保德信金融集團 (PRU) 2003 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Good morning and good afternoon, welcome to Prudential's first quarter earnings release. 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. If you should require any assistance during today's earnings conference you may reach an AT&T operator by pressing zero then star on your phone keypad. As a reminder, today's call is being recorded for replay purposes.

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.

Today we'll begin with prepared marks from Art Ryan and Mark Grier, after which we will be happy to entertain your questions. Rich Carbone and Buddy Piszel are also with us and will also participate in the Q&A. Now the highlight of my day. In order to help you to understand Prudential Financial, we may 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" of our earnings press release for the first quarter of 2003, which can be found on our website at www.investor.prudential.com on the investor relations page. In addition, in managing our business, we use a non-GAAP measures to measure the performance of our financial services businesses. The comparable GAAP presentation and reconciliation between the two for the first quarter are set out in our earnings press release on our website. Additional information -- additional historical information relating to the company's financial performance is also located on our website on our investor relations page.

And now I'm really happy to hand over to Art Ryan.

Good morning and thank you for joining us today. Mark will review our financial results in detail, so I'll be brief.

Overall, I characterize first quarter results as on track with our objectives for the year, despite some continued rough sliding in equity markets through March. Our domestic businesses continue to benefit from expense reductions. In the first quarter, we achieved reductions of $76 million compared to the prior year, most of that about 51 million, was in corporate-related expenses. We are reducing some of our support functions such as finance, human resources, and operations and systems. And we are spending less on some firm-wide initiatives including technology development, in which we have invested heavily in recent years. Additional expense savings were achieved in the private client group. I should mention that Prudential's work force has declined by approximately 10% in the last year, reflecting the expense reductions we've achieved. As you know, we have a goal to produce expenses by a total of 300 million in 2003 and 2004. We hope to achieve more than one half that amount in 2003, and we remain confident that we will achieve these objectives.

We also continue to see solid sales results in our individual life business and in annuities. Total individual life sales excluding COLI were up 9% on last year, even though variable life sales continued to weaken. In individual annuities we achieved 7% growth in total sales, and we accomplished this while reducing crediting rates on fixed products in order to preserve our spreads. Our international insurance business continues their solid performance. Sales are strong. On a accounts and exchange rate business, annualized new business premium increased by 13% year-over-year. This includes the results of Gibraltar, which achieved an increase of more than 20% with fewer life advisors than the year before. Gibraltar now has sales productivity well above the norm for Japanese insurance companies. Gibraltar's business model is fairly typical of the Japanese insurance industry. In Prudential's old home ground international insurance business, sales productivity is already exceptional, and our ability to grow is largely a function of our ability to increase the number of life planners. Through March of this year, the number of life planners was up by 11% from the prior year.

I'll update you now on the broad theme of capital management. We continue to believe that effective capital management begins with superior balance sheet and a superior capital position. And we have both. And we intend to keep them. For example, we have dealt proactively to resolve credit deterioration in our investment portfolio. Our credit-related losses have been manageable. And most importantly, when we have impairments we deal with them promptly. Gross unrealized losses on our fixed maturity portfolio are amounted to only 250 million at March 31 of this year. We believe that share repurchases are an appropriate way to return excess capital to shareholders. In the first quarter, we purchased 8 million shares at a total cost of approximately $250 million. We continue to believe that repurchases of roughly 250 million per quarter is a realistic base case for Prudential. Our strong capital position also gives us the ability to pursue acquisitions opportunistically that fit our business model, and obviously pencil out. Our acquisition of American Skandia which closed May 1 is a case in point. We believe that American Skandia will produce attractive returns, while taking Prudential to a new level among annuity writers.

