保德信金融集團 (PRU) 2003 Q4 法說會逐字稿

Welcome to the Prudential fourth quarter earnings conference call.

At this time, all participate lines are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given to you at that time. If you should require any further assistance, please depress star, then zero. As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Eric Durant with Prudential Investor Relations. Please go ahead, sir.

Yeah. Good morning, thank you for joining us.

Today Art Ryan, Prudential's Chief Executive, and Mark Grier, Vice Chairman of Financial Management will walk you through fourth quarter and full year 2003 results, after which they will be joined by Rich Carbone, Prudential's Chief Financial Officer, and Buddy Piszel, our Controller, for your Q and A.

In order to help you to understand Prudential Financial, we will make some forward-looking statements in the following presentation. It is possible that actual results may differ materially from the predictions we make today.

Additional information regarding factors that could cause such a difference appears in the section titled Forward-looking Statements of our earnings press release for the year 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 used a non-GAAP measure we called adjusted operating income to measure the performance of our Financial Services Businesses.

Adjusted operating income excludes net investment gains and losses and related charges and adjustments, life insurance sales practices, remedies, and costs, and results from divested businesses and discontinued operations. The comparable GAAP presentation and the reconciliation between the two for the fourth quarter and the year are set out in our earnings press release on our website. Additional historical information relating to the company's financial performance is also located on our website on our investor relation's page.

I'm glad that's over with. Now here's Art Ryan.

Good morning, and thank you for joining us.

Mark Grier will be giving you a review of fourth quarter results, so I'll focus on the full year, Prudential second as a public company.

Our earnings per share for the year increased by 23%, based on after-tax adjusted operating income. This result was within the guidance I shared with you on last year's fourth quarter conference call. Just as importantly, we believe that we have made substantial progress towards our goal of a 12% return on equity by 2005.

Our capital management efforts produced important results in 2003. Our acquisition of American Skandia, which closed May 1st, has fulfilled our expectations from the beginning. Earnings are solid, return on equities are in the 15% range, based on annualized results for the eight months of our ownership. Sales on both a gross and net basis have increased significantly under Prudential's ownership.

Integration is proceeding as planned, we are on track to achieve our expense reduction objective with minimal disruption to the business. Prudential is now a solid Top 10 player in the annuity marketplace and is moving up.

The integration of our Retail Securities business with Wachovia is also on track. We are absorbing our share of the venture transition costs, as well as retained expenses related to the period of Prudential's full ownership. These expenses will run their course. Meanwhile, the underlying business is performing well, and we expect it to achieve higher returns as cost savings are realized.

In November we announced the agreement to acquire CIGNA's Retirement business. We are able to finance this acquisition by redeploying capital within our domestic Life Insurance company, capital that was earning relatively low returns. As a result, we expect the CIGNA acquisition to be accretive to Prudential's EPS immediately upon close, which we expect to occur in the first half of the year.

As with American Skandia, CIGNA is expected to strengthen a business we want to grow. CIGNA will contribute additional products and services and will give us much greater scale in the retirement marketplace. The acquisition also enhances Prudential's position as a global asset manager.

Although we will continue to consider acquisitions that make business and financial sense, we are equally committed to ensuring that the capital we've already invested in our businesses is earning appropriate returns. Last year we sold our Property and Casualty businesses, these sales freed up about $1 billion in capital.

Share repurchases are another device we've used to manage our capital. In 2003, we repurchased $1 billion of common stock. Since we began this activity in May of 2002, share repurchases have amounted to $1.8 billion.

Yesterday, Prudential's Board of Directors authorized a new stock repurchase program under which the company is authorized to purchase up to 1.5 billion of its common stock. While we believe -- while we will review activity under this authorization with the Board regularly, we believe that the repurchase of roughly 375 million per quarter is a realistic base case for Prudential at this time.

I want to acknowledge that Prudential's financial strength is of paramount importance to us. We have maintained a superior balance sheet and capital position, and we intend to continue to do so. Indeed, we believe Prudential is a stronger company today in every important respect than it was one or two years ago.

Another theme we've stressed is expense management. In 2003 we achieved $200 million in expense savings. As you recall, I earlier committed to reduce expenses by $300 million over the 2003-2004 time frame. We updated our two-year objective to $330 million when we met with you in December, and we are confident that we will reach our goal.

Turning to our earnings guidance for 2004, we continue to believe that Prudential Financial will achieve common stock earnings per share in the range of $3.05 to $3.25 for the year 2004. And this is based on after-tax adjusted operating income.

