保德信金融集團 (PRU) 2003 Q2 法說會逐字稿

Welcome to the second quarter earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. Instructions will be given at that time. If you should require any assistance during today's call, press the star followed by the zero on your touch tone phone. As a reminder today's call is being recorded.

I would now like to turn the conference over to head of Investor Relations, Mr. Eric Durant.

Thank you. Good morning and thank you for dialing in to our second quarter conference call. Our line up today is Mark Grier, Rich Carbone and Buddy Pazel. Before our program let me break for this commercial message.

In order to help you understand Prudential Financial, we may make 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 second 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 businesses, we use a non-GAAP measure we call adjusted operating income to measure the performance of our financial services businesses. The comparable GAAP presentation and the reconciliation between the two for the second quarter are set out in our earnings press release on our website. Additional historical information related to the company's performance is also located on our website on our investor relations page.

Now I give way to Mark Grier.

Thanks, Eric. Thank you for joining us today.

Art Ryan is at a sales conference with some of the most important people to our company but he is many miles and many time zones away so he will not be joining us this morning, but I assure you that he agrees with everything we are about to say. Before deviling into the quarter's details, a few headlines.

First, we are pleased to report common stock earnings per share for the financial services businesses of .67 cents for the second quarter compared to .52 cents per share for the year ago quarter, a 29% increase. These results are based on after tax adjusted operating income which is before realized investment gains and losses, before results from divested businesses and before discontinued operations. After tax adjusted operating income for the financial services businesses reached $358 million in the second quarter, up from $290 million in the year ago quarter. We benefited from strong equity market conditions and favorable mortality in the quarter and the quality of our earnings is solid.

Second we continue to achieve expense reductions. In the second quarter we achieved reductions of about $50 million in the comparison to the prior year. For the year to date we cut $130 million of costs. As you know we have a goal to reduce expenses by a total of $300 million in 2003 and 2004. We hope to achieve more than one half of that amount in 2003. We remain confident that we will reach these objectives and our pursuit of additional expense reduction opportunities is ongoing.

Third, we are actively working the capital management levers. During the quarter we announced agreements to sell our principle property and casualty businesses. Those sales are expected to close before year-end and we've already recorded the expected losses on sale. We will be able to redeploy approximately $1 billion of equity capital as a result of our exit from the property and casualty business.

Acquisitions represent another aspect of capital redeployment. Our acquisition of American Skandia closed on May 1. We are pleased with the initial two-month earnings contribution which if annualized, would work out to a mid-teens return on our $1.2 billion initial investment. This is not a forecast and actual results could differ.

We believe that our businesses should have the first call on our capital. That means we will continue our opportunistic pursuit of acquisitions that pencil out. Gibraltar and American Skandia typify transitions that make business and financial sense. On the other hand we believed that the capital invested in our property and casualty business was not earning an appropriate return, hence our decision to exit that business.

In addition, we believe that share repurchases are an appropriate way to return excess capital to shareholders. In the second quarter we repurchased 7.4 million shares at a total cost of $238 million. We continue to believe that purchases of roughly $250 million per quarter is a realistic base case for Prudential. Given the change in tax treatment of cash dividends we are also evaluating our dividend payout but I won't be able to share our thinking on this topic with you today.

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 $2.25-2.40. This includes the impact we expect from our recent transactions including related charges of approximately .25 cents per share in 2003 from the combination of the Prudential and Wachovia retail securities brokerage operations of which about .05 cents per share has already been absorbed in second quarter results. This guidance also assumes appreciation in the S&P 500 of 2% per quarter. As you know, adjusted operating income as we define it includes all restructuring costs related to our expense reduction programs, which are ongoing. In addition while our mortality experience has been generally favorable across our insurance businesses so far this year, the nature of the beast is that mortality is variable.

I'll turn now to an overview of the second quarter results for financial services businesses. Overall pretax adjusted operating income was $531 million for the current quarter compared to $465 million for the year ago quarter.

Starting with the insurance division, the insurance division had adjusted operating income of $236 million in the second quarter compared to $149 million in the year ago quarter. The current quarter results include a $43 million contribution from our first two months of operations of the American Skandia business we acquired in May. The integration of the business is on track. In addition to $22 billion of annuity assets, the acquisition brought us the Nation's largest independent financial planner distribution channel for variable annuities. And that channel brought in gross annuity sales of about $550 million in the first two months all in variable products.