While we will continue to pursue acquisitions that make business and financial sense, we are equally committed to ensuring that the capital we've already invested in our current businesses is earning appropriate returns. Our property and casualty business does not earn an appropriate return. In March, we announced the agreement to sell our specialty automobile insurance operation, a component of this business. As for the rest of our P & C business we continue to work aggressively on dealing with the issues. I won't be able to say anything else today about our ongoing efforts to address this business for the simple reason we are working very aggressively on it. Also, we believe we will successfully transform our retail securities brokerage business, principally the private client group of Prudential Securities by combining it with Wachovia Securities. We expect this combination to close in the third quarter.

Finally, our earnings guidance for 2003 is unchanged. We continue to expect our common stock earnings per share based on after-tax adjusted operating income, to fall within a range of $2.25 to $2.40. This includes the impact we expect from the American Skandia and Wachovia transactions, including charges of approximately 25 cents per share in 2003, related to the combination of the retail securities brokerage operations. This guidance also assumes continuation of all of Prudential's existing businesses, and appreciation in the S&P 500 index of approximately 8% for the year.

Again, thank you very much for being with us and now I'll turn it over to Mark.

Thanks, Art and good morning everyone. Thank you for your attendance this morning.

I'm sorry to disappoint anyone who likes as long rest period before the questions and answers but we have had a very clean quarter so my remarks are a bit shorter than usual. I'll start with an overview of the first quarter results for our Financial Services businesses. In the first quarter, our adjusted operating income amounted to 58 cents per share of common stock, compared to 59 cents per share in the year ago quarter. Adjusted operating income is before realized investment gains and losses, before results from divested businesses and before discontinued operations.

Turning to the divisions, the insurance division had adjust the operating income of $172 million in the first quarter, compared to 203 million in the year ago quarter. Adjusted operating income from our individual life insurance business was 106 million for the current quarter, down 11 million from the year ago quarter. Mortality returned to within our expected range in the current quarter, following an unfavorable fluctuation in the fourth quarter that was driven by an exceptionally high incidence of large claims. However, the current quarter's mortality experience was not as favorable as the strong year ago quarter, resulting in the down tick in results. In the life insurance business, sales based on first-year premiums and excluding COLI increased 9% to $74 million in the current quarter. The overall increase came from strong sales of our universal life and term products, which both registered substantial increases over the year ago quarter. Our universal life products contributed $26 million to this quarter's sales. More than double the year ago quarter. And term sales, at $23 million, registered a 77% increase. The momentum from these products more than offset a $19 million decline in sales of variable life, which continues to be negatively affected by equity market conditions. It is interesting to note that two-thirds of this quarter's total non-COLI sales came from universal life and term. Products that were either introduced to our lineup when we became a public company, or updated within the past year. These products were especially well-received in our third-party distribution channel which registered a 31% increase in non-COLI sales over the year ago quarter, and contributed nearly 30% of the quarter's total non-COLI sales up from 24% in the year ago quarter. Our total sales for the quarter including $4 million of COLI business, amounted to $78 million.

Our Prudential agent count was just over 4,300 at the end of the first quarter, down slightly from year-end. We believe that we have stabilized the captive agency force while substantially reducing the cost structure of the owned distribution channel. Turnover comes at a high price, and we fine-tune our recruiting of new agents in order to avoid getting ahead of our training capabilities. As a result we hired at a slower rate in the first quarter of the year than the rate we expect over the balance of the year. This led to the slight decline in agent count. First quarter agent productivity stood at $34,000, consistent with a year ago.

Our individual annuity business reported adjusted operating income of $23 million for the first quarter, down 6 million from the year ago quarter. Lower asset values continue to have a negative impact on variable annuity fees. But results benefited from credited rate reductions we implemented on our fixed annuity business, including the fixed buckets within our variable products. Our total annuity sales were $441 million for the current quarter, up 7% from the year ago quarter, with the increase driven entirely by expansion of our third-party distribution.