This expectation includes anticipated charges to be absorbed within 2004 adjusted operating income of approximately 25 cents per share from the combination of the retail securities brokerage operations and approximately 10 cents per share from the integration of the CIGNA Retirement business. This guidance also assumes appreciation in the S&P 500 index of 8% for the year.

Over the next two years, we will give all of our efforts to deliver our 12% ROE objective. But it's not our only priority. We are equally committed to strengthening Prudential to successfully compete beyond 2005 and to deliver attractive longer term returns to shareholders. We believe that our -- that Prudential has a superior mix of businesses between domestic and international, between insurance and investment, and between captive and third party distribution.

There's no question that the international marketplace is presently offering faster growth opportunities than the U.S. market. Our international operations are well positioned to generate rapid, double-digit growth in earnings and to provide one third or more of Prudential's bottom line.

Within the United States, we are also positioned in the faster growing markets, namely annuities, retirement, and asset management. Our individual Life and Group Insurance businesses, although relatively mature, are competitive and sound.

In terms of distribution, we've made important strides and are heading towards an appropriate mix of captive and third party distribution. Importantly, as we move to more appropriate financial returns, we will continue to strive for consistency of results.

To sum up, we hope to achieve above average growth in EPS, consistency of results, good market position in diverse businesses, and the ability to allocate capital in the most attractive opportunities around the world.

Now let me turn it over to Mark for a review of fourth quarter results.

Thank you, Art. Good morning everyone, and thanks for joining us on today's call.

I'll start with an overview of fourth quarter results for the Financial Services Businesses.

We reported common stock earnings per share for the Financial Services Businesses of 64 cents for the fourth quarter compared to 46 cents per share for the year-ago quarter, a 39% increase. These results are based on after-tax adjusted operating income and include the absorption of about 4 cents per share of transition costs relating to the combination of our Retail Securities Brokerage business with Wachovia, which closed on July 1st.

Turning to the divisions and starting with the Insurance division. The Insurance division had adjusted operating income of $206 million in the fourth quarter compared to $137 million in the year-ago quarter.

The current quarter results include a $65 million contribution from the American Skandia business, which we acquired in May of 2003. The integration of this business is continuing on track and its contribution to after-tax adjusted operating income for the first eight months represents an annualized return of about 15% on our average investment.

The original Prudential Annuity business reported adjusted operating income of $31 million for the fourth quarter, up $16 million from the year-ago quarter.

The current results in our Annuities business include two special items that are roughly offsetting: First, a $39 million reduction in our expense for amortization of deferred policy acquisition costs reflecting the 36% increase in the S&P 500 since our last DAC unlocking which was in the third quarter of 2002 and which was negative.

Secondly, a $36 million charge to strengthen reserves for our periodic income annuities related to matching liabilities with assets at lower interest rates. Stripping out these items, we are left with a $13 million increase in adjusted operating income that reflects higher asset-based fees and lower costs for guaranteed minimum death benefits, tracking the improved equity market conditions.

Our total annuity sales, including the contribution of the American Skandia channel, were $1.6 billion for the current quarter, and net sales were just under $260 million in the quarter, continuing the momentum of the earlier two quarters when we began to benefit from the American Skandia production, and bringing our net sales for the year to well over $500 million. Substantially all of the current quarter's gross sales were variable products, and less than 10% of those sales went to the fixed bucket, excluding dollar cost averaging accounts.

We are encouraged by the initial market reception of the optional living benefits that we introduced to the American Skandia product line in October. We believe these features, guaranteed income, accumulation, or withdrawal benefits, provide us with competitive advantages in the marketplace while incorporating an appropriate level of risk management in their design.

For example, our guaranteed minimum income benefit allows limited opportunities to step up the protected value on which income benefits may be based, but establishes a new 7-year waiting period when that option is utilized. In addition, we are evaluating hedging strategies that can be put in place when we determine that the volume of business with these features warrants it.

Adjusted operating income from our individual Life Insurance business was $63 million for the current quarter compared to $70 million in the year-ago quarter. The current quarter and the fourth quarter of 2002 both reflected unfavorable mortality fluctuations in relation to the first nine months of the year.

We estimate that the current quarter's fluctuation in claims experience, after considering reserves, reinsurance, and DAC, resulted in a negative impact of about $15 million in relation to the year-ago quarter. The mortality fluctuation, together with about $10 million of employee termination and related costs absorbed in the current quarter, more than offset the benefit of equity market improvements on variable life asset values.