Net sales through Skandia after withdrawals, were positive at $21 million. Our existing individual annuity business reported adjusted operating income of $22 million for the second quarter which is a $39 million improvement from the $17 million loss in the year ago quarter. Last year's second quarter included a $48 million charge for additional amortization of deferred policy acquisition costs on our annuity business resulting from equity market conditions that caused us to lower our estimates of the profitability of the book of business at that time.

This year's second quarter market upturn did not result in a positive [inaudible] adjustment since our expected profitability based on the current quarter's experience and future experience based on our look forward return assumptions, which we ratcheted down, was within our assumed range. In comparison to the year ago quarter asset values are still lower despite the recent market uptick and the negative impact on the variable aunnuity fees partially offset the release from last year's DAK charge.

Our total annuity sales including the contribution of the American Skandia channel were $1.1 billion for the current quarter and net sales for our existing business were positive for the first time in several years at $68 million for the second quarter. Our overall sales mix continues to be heavily weighted toward variable products. Following our implementation of new money credited rate reductions in the first quarter. Variable annuity sales were 95% of the total quarter's sales and only about 20% of those sales went to the fixed bucket excluding dollar cost averaging accounts.

Adjusted operating income from our individual life insurance business was $113 million for the current quarter down $17 million from the year ago quarter. Mortality experience remained within our expected range for the quarter but not as favorable as the strong year ago quarter producing the down tick in results. The quarter absorbed $10 million of right sizing and restructuring costs over the year ago quarters level. However, results benefited from the equity market upturn in the current quarters, which increase variable life asset values leading to reduced amortization of deferred policy acquisition costs in the quarter. We would estimate the contribution from the market uptick to the quarter's results at about $12 million exclusive of the ongoing impact of asset-based fees. Sales based on first year premiums and excluding Coley amounted to $74 million in the current quarter, just ahead of 72 million dollar in the year ago quarter.

Our universal life and term products which we updated in June both registered substantial increases over the year ago quarter. Our universal life products contributed $23 million to this quarter's sales, a 44% increase over the year ago quarter and term sales at $25 million registered a 67% increase. The momentum from these products more than offset a $15 million decline of sales of variable life which continue to be negatively affected by the equity market volatility of the last several years. Our universal life and term products continue to be well received in our third party distribution channel which registered an 8% increase in non-Coley sales over the year ago quarter.

Our total sales for the quarter including $14 million of Coley business amounted to $88 million. Our Prudential agent count was 4300 at the end of the second quarter, down slightly from year end. The stability of this number reflects our past efforts to rationalize the captive agency force and our current efforts to recruit selectively so we don't return to the high turnover rates of the expensive past. Our agent exits have been stable at about the same number per quarter as we experienced in the first half of last year but new hires are only two-thirds of last year's pace. In order to avoid getting ahead of our training capabilities, we hired new agents at a slower rate in the first half of the year than the rate we expect for the balance of the year.

Second quarter agent productivity stood at $39,000 up from $38,000 a year ago. The group insurance segment reported adjusted operating income of $58 million in the current quarter, compared to $36 million in the year ago quarter. The current quarter benefited from unusually favorable group life mortality experience. Our life claims ratio was 89.9% for the quarter, which reflects lower than expected claim incidence. We estimate that this favorable claims experience was worth about $10 million to the current quarter's results when compared to an expected level.

Group disability experience with a claim ratio of 87% for the quarter was at the favorable end of our expected range. On a combined basis, our expense ratios for life and disability were consistent with the year ago quarter. Our annualized premiums from new sales of group insurance were $64 million in the current quarter compared to $60 million in the year ago quarter. Both the $8 million uptick in group life sales and $4 million decline in disability sales are mainly a function of lumpiness in premiums for large case sales both in the current quarter and the year ago quarter. We have been implementing rate increases on both group life and disability on a selective basis allowing us to retain profitable business. Persistently through the second quarter was 96% for group life and 89% for group disability. We continue to follow a strategy of selective repricing of existing business and pricing discipline in writing new business and we believe this strategy is contributing to gradual improvement of our loss ratios.