The current quarter's sales were virtually unchanged from the fourth quarter of 2002. But the mix is notably different. Fixed annuity sales dropped by about one-third, following our implementation of new-money credited rate reductions in the first quarter. But variable annuity sales increased 20% over the fourth quarter, to $331 million, as we continue to benefit from the expansion of our third-party distribution relationship. About one-third of our variable annuity sales in the first quarter went to the fixed bucket, excluding dollar cost averaging accounts. The acquisition of American Skandia that we completed last week will significantly grow our third party channel, adding about 34,000 representatives appointed to sell American Skandia products, and providing access to an additional 130,000 independent producers. The group insurance segment within the life business reported adjusted operating income of 34 million in the current quarter, compared to 37 million in the year ago quarter, which benefited from favorable disability claims experience, by a high level of claims resolution.

Our expense ratios for both life and disability improved over the year ago quarter when we were spending money on things that needed to be fixed in this business. Our annualized premiums from new sales of group insurance were $155 million in the current quarter, down 28% from the year ago quarter. The highly competitive conditions in the group insurance market have limited our ability to sell new business at rates that we believe would offer attractive returns. We have been implementing rate increases on both group life and disability on a selective basis, allowing us to retain profitable business. First quarter persistency was 96% for group life and 92% for group disability. We continue to come 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 adjust adjusted operating income of $9 million in the first quarter this year, compared to $20 million in the year ago quarter, which benefited from stop loss reinsurance recoveries of that amount. In March, we announced our agreement to sell the segment's specialty automobile business and the results from that business are now classified as discontinued operations. We are continuing to re-underwrite increased rates, cancel and non-renew the unprofitable business as permitted contractually and by regulation as we explore options for the remainder of the property and casualty insurance business, including the sale of all or part of the remaining business.

Turning to the investment division, the investment division reported adjusted operating income of $74 million in the first quarter, compared to $104 million in the year ago quarter. The investment management segment had adjusted operating income of $36 million in the current quarter, down $11 million from the year ago quarter. Lower asset-based fees, which came primarily from market value declines in the equity assets we manage, were partially offset by a lower level of expenses in the current quarter. The financial advisory segment, which is primarily our domestic securities business, had a loss of $24 million for the quarter, compared to adjusted operating income of $7 million in the year ago quarter. This segment was negatively affected in the current quarter by a decline in transaction-based and other revenues, which was partially mitigated by lower expenses reflecting our cost reduction initiatives. The division's two other segments, retirement and other asset management, reported adjusted operating income of $62 million in the current quarter, compared to $50 million in the year ago quarter. The increase came mainly from an uptick in results from our guaranteed products business.

Turning to international insurance and investments, the international insurance and investments division had adjusted operating income of $175 million in the first quarter, compared to 202 million in the year ago quarter. Substantially all of the division's results come from our international insurance operation. The international insurance segment reported adjusted operating income of 175 million for the current quarter, compared to 204 million for the year ago quarter. The segment's results included adjusted operating income of $75 million from Gibraltar Life in the current quarter, reflecting the absorption of $15 million of increased reserves resulting from stronger persistency than we expected at this stage of its operations. We had estimated that policy surrenders would continue at a high level in the two years or eight quarters following Gibraltar's acquisition and restructuring in April of 2001, and set up policy reserves accordingly. The lower than expected policy surrender experience of the current quarter, which essentially marks the end of the two-year period, is good news. It means that Gibraltar has retained policyholders we expected to lose, and is expected to boost earnings in future periods. In the year ago quarter, Gibraltar Life reported adjusted operating income of $104 million, reflecting favorable mortality experience. Our international insurance operations other than Gibraltar Life contributed $100 million of adjusted operating income, unchanged from the year ago quarter. A less favorable level of policy benefits and expenses in the current quarter, including the cost of relocating our Japanese operations to a new office building in Tokyo, offset the impact of continued business growth in Japan and Korea.