Claims experienced in this business tends to fluctuate within a band from one quarter to another, and the size of the band reflects the scale of the block of business, which in our case is nearly $300 billion of life insurance in force, excluding the closed block. We are reinsuring 80% to 90% of the face amount of most new business, but our large existing block of business, written before our demutualization, was not reinsured and reflected our capacity to retain large base amounts.

The current quarter mortality includes two large claims, both on policies written before we demutualized, totaling $55 million. While quarter-to-quarter fluctuations in mortality experience are inherent in this business, over time, mortality experience has been consistent with our expectations.

Life insurance sales, excluding COLI, amounted to $110 million in the current quarter, a 26% increase from $87 million in the year-ago quarter. About half of the increase came from two large universal life sales.

Our recently updated life insurance products have been well received in the third party distribution channel, which registered a $23 million increase in non-COLI sales over the year-ago quarter. For the full year 2003, third party sales accounted for one third of our overall non-COLI sales, up from 26% in 2002. Our total sales for the quarter, including a small amount of COLI business, amounted to $111 million, versus $103 million in the year-ago quarter, which included $16 million of COLI sales.

We finished the year with just over 4,300 Prudential agents, down slightly from a year earlier. We continue to focus on the cost effectiveness of the captive agency channel with selective recruiting, a key part of the equation.

We hired just over 1,000 agents in 2003, about the same as the previous year, and continued to achieve first-year agent retention in excess of 75%, and agent productivity at the $40,000 level. The modest drop in the overall agent count reflects some attrition that we expected to follow the sale of our Property & Casualty business among agents who emphasized property and casualty products.

The Group Insurance segment reported adjusted operating income of $47 million in the current quarter, relatively unchanged from a year ago. In Group Insurance we continue to follow a strategy of selective repricing of existing business and pricing discipline in writing new business. And we believe that this strategy is contributing to improvement of the segment's results over time.

Based on earned premium, over three-quarters of our group insurance is group life, where we had claims experience, both for the quarter and the full year at a level consistent with our targeted range.

Our disability experience was less favorable in the current quarter than a year ago, reflecting a slower pace of claims resolutions rather than a greater incidence of new claims or a deterioration in severity. We recently announced the opening of a new disability claims office in Portland, Maine, which will allow us to expand our claims handling capabilities.

Turning to the Investment division. The Investment division reported adjusted operating income of $56 million in the fourth quarter, up $21 million from $35 million in the year-ago quarter.

The Financial Advisory segment had a loss of $67 million in the current quarter. This compares to a $29 million loss in the year-ago quarter. The Financial Advisory segment's results for the current quarter reflect the combination of our Retail Securities Brokerage operation with Wachovia on July 1st.

Our 38% share of the results of Wachovia Securities resulted in pre-tax income of $41 million before transition costs. However, the segment's results absorbed expenses of $79 million in the quarter from obligations we retained in connection with the contributed businesses, primarily from retained litigation and regulatory matters, and the segment's results also absorbed $26 million of transition cost in the quarter. After absorbing a total of $105 million in these retained and transition costs, the Retail Securities Brokerage operations reported a loss of $64 million for the quarter.

The Retirement segment had adjusted operating income of $55 million in the current quarter, compared to $33 million in the year-ago quarter. Both of the segment's businesses, Guaranteed Products and full-service Defined Contribution, benefited from improved investment performance in the current quarter, which included $9 million of income from investment prepayments in the Guaranteed Products business.

The division's two other segments, Investment Management and Other Asset Management, reported adjusted operating income of $68 million in the current quarter, up $37 million from the year-ago quarter. Current quarter results benefited from higher fees that track the growth and assets under management reflecting improved equity markets, and from greater transaction fees, as well as improved results from our commercial mortgage operation.

Turning to the International Insurance and Investments division. The International Insurance and Investments division had adjusted operating income of $184 million in the fourth quarter compared to $176 million in the year-ago quarter. The International Insurance segment reported adjusted operating income of $222 million for the current quarter, up $42 million from $180 million a year ago. Foreign currency fluctuation did not have a significant impact on the comparison.

The segment's results included adjusted operating income of $93 million from Gibraltar Life in the current quarter, up $22 million from a year ago. About half of the increase comes from a more normal level of policy benefits in the current quarter compared to the negative fluctuation in experience a year ago. Also, in the year-ago quarter, Gibraltar Life provided $11 million of increased reserves due to stronger persistency than we had expected at that stage of its operation.

