保德信金融集團 (PRU) 2004 Q2 法說會逐字稿

Good morning. Good afternoon, or good evening. And welcome to the Prudential second quarter 2004 earnings conference call. At this point all of your phone lines are muted or in a listen-only mode. However, later during the earnings release, there will be opportunities for questions and those instructions will we given at that time. Just as a note, if you should require any assistance during the call, you may reach an AT&T operating pressing star then 0 on your phone keypad. As a reminder today's conference is being recorded for replay purposes, and we ask that you please stay on the line at the conclusion of the call to receive that replay information. With that being said, let's get right to the agenda here with the opening remarks is Prudential's Head of Investor Relations, Mr. Eric Durant. Please go ahead, sir. Thank you. On behalf of my colleagues let me add our good morning, good afternoon, or good evening. Thank you for dialing in to Prudential's second quarter call. Our presenters today are Art Ryan, Prudential's CEO and Mark Grier, Vice Chairman of Financial Management. Joining us in the Q&A they will be joined by Rich Carbone, Chief Financial Officer, and Buddy Piszel, Controller.

Now, for the moment you have all been waiting for -- 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 second quarter 2004, 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. Adjusted operating income excludes net investment gains and losses and related charges, and adjustments and results from divested businesses. Adjusted operating income also excludes recorded changes in asset values that will ultimately enure to contract holders and reported changes in contract holder liabilities resulting from changes in related asset values. The comparable GAAP presentation and the reconciliation between the two for the second quarter are set out in our earnings press release on our web site. Additional historical information relating to the company's financial performance is also located on our website on our investor relations page. Art.

Thank you for joining us today. Mark will review second quarter results in detail so I'll limit my comments to a few headlines. Overall I describe our results as on track with our expectations for the year. EPS based on adjusted operating income increased by nearly one half.

As you know, our adjusted operating income includes transition costs and items that can obscure underlying trends in our business. Mark will walk you through these items in a few minutes. However, stripping them away we would still have a very strong second quarter with an EPS increase of more than 20% over last year's results. Second quarter earnings included a contribution from the CIGNA retirement business, which became part of Prudential on April 1st. It is early days but thus far integration is proceeding as planned and retention of CIGNA's business is meeting our expectations. We remain confident that this investment will generate attractive returns, while significantly upgrading Prudential's positioning in the important retirement marketplace.

As you know, capital management has been central to our plan to deliver our 12% return on equity objective. We were able to acquire CIGNA, as well as American Skandia and Hyundai by reinvesting capital that was under deployed. In addition, we continue to use share repurchase to manage our capital. Through June we have repurchased 749 million of common stock under a current board authorization to purchase up to 1.5 billion this calendar year. While we will review activity under this authorization with the board regularly, we believe that repurchases of roughly 375 million per quarter remains a realistic base case for Prudential at this time.

Since demutualization we have invested roughly $3.6 billion in the acquisition of American Skandia, Hyundai and CIGNA, and we have repurchased nearly 2.6 billion of common stock. We still have dry powder, largely in the form of untapped borrowing capacity and our businesses generate excellent cash flow. In short, we continue to be able to pursue opportunities to improve Prudential's businesses and its financial performance. At the same time we have maintained a superior balance sheet and capital position and we intend to continue to do so.

Finally, I will address our earnings guidance for the full year. We believe that Prudential will achieve common stock earnings per share in the range of $3.15 to $3.25 for the year 2004 based on after-tax adjusted operating income. This represents the high end of our previous guidance of $3.05 to $3.25. This guidance includes expected charges to be absorbed within 2004 adjusted operating income of approximately 25 cents per share from the combination of the retail securities brokerage operations with those of Wachovia, and approximately 10 cents from the integration of the CIGNA retirement business. A total of 10 cents per share of these charges, of that 35 cents, has already been absorbed in first half results. The 2004 expectations also assume appreciation in the S&P 500 index, up 2% per quarter in the second half of the year.

As many of you know, Prudential Financial's Newark headquarters was named by the Department of Homeland Security, as a potential target for terrorism. We have been working closely with the Department of Homeland Security and other law enforcement agencies. Employees are reporting to work. And we are doing business while taking measures to ensure the safety of our employees, visitors and customers. Again, thank you for being with us. And now I will hand it off to Mark for further discussion.

Thanks, Art. Good morning, everyone. Thank you for listening in on our quarterly conference call today. I'll start with an overview of second quarter results for the financial services businesses.