On a constant dollar basis, new annualized premiums from sales in Japan increased 23% to $163 million in the current quarter, compared to the year ago quarter. Sales from Gibraltar Life increased 22% to $62 million. Sales in Japan, from our Prudential of Japan life planner sales force, were $101 million in the current quarter, up 23% from the year ago quarter. Current quarter sales benefited from the close of a sales convention qualification period as well as growth in our life planner force. Sales from other countries were $49 million in the current quarter, bringing total first quarter sales to $212 million. Our life planner force stood at about 4,550 life planners at the end of the first quarter, up 11% from 4,100 a year earlier. This is in addition to just under 5,000 Gibraltar Life advisors, down from 5,700 a year earlier, reflecting actions we've taken to make the distribution force more cost effective.

With respect to corporate and other, corporate and other operations resulted in adjusted operating income of $28 million in the first quarter, compared to $20 million in the year ago quarter, as current quarter results benefited from lower general and administrative expenses. The effective tax rate applied to adjusted operating income for the Financial Services businesses, was 32.5% for the first quarter, compared to 36.5% for the year ago quarter, and 33.6% for the full year of 2002. The decrease from the full-year 2002 rate came mainly from a lower overall tax rate applicable to our international operations.

I'd like to turn to several items outside of adjusted operating income that are included in net income of the Financial Services businesses. First, realized investment losses for the Financial Services businesses net of related adjustments amounted to $113 million in the current quarter, compared to $96 million in the year ago quarter. The realized losses in the current quarter included losses of 175 million from impairments and sales of credit-impaired securities, down by more than half from 385 million of losses in the fourth quarter of 2002. These losses were partially offset by realized gains from fixed maturities, including private bond prepayments. Our gross unrealized loss on fixed maturities stood at about $250 million at March 31, 2003, or 2-tenths of 1% of the Financial Services businesses overall investment portfolio, down from an already low $350 million at year-end '02. We believe our very modest level of unrealized losses on our balance sheet stacks up favorably among our peers. Non-investment grade fixed maturities comprise just over 7% of the Financial Services businesses fixed maturity portfolio at March 31, 2003, down slightly from year-end. Secondly, net income also includes an after tax loss of $22 million from discontinued operations reflecting our agreement to sell our specialty automobile insurance that we announced in March.

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 $1 million loss from operations before income taxes for the first quarter of 2003, compared to a loss of $175 million for the year ago quarter. We measure results for the closed block business only based on GAAP rather than adjusted operating income. The current quarter included realized investment gains of 41 million, while the year ago quarter reflected $79 million of realized investment losses. The current quarter also reflected a reduction in the policyholder dividend scale and a lower level of general and administrative expenses.

Turning back to the Financial Services businesses and summing up, our domestic business are on track, despite a continuing difficult market environment, and we've expanded our distribution strength while exercising pricing discipline on our core products. Our international businesses continue to make a strong contribution to our overall results, as we emerge from the initial two years of our ownership of Gibraltar Life, with a fully integrated business and a better level of policyholder retention than we anticipated. Finally, our focussed approach to managing the investment portfolio and dealing with impaired credits in a timely manner has proven to be a significant strength in the current environment.

Thank you for your interest in Prudential, and now we look forward to hearing your questions.

Certainly. And thank you, sir. Ladies and gentlemen, as you just heard, if you do have any questions or comments we invite you to queue up at this time. Press the one on your phone keypad. Now, you will hear a tone indicating that you've been placed in queue. And you may remove yourself from the queue just by pressing the pound key. So once again to queue up for a question, police the one on your touch-tone phone. And one moment, please, for our first question. Representing JP Morgan, our first question comes from Michelle Giordano.

Good morning. I had couple of topics I'd like you to address. First, can you talk about what kinds of acquisition opportunities are you looking at? and are there properties out there that are available? Second, can you update us on where you stand on the sale of the rest of the property casualty operations? And third, can you give us an update on what you've learned more about American Skandia since you had announced the deal in December? And what would be going on in terms of any kind of management changes? I understand that Wade Duncan had left?