Early in 2003, we moved past the initial two years after the acquisition when shock lapses were a factor and Gibraltar's business in force began to stabilize. This allowed us to begin to implement investment strategies to help improve Gibraltar's portfolio yield by lengthening securities and moving to more U.S. dollar investments.

Our International Insurance operations, other than Gibraltar Life, contributed $129 million of adjusted operating income in the current quarter, up $20 million from the year-ago quarter. These operations benefited from continued business growth in Japan and Korea.

The current quarter and year-ago quarter each benefited about $10 million from true-ups of capitalized costs associated with new sales. On a constant dollar basis, sales from Gibraltar Life based on annualized premiums were $64 million in the current quarter, just below the $67 million of the year-ago quarter.

We have completed the transition of Gibraltar Life adviser compensation to a more variable basis, resulting in a smaller, more cost effective distribution channel than was in place at the time of the acquisition when there were about 7,000 life advisers. The transition resulted in a net decline of about 300 life advisers since a year ago, which is reflected in Gibraltar's overall sales. We believe the life adviser count has now stabilized at just over 4,800 at year-end, with negligible declines in the third and fourth quarters.

Also on a constant dollar basis, sales in Japan from our Prudential of Japan life planner sales force were $105 million in the current quarter, up 17%. Sales from other countries were $61 million in the current quarter for a 13% increase, bringing total fourth quarter sales from the life planner channel to 230 million. Our life planner force stood at just under 5,000 life planners at year-end, up 11% from a year earlier.

Our international investment segment reported a $38 million loss for the current quarter, reflecting a $34 million charge to reflect a write-off of an investment-related receivable in Korea. The segment had a $4 million loss in the year-ago quarter.

Turning now to Corporate and Other, where operations reported adjusted operating income of $44 million for the fourth quarter compared to a $1 million loss in the year-ago quarter when we incurred expenses of about $45 million under previous contractual settlements. A lower level of expenses, especially in the area of initiatives such as internet platform development, roughly offset the reduced level of income from our own qualified pension plan, which we had anticipated.

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 $29 million in the current quarter. This net realized loss amount reflects losses from impairments and sales of credit-impaired securities of $93 million, which are down dramatically from $385 million in the year-ago quarter.

About $30 million of the current quarter losses relate to Parmalot. The impairment losses were largely offset in the quarter by realized investment gains, mainly from sales of equities at Gibraltar Life.

Our gross unrealized losses on fixed maturities stood at about $370 million at year-end, including about $320 million on investment grade securities, which is essentially interest-rate related. Only about $15 million of the overall gross unrealized losses relate to bonds that have declined in value by 20% or more. Non-investment grade fixed maturities comprised just over 7% of the Financial Services Businesses fixed maturity portfolio at year-end.

Fourth quarter results also include pre-tax income of $265 million from divested businesses that came mainly from the following: A $332 million favorable settlement from Kyocera that we announced in December relating to a former business of Prudential Securities, and a $54 million charge to fully reserve our remaining exposure under a stop-loss agreement we entered into in 2000, when we sold our commercial Property & Casualty Business to [Everest Reed].

To wrap up, I'd like to sum up where we came out for the full year 2003. Our after-tax adjusted operating income reached $2.54 per common share, registering a 23% increase over $2.07 per share in 2002. Our full-year 2003 results absorbed transition costs of about 12 cents per share related to the retail brokerage combination, which is net of a modest gain we reported on completion of the transaction.

The headlines in our 23% increase are, first, the benefit of the initial results from American Skandia, second, a return to the more favorable equity market conditions, third, the continuing strength of our international insurance operations, and, finally, our ongoing efforts to attain a lower cost structure. These positives were counterbalanced by less favorable individual life mortality and the absorption of retained and transition costs in the financial advisory segment.

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

[OPERATOR INSTRUCTIONS]

Our first question is from the line of Joan Zief from Goldman Sachs. Please go ahead.

Thank you. I have two questions. The first is: Could you talk a little bit about the CIGNA integration, what you anticipate for keeping that business, what type of lapses you're assuming, and what would be the key variables that you're looking at in order to feel confident about your expectations for accretion?

And my second question is: If you could speak to the strategic value of your International Investment Management segment, and what type of timetable do you think is reasonable to reach an attractive positive return in that business?

Thanks, Joan. This is Art. I'm going to let Mark talk about CIGNA, and then I'll talk about the international investments.

Yeah, I don't want to get too specific on -- on detailed numbers, but we have experienced lapses in sales with respect to CIGNA that are within the range that we anticipated.