Turning to the investment division, the investment division reported adjusted operating income of $78 million in the second quarter compared to $92 million in the year ago quarter. The financial advisory segment which is primarily our domestic securities business had a loss of $20 million for the quarter which included a $37 million retirement plan charge related to the combination of the retail securities business with Wachovia. This charge equivalent to about 0.05 cents per share was part of the one-time charges that we expected as a result of the Wachovia transaction leaving us with charges expected for the remainder of the year of about 0.20 cents per share.

Absence this charge, the segments operations resulted in adjusted operating income of $17 million for the current quarter compared to a $6 million loss in the year ago quarter. The segment benefited in the quarter from a lower expense level that reflects the actions we've taken to reduce the cost structure. This lower expense level more than offset declines in transaction base and other fees which were still behind last year's level despite the recent market upturn.

Our retail financial advisor count stood at 3900 at June 30th down 300 during the quarter which is consistent with the average attrition of the past four quarters. Incentives have been put in place to retain top producing financial advisors as we move through the combination with Wachovia. While it's still early, we have no signs of dislocation.

The retirement segment had adjusted operating income of $45 million in the current quarter compared to $50 million in the year ago quarter. The segment benefited from mortgage prepayment income of $30 million in the second quarter of last year. In this year's second quarter there was a benefit of about half that amount from investment market value changes mainly from our share of separate accounts which we mark to market and for mortgage prepayment income. The division's two other segments investment management and other asset management reported adjusted operating income of $53 million in the current quarter compared to $48 million in the year ago quarter. The increase came mainly from lower expenses in some of the businesses in these segments.

Now looking at the international insurance and investments division. The international insurance and investments division had adjusted operating income of $217 million in the second quarter up $34 million from $183 million in the year ago quarter. Substantially all of the division's results came from our international insurance operation. The international insurance segment reported adjusted operating income of $207 million for the current quarter up from $187 million for the year ago quarter.

The insurance segments results included income of $98 million from Gibraltar life in the current quarter, which compares to $101 million in last year's second quarter. Last year's second quarter reflected refinements in estimates and gains from policy surrendered. The net of these items reduced that quarters income by about $20 million but we also enjoyed favorable benefits experience that quarter which exceeded our expectations and roughly offset the $20 million negative impact of the other adjustments.

In the current quarter Gibraltar's level of policy benefits and expenses were in line with our expectations but less strong than a year ago. There was also a negative impact on Gibraltar's earnings of about $5 million from currency exchange rates. Now that we are past the initial two years after the acquisition, the unusual surrender level that we referred to as the shock lapse effect should no longer be an issue and we have been able to take advantage of that in our investment strategy to help improve the portfolio yield by lengthening maturities and moving to more U.S. dollar investments.

Our international insurance operations other than Gibraltar life contributed $109 million of adjusted operating income in the current quarter, up $23 million from the year ago quarter. These operations benefited from continued business growth in Japan and Korea and a more favorable level of policy benefits and expenses in the current quarter. On a constant dollar basis, total: meaning Prudential plus Gibraltar, new annualized premiums from sales in Japan increased 29% to $165 million in the current quarter compared to the year ago quarter. Of this total, sales from Gibraltar life were $84 million in the current quarter up 38% from the year ago quarter. We increased the productivity of Gibraltar's life advisors, whose compensation has been transitioned to a more variable basis and the quarter benefited from a bulge in single premium life policy sales which can be volatile.

Sales in Japan from our Prudential of Japan life planner sales force were $81 million in the current quarter, up 21%. Current quarter sales benefited from growth in our life planner force as well as the spill over impact of a sales convention qualification period that ended in the first quarter. Sales from other countries were $45 million in the current quarter bringing total second quarter sales to $210 million in our international life insurance business.

Our life planner force stood at about 4,700 life planners at the end of the second quarter up 11% from 4,200 from a year earlier. This is in addition to 4,900 Gibraltar life advisors. Corporate and other operations reported a break even compared to adjusted operating income of $41 million in the year ago quarter. The current quarter reflected absorption of $37 million cost for a financing transaction we entered into before our demutualization involving a future payment of a preferred stock dividend that we believe is probable. We don't expect any further significant charges from this transaction.