Okay. You had three questions. On acquisitions, I would make a couple of points. One, as we have said, we are only interested in acquisitions that expand our current portfolio of businesses. We are not looking to enter any new lines of business. And second, they are opportunistic. So by definition, it's difficult for me to say anything more than that. Because we look very, very hard at the appropriate use of capital of the we look very hard at stock buybacks, compare different scenarios in terms of what's going to get us to the 12% return in 2005. That drives all of our decisions. If it is not going to help us get there, then we won't make them. We are in a very strong position in virtually all the markets in which we compete, so again, acquisitions are opportunistic. There are no particular ones that I can comment on at this particular point in time. As I said on property and casualty, we've been working very very hard on this. We did announce the sale of the specialty auto business, and as I said in my opening remarks, we continue to work very hard in terms of the other aspects of property and casualty. And hopefully in the not too distant future I can provide you with greater details. But at the moment, that's as far as I can talk about. Lastly, on American Skandia, we're very, very pleased. I mean, obviously we worked very hard before announcing it in December. Over the past few months, we've done a very very thorough review of the business. We have been very, very fortunate in terms of the business we've acquired but also the individuals we've acquired. We've kept virtually the entire sales organization, which, as you know, has been the strength of American Skandia, in addition to their product capabilities in accessing the independent financial adviser channel. So we're quite comfortable on that. We announced that the leadership would be under David Odenath, and Wade Duncan continues to support Prudential in a number of areas, relating not only to the annuity business but our broad retail business, and we expect that to continue going forward.

So is Wade going to stay on or is he going to act as a consultant?

Well, he's going to be supporting us, going forward. I'm not quite sure what kind of arrangement he has. Normally we wouldn't can't on that. But certainly we would expect he will continue to support Prudential going forward.

And just as a follow up, on the group disability, can you talk about the slowdown in claims resolutions, what's driving that and where specifically are you seeing that occurring?

Well, we've looked very, very long and hard, as we do every quarter, at the group disability. There are no unusual or systemic issues that we can see, but there is, if you go back over the prior five quarters, a reasonable level of volatility around the claims processing component. So we did see, as you correctly point out, some change in the first quarter. But nothing systemic. And we expect to continue to meet our plans in that business.

Thank you.

And thank you very much, Ms. Giordano. And next representing Smith Barney let's go to the line of Colin Devine. Please go ahead.

Good morning, gentlemen. A couple of questions, it's hard to pick a few, since the quarter was so clean. But I was wondering, Mark, if you can give us a bit more of a time frame on the integration of American Skandia, what's the game plan? How should we see that roll into earnings over the next sort of couple quarters? Secondly, could we talk a bit about minimum crediting rate pressures, both domestically and in Japan, and how this current interest rate environment's continuing to put some pressure there? And then finally, I wondered if you had any more update on the Wachovia Securities transactions, how that's progressing?

Hi, let me start off with respect to your question about Skandia. I guess the summary statement is that we have reinforced the guidance that we issued when we discussed the Skandia acquisition. And we are on track financially. As you probably know, because of the antitrust laws, we can't actually take apart things like pricing models until the deal is actually closed. So that's happening as we speak. So I would describe us as moving into the integration phase on schedule having found no surprises. And anticipating the realization of the economic benefits that we talked about when we announced the deal, I guess the basic picture on Skandia is no surprises and consistent with the original guidance and original discussion we had, moving into the integration phase with no surprises in the business at this point. Secondly, on the crediting rate picture, as you probably know, in Japan interest rates have come down more. We have positive spreads in Gibraltar and we have negative spreads in Prudential of Japan. However, our profitability in particularly the core pick book in Prudential of Japan is driven by mortality and expense profits as opposed to the positive spread opportunities on the investment side. The impact on us broadly of declining rates there is minimal.

What about on Gibraltar? I mean, interest rates are down from where they were when you bought the company.

Yeah.

I don't believe you changed crediting rates.