If you recall, it was public knowledge that CIGNA was working on a strategic resolution of this business as of last summer. So we knew there would be a period of uncertainty, and we anticipated some impact on both sales and retention. And the experience that's unfolding is within the range that we modeled. So right now we believe that we're still on track with respect to the CIGNA acquisition.

In terms of international investments, the strategic rationale, obviously, is not dissimilar to what we've done over the years in the United States, which is you look at the insurance business, you build an investment capability, and then you extend that investment capability into providing the products to third party, be they retail or institutional. And that's precisely the logic that we follow internationally.

So you would rarely see us expand aggressively in markets where we don't also have interest in the insurance business, whether or not we've been able to acquire or build one in a particular country. So that's the strategic rationale for it.

My expectations in terms of it producing appropriate returns are relatively soon. That would mean that we would expect it certainly to be profitable in the near term and meeting minimum targeted returns within the next 24 months. And so we will be looking very aggressively to ensure that that occurs.

So I think it's a good strategic fit. It utilizes our skills, and we hold it to the same high standards we hold everything else to in terms of meeting the financial objectives.

Thank you.

And we move on to a question from the line of Andrew Kligerman from UBS Securities. Please go ahead.

Good morning. A couple quick questions. First, with regard to your expense savings of the $330 million over two years, at what stage are you, how much savings do you have left?

Secondly, on the -- the long-term disability loss ratio kind of creeping up a little bit, and you commented, um, you didn't get enough resolutions, and I think the same thing happened with Met. And as I understand resolutions, and correct me if I'm wrong, is that when people die and you no longer have to pay off -- pay out the disability claim? And if so, are people living too long and there may be a problem?

And then, lastly, the litigation reserve, is that -- is that a reserve for what you're expecting in the future for litigation involving Wachovia?

This is Art. That's -- let me try them a little bit at a time. Let me do the expense one.

Uh-huh.

We've achieved about $230 million of that 330. We've got 100 to go and, um --.

Most of it'll be achieved next year.

And we know that. We know where it is, and we will get it this year. So we will achieve the $330 million. And that is the -- we're on target to do that.

Great. To cover the disability?

Yeah. The actual -- the resolution more often results in people going back to work, I think, than mortality.

Oh, okay.

So we're not reading any trend into this at this point. Whether it reflects economic conditions or something else. As I said in my prepared remarks, we've opened a new claims center, and we expect to manage this aggressively. But, again, right now we're not reading any more into this.

On the question of litigation reserves, we're not going to say any more than we've already said.

Okay. Thanks very much.

Thank you, Andrew.

Our next question is from the line of Vanessa Wilson from Deutsche Banc. Please go ahead.

Thank you, good morning.

Good morning, Vanessa.

With respect to your increased share buyback dollar amount, it's an increase of 50%, which is quite sizeable, could you help us think about what that -- what the message is there?

It's your -- are your statutory earnings very strong, and therefore your capital position a little ahead of what you're expecting? And what does it mean in terms of your dividend growth or dividend payout over time? And where are the rating agencies with respect to this and your ratings upgrade?

Okay. Mark, do you want to start and then I can add.

Yeah. I think the broad message is that we have been more efficient at deploying capital than we anticipated, let's say back in '01, when we were first launching ourselves on the trajectory toward the 12% ROE. So I would view this as a mid-course correction reflecting better execution and probably better discipline and probably better deals than we might have anticipated a couple of years ago.

And it is a mid-course correction that we expect to keep us on track to achieve the results that we've promised, both with respect to the financials of the company, as well as strengthening the businesses. And we've made a pretty big deal out of the opportunities we've had to do things with capital in the annuity business and the retirement business and in the international arena.

So I think it's -- it's good news. It doesn't reflect the fact that we've failed to execute and have to do something with money. We've actually overexecuted a bit, but done it a little better and have a good result.

I think it's also fair to say, Vanessa, that the deal pipeline is changing as well. Remember, in '02 and '03, there were opportunities for very attractive returns. I think as the economy improves, especially in this country, the deal structures and deal costs might not meet our financial objectives, so there's a little bit of that in there as well.

Internationally, the deals still appear to be -- the deal pipeline still appears to be there. So I think it's a combination of the two, but mostly in what Mark had said in terms of being somewhat ahead of our game plan with the acquisitions we've made and the success of those acquisitions, plus the freeing up of capital in the businesses that you're all too familiar with.

Yes, the dividend and --

Dividend, you want to talk about?