We reported common stock earnings per share for the financial services businesses of 97 cents for the second quarter, compared to 66 cents per share for the year-ago quarter. These results are based on after-tax adjusted operating income which includes the absorption of about 5 cents per share of transition costs relating to the combination of our retail securities brokerage business with Wachovia, and another 1 cent per share from our acquisition of the CIGNA retirement business. On this basis, the EPS increase is 47%. I would characterize this as a very good quarter with results, as Art said, that are on track with our full year expectations.

In the quarter, we benefited from some one-time items and from some influences on business performance that we do not expect to be sustainable. On the other hand, we continue to recognize one-time charges related to the Wachovia and CIGNA deals, and expenses for retained liabilities from PSI continued to depress earnings.

Before I get into the business discussions, I would like to go through some of these notable items. First, mortality was favorable in both individual life and group life. Not out of the range we have experienced in recent quarters, but in both cases in the favorable part of that range. If we were to compare this quarter's experience with our average expectations, the benefit would equate to about 4 cents per share.

In our international insurance segment, Gibraltar Life benefited from the extinguishment of liabilities that date back to its restructuring three years ago. This contributed about 1 cent per share to the quarter's results. Corporate and other results benefited from an uptick in investment income on joint ventures and similar non coupon investments, where results vary from quarter to quarter. This lumpy income benefited the quarter's results by about 3 cents a share. Our estimate of the effective tax rate for the full year was reduced from 31% to 30%, resulting in a favorable catchup of the tax liability since we applied the higher tax rate in the first quarter.

And in connection with the completion of the company's tax return, we had a favorable true up of some income tax liabilities as well. In total, the one-time benefit not quarter's after-tax adjusted operating income was about 9 cents per share. Going in the other direction, Wachovia one-time charges amounted to 5 cents a share in the quarter and CIGNA related one-time charges came in at a penny a share. We also recognized $77 million or 10 cents per share related to retained liabilities from Prudential Securities. I will not comment on this, beyond what we have said before, which is that these expenses are affected by both our market timing investigations and by ongoing client broker disputes.

Art mentioned capital redeployment. Now, that we have completed the CIGNA retirement acquisition, only about $3 billion or roughly 15% of the attributed equity for our financial services businesses is in corporate and other at the end of the second quarter. With $15 billion now deployed in our 3 operating divisions. A year earlier, more than one third of the attributed equity or over $6 billion, was still in corporate and other including the property and casualty business which was awaiting divestiture. Now, I will review our business results for the quarter. Since we're reporting results including the retirement business acquired from CIGNA for the first time, I'll start with the investment division.

The investment division reported adjusted operating income of $72 million in the second quarter, compared to $77 million in the year-ago quarter. In total, the acquired CIGNA business contributed $47 million to the divisions adjusted operating income for its first quarter of operations. Our acquisition of CIGNA's retirement business, in addition to greatly expanding the scale of our retirement segment also brought us about $28 billion of proprietary assets to be managed by the asset management segment resulting in contributions to both of these segment's results, meaning retirement and asset management.

As we mentioned in our earnings release, we modified our definition of adjusted operating income as a result of the acquisition of CIGNA's retirement business. I would like to briefly discuss this change. The vast majority of the business we acquired is experience rated. Although the assets are in the general account, the economics are more like fee-based business, with investment risks and rewards going to the contract holders. Accordingly, we are excluding from adjusted operating income, the changes in recorded asset values that will ultimately be passed to the contract holders, and the changes in recorded contract holder liabilities that arise from asset value changes. With about $12 billion worth of bonds supporting these experience-rated contracts, we would expect to see the greatest mark to market activities when there are significant interest rate changes as in the current quarter. In that sense these adjustments will behave much like the unrealized gains and losses we record under FAS 115, except that these are in GAAP net income and excluded from our adjusted operating income. There will be plenty of detail in the accounting for these contracts in our 10-Q.

Within the investment division, the retirement segment reported adjusted operating income of $92 million for the second quarter, including a $36 million contribution from the CIGNA business. The segment's original retirement business reported adjusted operating income of $56 million for the second quarter, up $11 million over last year, with benefits from both improved spreads and higher asset-based fees. The asset management segment had adjusted operating income of $60 million in the current quarter. Up $7 million from the year-ago quarter. The segment's current quarter results included the remaining $11 million contribution from the CIGNA business, as well as greater asset-based fees tracking market appreciation. However, these results also absorbed $7 million of costs in the current quarter from exiting a facility.