We've been able to have a significant positive impact on the investment side of Gibraltar as a result of managing the asset mix, making some changes in some of the lower yielding assets in favor of some U.S. dollar denominated assets. So we have seen improvement with respect to the asset side of Gibraltar that's keeping us above water there.

This Art, Colin. The Wachovia transaction remains on track. We are obviously going through a series of due diligence between both companies. Nothing has surfaced of any concern for either side. And we still expect to close the deal in the third quarter.

A quick follow-up. On the investment portfolio, the rate of losses that you experienced in the first quarter here really hasn't changed from the rate full-year 2000 rate. What are you doing at for the year right now?

Well, I think the rate is much lower, Colin, because I think the gross losses in the fourth quarter, for example, are over 300 million and I think they were also over 300 million in the third quarter. And in the first quarter it was 175 million. So we are seeing, you know, normalization -- well, I don't like that word, normalization. We're seeing lower, obviously they're higher than I like, but certainly lower. We don't see any significant change in the outlook from where we are today in terms of what we should expect going forward. So we're pretty comfortable with where we are.

Art, I thought the company, per the K, full-year, pretax, gross realized losses were a billion 50. If we go pretax for the first quarter, I think we're looking at about 269. I'm not sure that I see your point that the run rate's really changed.

I'm sorry, I was talking about the Financial Services business. Were you looking at --

I am looking at FSP. I'm just going straight from the K. I know it's 175, but that's after tax.

That's pretax, Colin.

Okay. Thank you.

Thank you very much, Mr. Devine. Next we go to the line of Nigel Dally with Morgan Stanley. Please go ahead.

Great. Thank you. Three questions. First is on excess capital. You've announced a lot of transactions recently; I'd like to get an update on where you expect excess capital to be at the end of the year. On the corporate line, can you provide a bit of guidance as to how we can think about earnings on that line going forward. And lastly, just going back to Skandia, if you can just provide a couple of details on how that block of business performed in the first quarter. Thanks.

Okay, let me -- this is Art Ryan. Let me just -- I'll let Mark answer the excess capital and the first quarter on Skandia. On the corporate line, I think we're roughly -- where we are in the first quarter is probably a reasonable assumption going forward. It ought to be around in that range. So there should not be any significant surprises or changes in that line.

Great.

Mark, you want to talk about excess capital and first quarter American Skandia?

Yeah. Nigel, I think the broad statement about capital, as with American Skandia was no surprises and we're pretty much on track. You're aware of what we've been doing in the arena of share repurchases. You probably saw that we issued some debt recently as part of our broad capital management initiative. We do anticipate continuing to reduce our excess capital, but a specific forecast depends on things like un and realized gain and losses, opportunistic acquisitions that might come along. But in the context of the broad several-year plan, I would say we're exactly on the trajectory that we had anticipated being on. With respect to the corporate and other line, we don't give guidance for individual pieces of our income statement. I would say, however, that that's the ballpark. In terms of that number as we move forward. With respect to Skandia in the first quarter, I'm not going to answer questions about their specific performance. We will be making purchase accounting adjustments when we buy Skandia. And as Skandia goes on our books, it's not going to look like it looked stay stand-alone company in the first quarter. And because we're in the process of making those purchase accounting adjustments, I don't have anything to add other than to reinforce the statement earlier about guidance being on track for Skandia.

Just a follow-up. I understand the comment regarding earnings and it's going to be a lot different, but is there any details on the sales performance on that block that you can provide?

Their sales were down somewhat in the first quarter. However, their balances are essentially unchanged. You may recall that their annuity separate account balances were 21 1/2 billion dollars when we announced the deal, they're at 21.4 as of the end of March, so virtually unchanged. Similarly, the mutual fund balances are also virtually unchanged.

That's very helpful, thank you.

Thank you very much, Mr. Daley. Representing UBS Warburg our next question comes from the line of Andrew Kligerman. Please go ahead.