Well, we'll be reviewing the dividend again at the end of this year and, you know, our view is that that's part of our consideration with respect to the broader issue of deploying capital and returning capital to our shareholders. Right now we like the flexibility and the market impact, frankly, of share repurchases, but we raised our dividend last year, and we'll evaluate it again at the end of this year with a positive view toward our capital position.

And the rating agencies?

The rating agencies have received our capital management plans, I would say, very well. The acquisitions that we've done have fundamentally strengthened the company. We've reduced the risk profile of Prudential significantly over the past year, both as a result of the positive redeployment of capital into businesses like retirement, but also the transactions in Property and Casualty and in Prudential Securities. And I think that's all been recognized, and as I said, the broad capital plans for Prudential have been well received.

Thank you.

And our next question is from the line of Colin Devine from Smith Barney. Please go ahead.

Good morning, gentlemen. A couple questions. One, if you could provide some follow-up to the potential reinsurance transaction, I believe you were considering for your universal life block that you discussed at the analyst day.

Second, perhaps you could explain the rationale for not having in place a hedging program for your living benefit variable annuity products, and also give us some update, if you did go ahead and put through the hedge program for the death benefit.

And perhaps you could just give -- flesh out a little bit more what happened with the loss in Korea, rated and receivable.

Okay. Mark, do you want to talk about the annuity and the hedging program?

Yeah. Colin, we have not yet put in place a hedging program on death benefits, and as I said in my remarks, we'll consider hedging the -- the living benefits as that book grows.

Our view right now for the total company is that our equity exposure is not out of whack. We certainly have some sensitivity in the equity markets, but it's not something that's uncomfortable for us.

But having said that, where we find opportunities to lock in attractive returns and reduce risk, we will take those opportunities, but we're not uncomfortable with where we are as a total business with respect to our equity market exposures.

The reinsurance -- I think you were talking about the closed block insurance, Colin?

No. I think you guys were talking about a universalized block at your analyst day.

Oh, the captive re, that's for term.

Right. Sorry, the term.

Okay. I'm sorry, go ahead.

Yeah. That's on track. Jim Avery talked about freeing up between 500 and a billion dollars worth of capital over time from several different sources, and we anticipate that that will play out as he discussed on investor day.

Do you need that to fund the share repurchase program this year, or that would provide incremental excess capital above and beyond?

You know, we don't specifically allocate the excess capital. We don't need to do that in order to have the current repurchase program that we announced yesterday. So we're comfortable with those levels. And -- going forward with or without that.

Now, you had asked about the Korea transaction. Mark?

No, the receivable loss.

Yeah, that was income that we had accrued on an interest-bearing investment that will not be collected. So that had gone through AOI and was reversed from AOI in the quarter.

What was the investment in, Mark?

This was part of our CJ.

Thank you.

We move on to a question from Michelle Giordano from J.P. Morgan. Please go ahead.

Good morning. Mark, on the hedging program with the living benefits, I think you highlighted that you want to see what the volume got to on some of these before you actually did the hedging program. What kind of a volume are we talking about that sales would need to get to before you would actually go through with this hedging program?

And then secondly on the rating agencies, Mark you've articulated that a lot of things have really shown some great signs of improvement. You've also had a lot of discussion with the rating agencies over the last couple of years. After they review your statutory and GAAP results, is there anything that you can think of that they might focus on negatively to prevent you from getting a rating upgrade?

On the hedging question, I don't have a specific number in mind. You know, we will look at that as part of everything that's going on in terms of our equity risk and market exposures as opposed to just one specific product.

Obviously, there are considerations like the economies of scale and the cost of hedging, the impact on capital and those things that will be considered. But I don't have a narrow view of just one product when we think about risk management, although, as I said, there are capital and scale issues with respect to how we implement hedging programs.

Secondly, on the rating agencies, we certainly have addressed the issues that we've committed ourselves to address over the past few years. And the uptrend in operating performance will probably be the last item to focus on. And I guess maybe you ought to think about it as, show me. We've had a lot of moving parts, a lot of big changes, and if there's anything, it may be just let's wait and see what prints after everything closes and the dust settles.

Okay.

I don't think -- this is Art. I don't think there are particular negatives. As I've sat through the rating agency meetings. But, I'm not a good predictor of rating agencies, unfortunately. But I kind of like our story, and I hope they do as well.

Okay. Fair enough. Thank you.

Our next question is from the line of Suneet Kamath from Sanford Bernstein. Please go ahead.

Hi. Just a question about something you put out your first investor day. You kind of layed out three businesses that were fundamentally sound and you were looking to improve the ROEs there, individual life annuities, group insurance, and retirement. It looks like you've done a transaction, obviously, on the annuity side to help, you've done the transaction now on the retirement side to help.