I'd like to turn now to several items outside of adjusted operating income included in net income of the financial services business. The second quarter reflects a $402 million pretax loss from divested businesses that relate mainly to the agreements to sell our national and New Jersey property and casualty insurance businesses that we announced in May. Realized investment losses for the financial services business net of related adjustments amounted to just $11 million in the current quarter. The realized losses in the current quarter included losses of $80 million from impairments and sales of credit impaired securities, the least in any quarter since well before Prudential became a public company. These losses were partially offset by realized gains from fixed maturities, including private bond prepayments and other investments.

Our gross unrealized losses on fixed maturities stood at $160 million at June 30, 2003 or about one tenth of one percent of the financial services business overall investment portfolio, and essentially a non issue for us. Only $15 million of these gross unrealized losses relate to bond that is have declined in value by 20% or more. Non-investment grade fixed maturities comprised about 7.5% of the financial services business fixed maturity portfolio at June 30th, essentially unchanged from year-end.

Let me briefly discuss the Closed Block business. The results of the Closed Block are associated with class B stock which we sold in a private placement. The Closed Block business reported pretax income from operations of $108 million for the second quarter of 2003 compared to a pretax loss of $254 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 realized investment gains of $114 million while the year ago reflected $177 million of realized investment losses. The current quarter also reflected a lower policyholder dividend scale and lower level of general and administrative expenses. Turning back to the financial services businesses and summing up. Our domestic businesses benefited from the improving equity markets during the quarter from benefits experienced with expected levels at or above the favorable end of the expected range and our actions to reduce cost structure. The strengthening of our annuity business with the acquisition of American Skandia has made a significant early contribution to our results and our international business produced solid results this quarter. Thank you for your interest in Prudential and now we look forward to hearing your questions.

At this time, if you would like to ask a question press star and then the 1 on your touchtone phone. You will hear a tone indicating you've been placed in queue. You may remove yourself from queue by pressing the pound key. If you are using a speakerphone, please pick up your handset before pressing the numbers. The first question is from Joan Zief with Goldman Sachs. Please go ahead.

Hello.

Good morning, Joan.

Thank you. My question really relates to first year debt capital ratio. You have a very low debt to capital ratio and I was wondering how that ties in with your expectations to achieve a 12% return on equity in 2005. Can you give us a road map to what type of balance sheet leverage you think that you're going to be seeing over the long run and my second question kind of relate to that, can you talk about, again, all of your excess capital and how much that is and what are your opportunities to redeploy that in the next year and a half to two years to achieve that 12% ROE.

On the first question which is the relationships between that capital structure and our target, our game plan to achieve the 12% ROE does reflect actions that we anticipate taking to move toward a more optimum capital structure and our share repurchase program is part of that. Over time we anticipate generally continuing to buy back shares and generally issuing debt. We've talked about a 12% sort of -- I'm sorry. 20% upside limit on debt to capital and as you observed we still have room to go and part of the game plan includes moving in that direction.

Secondly, we have cautioned everyone many times about adding up pieces of the balance sheet and pieces of capacity to arrive at our overall excess capital position. So, let me give you a couple of indications. Again, with the caution they are not additive and you ought to be careful how you think about what might offset what. At the end of the quarter we had around $1 billion of cash and short-term investments and $3 billion of excess debt capacity. You're aware that we believe we have significant redundant capital in our life insurance companies, supporting the Closed Block liabilities, those three pieces are the things we have factored into the game plan we expect will move us to the 12% target and capital redeployment remains a significant part of that game plan including share repurchases, deployment in the business, and payment of dividends.

I guess I wanted to follow up talking about the capital position and where you stand with the rating agency. I guess my question is if sales cannot be reaccelerated maintaining some sort of profit discipline and you don't see any opportunistic positions there, would we expect over the next several quarters to hear maybe the company would consider increasing the buyback program?

Well, obviously, the general answer is maybe. The picture is dynamic. I think we do have sales momentum particularly focused on our new distribution channels. Our distribution strategy through third party channels are starting to mature. On a relative basis we have good momentum in our individual life business. Good momentum in our annuity business. Group life continues to do well with a lot of pricing discipline. Our businesses are growing and we do see opportunity to continue to support that growth. We'll look for opportunities for acquisitions that fit with respect to both strategic impact and financial discipline around that 12% ROE. It's hypothetical to say what may or may not change. Our game plan is unfolding pretty much the way we anticipated.

Okay. And the rating agencies as to where you are there with potential upgrade?