Good morning. A couple of questions. First, with respect to Gibraltar, the bump up of $15 million in reserving due to a slower -- to a better persistency rate, when does that $15 million reserve hit stop impacting the quarters? That's the first question. The second is: With respect to your tax rate, I see it came down a little bit again. Can you give us any guidance going forward? You know, maybe you could get the tax rate down to the 20s. And lastly, -- go for it. And the last question is: With regard to cost savings, 50 million in corporate and other, could you give us a sense of, you know, are you going to do just 150 million this year in cost savings or is there a possibility of exceeding that even further than that level?

Okay. Also Art. Let me start with the cost savings. As we said, we had about 76 million actually in cost savings, 50 million came from corporate expenses, but the so little was 76 million. I've said we are going to do 300 million over two years and I fully expect to do more than half of it in 2003 to answer your question.

Okay, great.

Second, tax rate, I'm going to let Rich Carbone talk about tax rate.

How are you doing? As a result of reorganizing certain of our foreign operations, start-up -- losses on start-up businesses internationally, which prior we did not recognize any benefit on, we're now able to recognize the benefit on those losses. Additionally, the proportion of earnings in certain foreign jurisdictions, with statutory tax rates less than the U.S. 35% statutory tax rate are becoming more proportional to our earnings. So it's the combination of being able to recognize benefits and higher earnings in lower tax jurisdictions.

Going forward?

Going forward.

And we do believe the lower rate is sustainable, but we don't anticipate getting it into the 20s. Let me comment on Gibraltar. When we set up the reserves for Gibraltar two years ago, we worked in the context of an eight-quarter period with respect to lapses associated with the restructuring of Gibraltar. We are now finished with those eight quarters, and we anticipate that this $15 million will be the last piece of sort of the midcourse corrections that we make as we see the actual lapse experience versus our assumptions.

Great. Thanks much.

And thank you very much, Mr. Kligerman. Let's go to the line of Vanessa Wilson of Deutsche Banc. Please go ahead.

Eric, you gave us the assets that were separate account assets. Do you also have general account assets or is that the same?

Well, they did not -- didn't offer a fixed annuity product nor did they offer fixed options, so they're one in the same.

They have no fixed options. Okay, good.

Their general account is six or $700 million; it's not very much.

Good news. And, you know, I'm trying to go back to my Wachovia notes, and at the time you had your conference call, I had understood the restructuring charges were going to spread over two years, I don't know if it's severance or what it is. Should we think of this all in this one 25-cent number?

No, it will be spread over two years, and it is driven by the accounting rules that we have to follow relative to the expenses that we take out and when they're taken out. So the 25 cents applies to 2003. Obviously, when we do 2004 guidance, we'll be able to update you on what the impact will be in '04.

Okay. And Wachovia provided us some forecasts for '03 earnings, and you are 32% of the earnings spread from the restructuring charges was 64 million after tax for the year, so that would be almost 100 million for the year. And you still feel comfortable with that, even though you've lost 24 million in the first quarter?

Well, again, we don't do forecast segment by segment. I'm not familiar with all of exactly the presentation you're talking about. By the way, the number is 38%, not 32 is our ownership, Vanessa.

Sorry.

So I really wouldn't comment at this point until I have a chance to look at it. But let me look at it, and then we'll get back to you.

Okay, thanks very much.

Thank you very much, Ms. Wilson. Representing Merrill Lynch, a question now from Ed Spehar. Please go ahead.

Thank you. I was wondering if you could tell us what the size of the pension credit was in the first quarter, and if there's any change in the expectation of how that plays out in '03 and maybe anything you might be able to offer up as sort of a longer term outlook on how to think about that item going forward. Thanks.