So can you talk about the returns in the group life business, kind of where you are and, you know, whether you need a transaction there to get the returns to the appropriate hurdle rate? Thanks.

This is Art. No, we do not. We are north of 12% in that business on an unlevered basis. And so it is really just a consistency issue in ensuring that we maintain the consistency we've shown in the last, I guess, four to six quarters, which we didn't show in earlier periods of time.

Sales have been good, but reflective of a pricing discipline to ensure that we keep that 12% return. So we do not have to do a deal to meet our return targets in the group life business.

Okay. Thanks.

Our next question is from the line of Tom Gallagher from Credit Suisse First Boston. Please go ahead.

Good morning. Just a follow-up on the litigation reserves. I'm not going to ask what they were for in particular, because I know you can't talk about that, but -- but just about, um, the level of the expenses.

When we think about on a go-forward basis, is it fair to assume that's going to come down, or are those likely to remain at about current levels, and what is baked into '04 earnings guidance?

Tom, it's Mark. We're not going to comment beyond what we've already said about the retained exposures there. And with respect to '04 guidance, we don't give guidance for any specific line items.

Okay. The --

That wasn't a very satisfactory answer, was it?

The -- let me try and ask it a little bit of a different way. Can you answer, is there anything one-time in nature in there, or does -- you know, the bulk of it reflect kind of ongoing expenses that we should expect to see for a while?

No. I'm not going to comment on that.

Okay. Thought I'd try. The -- and then just a question on life insurance sales.

You had a pretty significant -- significant pickup in third-party distribution life sales, and I know you commented there were some large cases there. But just conceptually, do you think you need ratings upgrades to significantly grow that business, or are you seeing signs that you can grow at your current ratings level?

I don't see a lot on the ratings side. It's hard for me to be too confident on that answer, though, Tom, because I'm not sitting across the table from the client when they're comparing as they would in a third-party sale, you know, our product from a competitor's product and if the desires of the client are such that their rating is important. But in talking to the third-party distributors, we do not hear that at all.

Obviously, we hear the normal about, well, your prices should be better and your -- this could be better, and so on. The same thing they would tell all of our competitors, I'm sure, the same thing. But no, we hear nothing to be singled out on rating.

And, in fact, I think the brand Prudential is well received in that third party. I have visited many of the major third-party players, like the M Group and others, and -- no, I don't hear anything about ratings or concerns. It's just the normal competitive market against many fine competitors that we compete against every day.

Okay. Thanks.

And our next question is from the line of Nigel Dally from Morgan Stanley. Please go ahead.

Great. Thanks. First question on guidance. At your investor day you provided EPS guidance based on a billion dollars of stock buybacks. Given the announcement to be buying back 50% more stocks and with earnings coming in above your fourth quarter guidance, why aren't you increasing EPS guidance for 2004? That's my first question.

And second question is just with the rating agencies. Is it possible to discuss the potential earnings impact from a ratings upgrade? Thanks.

This is Art Ryan.

The reason we use ranges in earnings guidance is we anticipate that we might make a change, but have not gone through the process of getting board approval relative to that change. And so the potential of raising the stock buyback, as we have done, was incorporated in our thinking on investor day when we gave you that range. And obviously we're pleased that the board approved the 50% increase in our base case.

The second question, Mark on -- ?

Yeah. I don't want to quantify it, but a higher rating would improve our opportunities in guaranteed products, improve our spreads, for example, on [INAUDIBLE] and we believe would also have a positive impact on our retail annuity business. So there are some sources that would pretty directly impact the bottom line as a result of a possible ratings upgrade, but I don't have a quantification to share with you.

Just as to follow up. Does your guidance currently incorporate a ratings upgrade, or do you -- is the guidance still fine without a ratings upgrade?

It's fine without a ratings upgrade.

So there is potential upside to the guidance based on a potential upgrade, as well?

Lots of things can happen during the course of the year, Nigel.

Okay, that's good. Thank you.

And thank you. We will go to the line of [Jody Hansen] from Credit Suisse Assets. Please go ahead.

Hi. Thank you for taking the call. In your prepared remarks, Art, you had said that -- I believe it was you, said that you're still on track for your ROE objective. But then you said, but equally important is the financial strength for future opportunities.

Are -- are -- and a higher agency rating, would obviously be a part of that. Would you be prepared to back off of your ROE target to get a higher rating? That's my first question.

No.