I don't want to speak for them but the quality of our results is extraordinary. We do have momentum in the marketplace. We are seeing growth in our third party distribution as well as at the least stability in our [inaudible] distribution. Credit quality is terrific. The investment portfolio looks great. Our capitalization remains strong so I'm optimistic the rating agencies are going to start to interpret these things favorably.

Thank you.

Our next question comes from the line of Jason Zucker with Fox-Pitt Kelton. Please go ahead.

Thanks. I was hoping you could update us on your acquisition strategy. Back in December, management stated the focus is going to be both on acquisitions and gave a number below say $1.5 billion. What I wanted to know was whether that still holds and hoping you could balance that out with comments with respect to the new story that was discussing the possible acquisition of John Hancock and while I don't expect you to comment on John Hancock unless you feel you can, maybe just comment hypothetically on Pru purchasing or looking at a very large multibillion dollar business.

On the sort of broad theme of acquisitions in the billion and a half and down range, that has been what I guess you call the bread and butter neighborhood for us. It has been the Gibraltar deal, it has been the Skandia deal, there has been some other international acquisitions that fall further down the scale. The way to think about those is really segment acquisitions and the things we said at the time about that would still hold. With the caution that that's not an absolute line in the sand, we would under the right circumstances consider something bigger given our capital strength and given the opportunities that may come up in the market. Qualifying that a little bit further, we do like the businesses we are in and part of what we've said about acquisitions is we anticipate enhancing our current capabilities in the grow and protect world as opposed to trying to do something very different and again lot of financial discipline. We are committed to not diluting the 12% ROE target in '05.

On the question about of a possible larger acquisition, in the abstract, certainly the question of consolidation economics in insurance is important but it's a question about which we would be very, very cautious and we would take a close look at the risks and the opportunities and the impact both on the market and 12% ROE target on anything we might think about doing. The headline is maybe the $6,400 question is how and when will somebody try to realize significant consolidation economics and I guess from the fact that nothing happened, the jury is out.

Thank you.

Our next question comes from the line of Vanessa Wilson from Deutsche Bank.

Good morning.

I wanted to look at American Skandia a little bit more closely. It's doing well this quarter and my question, if I take your earnings number for American Skandia and annualize it over the assets that you got in the deal, I get a pretax [inaudible] of about 1% and base business at Pru has a pretax ROE of 50 basis points so it's double the profitability of your base business. Does that relate how you bought it, the price you bought it for and the fact it has little DAK, or something unique about this business that makes it profitable?

You hit the nail 99% on the head. It is related to the fact when we bought it we essentially wrote off DAK and replaced it with a much smaller global asset value of business acquired which is probably a third or so the size of the previous DAK that American Skandia had so that's the main influence.

I remember the time you went public in your corporate segment you had leveraged assets and corporate investments you wanted to unwind. Where are we on that process and is there more capital opportunity there as well?

We are grinding it out. If you recall the conversation about those assets, we described them at legacy assets that included some liquid partnerships, tax related assets and other assets that weren't a great fit for the operating businesses as part of a public company. We have sold about $1 billion of assets that were held in corporate and other and the answer is we continue to grind it out. It's factored into both the ROE target and capital redeployment trajectory that we are on.

And the charge this quarter, the $37 million, was it related to that portfolio?

No, it was not related to the asset side but it was related to a structured financing transaction.

Okay. Thank you.

Our next question comes from the line of Colin Devine with Salomon Smith Barney.

Good morning. A couple questions.

Might as well beat the capital issue to death, it's my understanding you are in the middle of closing reinsurance transaction on the Closed Block and perhaps you could confirm that it will bring in $2 billion in cash in the fourth quarter.

Secondly, if we could slip back to Japan and talk about Gibraltar, I believe you bought it with the intention it would be a runoff and you are now starting to see growth. If you could expand on your comments about the single premium sells and what you have them selling and what you expect going forward?

On reinsurance, I don't want to say too much about where we are in the process. We do anticipate a reinsurance transaction in the second half of the year. It will not, however, generate cash. It will free up statutory capital in the insurance company for redeployment. So, we are on track for that, it may not be as large as the number that you quoted, and again, it will not generate cash, it will free up capital in the statutory life company that will the look at redeployment opportunity for - We're on track on that. It may not be as large. It won't generate cash but free up capital in the statutory life company and look at opportunities for part of the game plan we talked about from the beginning.