The financial advisory segment had a loss of $80 million in the current quarter. This compares to a $21 million loss in the year-ago quarter. The financial advisory's segment's results for the current quarter reflect the combination of our retail securities brokage operation with Wachovia last July. Our 38% share of the results of Wachovia Securities, resulted in pretax income of $36 million before transition costs. This is down $18 million from the first quarter and reflects lower trading volume. The segment's results absorbed expenses of $77 million in the quarter from obligations and costs we retained in connection with the contributed businesses, primarily from retained litigation and regulatory matters. The segment's results also absorbed $38 million of transition costs in the quarter. After absorbing a total of $115 million in these retained and transition costs, the retail securities brokerage operations reported a loss of about $80 million for the quarter.

Turning to the insurance division. The insurance division had adjusted operating income of $238 million in the second quarter compared to $236 million in the year-ago quarter. Our annuity business reported adjusted operating income of $94 million, up $29 million from the year-ago quarter, which reflected the first two months of American Skandia results. In addition to an $18 million greater contribution from American Skandia, which continues to deliver returns consistent with our expectations, the annuity business benefited from increased spreads on general account products, as downward yield pressure has abated, and from higher asset based fees tracking market appreciation. Our annuity sales for the quarter were $1.7 billion including $200 million from fixed annuities reflecting a product we introduced this year in the bank channel. The quarter's gross sales brought the total for the first half of the year to $3.5 billion. 15% ahead of the second half of last year. We have also continued to register positive net sales amounting to $400 million for the quarter, well ahead of the average of about $325 million per quarter in the second half of last year.

Adjusted operating income from our individual life insurance business was $98 million for the current quarter, compared to $113 million in the year-ago quarter. The $15 million decrease came mainly from actions in late 2003 which as we expected had a similar effect on the second quarter comparison, as in the first quarter. Namely, late last year we reduced the level of equity required to support the individual life insurance business by use of captive reinsurance for new term business and reduction of some redundant statutory reserves. This allowed us to free up capital for redeployment at higher returns, resulting in a $600 million decrease in average equity attributed to this business in the current quarter as compared to a year ago. The lower investment income contribution that came from this reduction in average equity, accounted for nearly half of the decline in reported results for individual life.

Additionally, due to the sale of our property and casualty business last year, our agents now distribute only third-party property and casualty products. While the agency system is still compensated for its P & C sales, the compensation structure is less favorable than it was historically, resulting in lower recovery of costs associated with our agency distribution system. The near-term impact continues to be consistent with our expectations as we pursue cost reduction opportunities. In individual life, sales excluding COLI amounted to $94 million in the current quarter. An 18% increase from $80 million in the year-ago quarter. Most of the increase came from universal life reflecting the market's current emphasis on that line, and the traction of our products which we updated in late June of last year, to include more flexibility of guarantees as well as survivorship policies.

Nearly all of our sales growth in the current quarter came from the third-party distribution channel. Our Prudential agent count stood at about 4,000 at the end of the second quarter. a decline of about 300 from a year earlier. As we expected we experienced some attrition among agents who emphasized property and casualty products, as a result of our sale of our property and casualty business, and this continued on into the current quarter.

In addition we are continuing to emphasize cost-effectiveness rather than growth in this channel and we have announced some actions to increase cost sharing by agents consistent with industry standards leading so some additional attrition among lower producers. We are also continuing to recruit selectively. A continued modest decline in agent count over the balance of the year would be consistent with our emphasis on cost-effectiveness. The group insurance segment reported adjusted operating income of $46 million in the current quarter. A decline of $12 million from the year-ago quarter. The decline came from less favorable disability experience in the current quarter, reflecting a slower pace of claim resolutions, rather than a greater incidence of new claims or a deterioration in severity. Our recently opened disability claims office in Portland, Maine will allow us to expand our claims handling capabilities when it comes fully on stream later this year.

Turning now to the international insurance and Investments division. This division had adjusted operating income of $262 million in the second quarter compared to $217 million in the year-ago quarter. The international insurance segment reported adjusted operating income of $244 million for the current quarter, up $37 million from $207 million in the year-ago quarter. The segment's results included adjust the operating income of $115 million from Gibraltar Life in the current quarter, up $17 million from a year ago. Current quarter results benefited by $9 million from extinguishment of liabilities that were established as part of Gibraltar's restructuring in 2001. Under the terms of the restructuring, these liabilities had to be held for three years which expired this quarter. Gibraltar's results also benefited about $5 million from currency translation compared to the year-ago quarter. Our international insurance operations other than Gibraltar Life contributed $129 million of adjusted operating income in the current quarter, up $20 million from a year ago. These operations benefited from continued business growth in Japan and Korea, and also from about $5 million in currency translation compared to the year-ago quarter.

