the voice prompt enter today's conference ID of 669819. International participants, you may access the replay, as well, by dialing 320-365-3844. Again, with the conference ID of 669819.

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