That could be an acquisition. Potentially.

In the abstract, therotically it could.

Thank you.

In Gibraltar, we have made probably more progress faster than we might have thought in motivating the Gibraltar sales force. We've changed their compensation, they are benefiting from the management team we put in place. They are benefiting from Prudential support in products and in brand and we are seeing signs that that business will probably show some better than expected market performance. I am not sure how that specifically translate into financials, we already earn a good return and expect to continue earning a good return. Overall, you're right. We are doing better there than we thought we would. Our growth will be measured and careful. On the single premium life sales, I don't have a specific number. It's a lumpy thing. Sometimes we sell a lot, sometimes less. I don't have the specifics of that for the second quarter off the top of my head. It's part of the portfolio and it happens to move around. As part of the general observation that we are growing some there, you are right and we're encouraged.

A quick follow-up, where do you stand with the situation in Korea with the purchase of the Hyundai trust units?

We've announced a letter of intent and that's where we are.

Any further along in terms of getting this deal done this year or not?

I can't comment on it. We are in process working on it. These negotiations are time-consuming and difficult.

Thank you.

Our next question comes from the line of Michelle Giordano of J.P. Morgan.

Good Morning. Couple of questions, first the variable annuity sales were very strong both at American Skandia and very strong also at Pru. I was wondering if you could highlight if there were any special features you were offering this quarter and if not, what are you attributing the results to excluding the stronger equity market.

Secondly I was wondering if you give us an update, we see that you have front ended some of the restructuring charges related to Pru. Securities and Wachovia. Can you give us an update on the Wachovia side where they are and the earnings guidance they provided at the time of the announcement still be sufficient for the remainder of this year.

Lastly, clearly looks like your earnings guidance is conservative. You highlight mortality as being lumpy. Anything else in the second half of the year that may cause you to be conservative or take the opportunity to perhaps front end some restructuring charges for future expenses in the second half of the year as well.

Thank you. I'll take them one at a time. Variable annuity sales the answer is no in terms of particular bells and whistles and tricks in product. What we are seeing there, I believe, is the emerging effectiveness of our distribution strategies. Skandia is a very strong distribution company and puts us in a leadership position in the independent financial advisor channel. We are also seeing growth in our own third party distribution efforts that we've been working on for a couple of years. And our agent force had a decent quarter in terms of selling annuities. I believe it's primarily distribution driven and reflects the majority of our distribution strategies as well as the acquisition of Skandia.

On Wachovia, I don't want to speak for them. We've taken .05 cents of the expected .25 cents to hit our books in this year we will not be front ending costs related to the Wachovia deal. We will take them as they are appropriately recognized for accounting purposes. We don't have a lot of room to maneuver in terms of front ending any right sizing and restructuring at this point. We are still sticking with the projections that Wachovia has in the market and expect that we're on track.

In terms of guidance. I guess the broad theme is caution around annualizing any particular quarter. Things move around in our businesses. There is volatility in mortality. There is volatility in investment results. There is even seasonality in some of the things that we do. You may conclude we are cautious but I think it's prudent in light of some of the basic elements of volatility that we talked about. We also will have right sizing and restructuring charges as we go through the year and those will hit our ROI and compression continuing in some of the spread business that are on our balance sheet. You may conclude that we are cautious and conservative but I think it's appropriate. It was a good solid quarter but I'd be careful about annualizing it.

Thank you.

Our next question from the line of Andrew Kligerman of UBS Warburg.

A couple of questions. The first one will be on Wachovia securities.

What are you hearing about brokerage towns and the integration in terms of how well, it's going in terms of combining the back offices et cetera and I'll have a follow-up.

In terms of the broad Wachovia thing, I'd rather let Wachovia comment on it. As we see it as I mentioned in my comments we are not seeing signs of dislocation in the sales force. Retention in fact looks pretty good right now. We seem to be going through the early stages of transition on a very positive note. The cultural fit is good and the management initiatives including sort of hands on management as well as retention have been on track and supportive of the FAs. We have no reason to think we are not on track to merge the back offices and realize the consolidation benefits that we expect but remember that's about an 18-month process. Our time horizon is that we'll be emphasizing the need to have this done by next year but I don't want to be more specific than that.