No? So you're sticking with the 2005 goal?

I -- all of our plans have built us on having a strong position and the 12%. In other words, I've always tried to communicate that -- I don't know of any corporate executive who would intentionally, you know, weaken a company in order to improve the return on equity.

And I wanted to reensure that we certainly would never do that, either by having excessive risk in our investment portfolio or other means that could in the near term or short term improve earnings. We target all of our capital ratios to the AA level, and I intend to keep them at a strong AA level and meet that target in 2005.

Terrific. Thank you. That's very clear. And then just two real quick questions.

Can you quantify the percent of variable annuities that you're selling that have the living benefits?

And the second was, can you give a little more color on the $36 million asset liability reserve adjustment in individual insurance? That would be helpful. Thank you.

Sure.

All right. On the $36 million reserve adjustment, it reflects a resorting of the asset portfolio and realignment against liabilities. And the assets are at a rate that was a bit lower, and as a result of that, we had to increase our reserve.

It was an annuity reserve, not a life insurance reserve. And the fundamental event, more or less, is lower interest rates, and the recognition of that is what was reflected in this entry.

Got you. And then the VAs, the sales with the guarantees?

I don't have the sales here in front of me, but I do have the account balance that American Skandia as of the end of the year. And bear in mind that the GMWB and the GMIB were only introduced in October.

Sure.

Balances as of the end of the year were $33 million and $25 million, respectively. We also have about a billion dollars of GMIB in the old Prudential block. And American Skandia has for some time offered a GMAB product called the guaranteed return option, and the balance there, as of the end of the year, is $3.7 billion.

But of the marginal sales that you're generating, you don't have a percentage.

It would be very, very small, as you can see from the account, compare the account balance for the options to the overall sales of a billion dollars in the latest quarter.

Yeah.

At American Skandia. Very small at this point in time.

This is a pretty new product.

Understood. Thank you very much.

Thank you.

And our final question comes from the line of Eric Berg from Lehman Brothers. Please go ahead.

I guess it's still appropriate to say good morning, it's just before noon. A couple of questions.

First, with respect to the life insurance business. I couldn't help noticing that the revenues of the business are down, both for the quarter and for the year. And as I look at -- I think it's page 13 of the supplement, I'm looking at the full-year numbers now to get away from the -- any noise or seasonality. It looks like the problem is in the premiums area.

What's that all about since you're no longer selling -- or at least since you reinsured the -- the -- pardon me, since you sold off or securitized the traditional business? Why are your revenues down in the life insurance area, and when can we expect the revenues to increase? That's my question, really.

Eric, this is Buddy. If you recall in the fourth quarter of last year we had extended term products where variable life converts over to term because of the poor performance in the markets. That had an impact of reducing premiums, which is a good thing, quite frankly.

That means our variable products are staying in force by $80 million in the quarter and $80 million on a full-year basis. And that accounts for a substantial part of the decline. It's all of it, matter of fact.

That's the whole decline.

Okay. And then separately, I know you report your sales out of -- out of Japan on a constant dollar basis. Can you tell me what earnings growth would have been, had the Japanese yen not appreciated as much as it did?

Had about a 5% pickup due to our currency translation, specifically in Japan.

No no. Wrong way. An $18 million drag at Gibraltar.

And no impact on the international insurance, ex-Gibraltar. The FX impact offset between Japan and the other currencies.

Could you go over that one more time, Buddy, please? You're saying no FX impact on earnings?

Right. No impact on earnings for the insurance businesses, other than Gibraltar, because the yen strengthening was offset by the other currencies. So it really had no impact on the full-year basis or in the quarter. And then for Gibraltar only.

Uh-huh.

I think it reduced their earnings on a full-year basis by roughly $18 million.

So, in other words, if you wanted to do an apples-to-apples AOI comparison for Gibraltar, the 2002 number is 378 and the 2003 number, which on an AOI basis we reported as 370 would increase to 388.

Those were my questions. Thank you very much.

Sure.

And gentlemen, any closing comments you may have.

This is Art Ryan, thank you very, very much for participating today, and look forward to seeing you during the course of the new year and certainly at the end of the first quarter. Thanks again.

And ladies and gentlemen, this conference is available for replay after 4:15 p.m. Eastern time today through February 18th at midnight. You may access the AT & T Replay Service at any time by dialing 1-800-475-6701 and enter the access code of 715701. International participants may dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844, with the access code of 715701.

That does conclude your conference for today. Thank you for your participation and for using AT & T Executive Teleconference. You may now disconnect.