Okay. Well, the pension credit in the first quarter was $93 million and we anticipate it being flat at that level for the year. And as we've discussed in the past, we do lose about $100 million of so-called transitional credits as we move from this year into next. So there will be another decline in the pension credit moving from '03 into '04. Obviously, as we do every year in the fall, we'll be re-assessing the picture with respect to assets and liabilities in the plan, and returns and costs. So I can't forecast where we may come out with respect to the '04 expectation other than to tell you that in the pipeline now is a loss of the transition credit which relates to the implementation of the accounting standard that puts this asset on the books.

and just to follow up, if we look at that transitional credit and it goes down by 100 million in '04, would we also expect another 100 million decline in '05?

No, that's the transition credit finishes then.

Thank you.

Okay, and thank you very much, Mr. Spehar. And our final question today comes from the line of Eric Berg with Lehman Brothers. Please go ahead.

Thanks. Hopefully even though I'm last, hopefully I have good questions. Good morning to everyone. I'm hoping -- two questions. I'm hoping you can provide a little elaboration on why, even though you have so many more customers now than you did a year ago, in Asia, let's say outside of Gibraltar, and the premiums are so much higher, what do you mean the benefits are higher? I would think with a much, much, much larger business you would not have shown flat earnings, but significantly higher. I realize you relocated your office in Japan. But you got a lot bigger business over there.

Yeah, well I think there are two parts we talked about. One, there was an expense associated with the relocation as we moved into the new headquarters there. Second, like any insurance business, there's going to be changes in mortality quarter to quarter. And these were all offset by growth in the business. So as reflected in our sales numbers, our life planner numbers, and the premium growth, we're very comfortable with the growth in the business. In this quarter there were two of those activities. In addition, you had a year-over-year FX adjustment of about 5%. So the combination of the FX adjustment, the mortality in the one quarter, and the one-time costs associated with the relocation. Again, we always include one-time costs in our adjusted operating income and then obviously explain it. But the business growth was very solid and we're quite comfortable in terms of the growth patterns with our Japanese business.

If I could ask one final question, this one perhaps directed to Mark. A lot of companies talk about this unrealized loss number, I suppose I understand why, but I guess my question is: Can't that -- how helpful is that number from an analytic point of view in the sense that isn't that number a function of a company's decision either not to sell or to sell bonds that are trading at a loss?

Well, I guess in a simplistic way, maybe it is. But first of all, we talk about it because you guys talk about it a lot. It has received a lot more attention from the analyst community and I think there's some sense that this is a precursor of future losses in the portfolio. Speaking with respect to what we do here, we have significantly changed the way we manage our asset portfolios as we've become a public company. As you know, we are much more focussed on operating earnings, but digging a little deeper, we have made significant changes in our risk profile, revising credit limits, for example, revising our tolerance for holding assets that have been downgraded. And also moving much more quickly, particularly in the public markets. To deal with problem issues. I think I may have said before that some of this probably reflects our instinct as bankers whereas in the days of the mutual company, we might have been thinking about long-term value, I think the instinct of a banker is to think about the problem that you don't know about yet that's still coming. So we have acted much more aggressively to sell these bonds, particularly the public bonds which we've had problems. And we report, by the way, when we talk about impairments and credit-related losses, the total of impairments that are recognized -- and that's on assets that we still own -- but also the consequences for our income statement of selling bonds that have depreciated in price for credit reasons. So with we talk about our credit experience, it's complete and we're not managing the unrealized credit loss portion of this as a separate event, we're managing the overall credit picture, I think, very effectively.

Thank you, Mark.

And thank you, Mr. berg. Well, with that, Mr. Ryan and our host panel, I'll turn the call back to you.

Thank you very, very much for participating in the call and we look forward to talking to you again next quarter. Thank you very much.

And ladies and gentlemen, your host is making today's conference available for digitized replay for five days, starting at 4:15 p.m. eastern daylight time May 7, all the way through 11:59 May 12. You may access AT&T's executive replay service by dialing 1-800-475-6701. Now, at the voice prompt, enter today's conference ID of 681461. And that does conclude our earnings release for this quarter. Thank you very much for your participation. As well as for using AT&T's executive teleconference service. You may now disconnect.