That's helpful. And the other question involves your investment yields. It appeared 10-15 basis points of yield decline. It seems like Prudential is in that ballpark. Can you give us a trend of where you see your investment yield overall going in the financial services business for the next year?

I don't have a specific number on the top of my head. The general answer is it's trending down gradually. These things don't turn over every day. We happen to have a light year for reinvestments and some of our asset classes but the number you're talking about is probably not unreasonable and we'll be trending lower because of lower investment rates.

And one other, Genesis(ph), the performance over there. It looks like closed were mixed. [inaudible] Any data points in terms of their performance recently related to yours in mutual funds, institutional or anything to hang your hat on?

I don't have an investment performance number on the tip of my tongue. I can get something and we can get back to you on that. Broadly we are still concentrated as a growth manager and that's still not been the place to be in some respects in the market. But we think we have the right platform and strong capability that will perform.

Thanks a lot.

Thank you.

Our next question comes from the line of Tom Gallagher from Credit Suisse First Boston.

Hi, the first question is on Skandia.

Can you refresh us with regard to what types of guarantees they are offering in their variable annuities. Any principal product guarantees or accumulation guarantees, death benefit or minimum income benefit guarantees?

Eric Durant has answered that question well and I'll let him do it again.

[inaudible] simple. GMDV period and 90%, 85% is claims, return of premium.

Are there any plans to offer any of the principle guarantees or GMIBs coming forward?

Bearing in mind we've only owned Skandia for two months and we didn't have access to their pricing models until we did own them until the first of May, you can appreciate we are fairly early in the process of evaluating their product line and I'd like to leave it at that.

Okay. Can you give an update on if you have the number what your statutory earnings were for the quarter and where capital ended for the main subsidiary as soon as.

We haven't made our staff filing yet, Tom. Kindly check back with us a ways down the road and we'll be happy to give you the numbers.

Thanks.

Our next question comes from the line of Tanya Lewendowski with AG Edwards.

Just wanting to circle back on the Wachovia transaction to get an idea of the break down. The .05 cent charge related to a tick this quarter. In terms of breaking out the remaining .20 cents that we'd be looking for in the second half of the year, do you feel that would be equal split between Q3 and Q4 or do you have any expectations in that regard?

Without being more specific, we expect somewhat more in the third quarter than the fourth quarter. Maybe 12 and 8 if you had to make a guess. These are numbers that are going to move around based on what we actually do. Somewhat more in the third and somewhat less in the fourth.

I guess, have you guys given any guidance with regard to expectations for charges for '04 yet or is it something we'll look to later in the year to get a better idea?

When we discuss the Wachovia, you're talking Wachovia-related?

Yes.

When we discussed the transaction we talked about some of the total charges we anticipate taking. For us it's about $200 million pretax in '04.

Right. Okay. Okay. Great. Thank you.

And our final question this morning from the line of Eric Berg with Lehman brothers. Go ahead.

I've seen most of you last year, I don't know what you read into that but let me ask you this. With respect to the contribution from Skandia, is that taking into consideration sort of everything and by everything I mean the amortization of [inaudible] as well as loss investment income on the sales price?

It does take into account the amortization. It's everything related to the Skandia acquisition as a business. The opportunity costs of the money that we redeployed to buy Skandia is not in that number. However, after tax for the quarter it was probably $5 million. It wouldn't be very much.

And one quick question that was helpful. On Gibraltar, there are certain numbers that point to continued shrinkage. For example number of policies as well as the enforce. It looks like if you look at the data over time in your statical supplement, those numbers continued to decrease. So what would be the strongest evidence you would want to repeat that this business is in fact growing?

You're right. We're on a treadmill and we've got to run to offset the fact the floor is moving the other way beneath us but sales results are encouraged.

Very good. Thank you.

Okay. No more questions? Thank you all very much for your interest and you know who to call if you have further questions and need some follow-up. Thank you.

Ladies and gentlemen, today's conference will be available for replay beginning this afternoon at 4:15 P.M. eastern time and running through the 13th of August at midnight. You may access the AT&T executive playback system by dialing 1-800-475-6701. For international participants dial 320-365-3844 and for either number enter the access code 681465. Those numbers again are 1-800-475-6701 and 320-365-3844 with the access code 681465.

That does conclude our conference for today. Thank you for your participation and for using AT&T's executive teleconference service. You may now disconnect.