On a constant dollar basis, sales in Japan based on annualized premiums were $164 million in the current quarter, compared to $178 million a year ago. Sales from other countries were $48 million. Bringing total second quarter sales internationally to $212 million. The apparent decline in Japanese sales came from a drop in sales of a single premium business by Gibraltar Life, reflecting a credited rate cut that we implemented on savings oriented products last year. Stripping out Gibraltar's single premium business, constant dollar sales in Japan are up about 7% over a year ago. Our life planner force stood at just over 5,100 life planners at the end of the quarter, up nearly 10% from a year earlier. Together with 4,900 Gibraltar life advisors we now have a total of more than 10,000 international insurance representatives. The international investment segment reported adjusted operating income of $18 million for the quarter, up $8 million from a year ago with our recent acquisition of Hyundai Securities beginning to contribute to results.

Turning now corporate and other. Corporate and other operations reported adjusted operating income of $66 million for the second quarter. This compares to a $1 million loss a year ago when results absorbed $37 million of costs from a financing transaction we had entered into before our demutualization. The current quarter's results include adjusted operating income of $31 million from our real estate and relocation business, up $14 million from a year ago on the strength of greater transaction volume and home sale prices. Current results in corporate and other also included our initial $13 million quarterly benefit from a new Medicare program which will defray our costs to provide prescription drug benefits to eligible retirees on a continuing basis.

Now, I'll briefly discuss net income. Net income for the financial services businesses was $519 million for the second quarter, compared to $127 million in the year-ago quarter when we announced the sales of our main property and casualty businesses and recorded a $410 million pretax loss from divested businesses. Current quarter net income includes, for the first time the two line items outside of adjusted operating income that capture recorded changes in asset and liability values relating to our experience rated business as I discussed earlier. The size of these numbers, $322 million and a partially offsetting $183 million in the current quarter, is essentially a function of the rise in interest rates this quarter which resulted in mark to market on bonds associated with the experience rated contracts. Realized investment gains before taxes were $143 million in the current quarter after related adjustments. These gains were net of impairments and credit related losses, which amounted to $63 million in the quarter. Our gross unrealized losses on fixed maturities stood at $803 million at the end of the quarter. Almost entirely on investment grade securities and essentially interest rate related. Non investment grade fixed maturities comprised just 6% of the financial services businesses fixed maturity portfolio at the end of the quarter.

Briefly on the closed block business. The results of the closed block business are associated with our Class B stock. The closed block business reported net income of $30 million for the current quarter compared to $69 million in the year-ago quarter. We measure results for the closed block business only based on GAAP, rather than adjusted operating income. The current quarter includes $60 million of pretaxed realized investment gains compared to $114 million of realized investment gains in the year-ago quarter.

Turning back to the financial services businesses and summing up. Our domestic results benefited from the strengthening of our annuity and retirement businesses with the acquisitions of American Skandia and CIGNA retirement. Increased spreads and growth of asset-based fees also contributed to the results of our domestic businesses. Our international businesses continued to produce solid results and the strong results from our domestic and international business operations were complimented by several items of note that were net positive to the quarter. Thank you for your interest in Prudential. Now we look forward to hearing your questions.

Very good 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 point. Press star then one on your phone keypad. You do hear a tone indicating you been placed in queue. And just as a note, if you would like to remove yourself from the queue simply press the pound key. To ask a question please press star 1 on your touchtone phone. The first participant in queue we go to Jason Zucker with Fox-Pitt Kelton. Please go ahead.

Thanks. Hello, everybody.

Hi.

I want to touch on a couple of things. The first one being the expenses that we are seeing at Prudential Securities and I was hoping that you could just comment more on the process in terms of how these expenses actually show up on the P&L. Is is a pay as you go type of expense or are you setting aside reserves along the way? And then relatedly, is there an opportunity where you could just take one big charge perhaps and just move past it?

This is Art Ryan. The answer to the first question. It is a mix. A combination of pay as you go as well as some reserving as we identify costs that we know will be incurred. Second, no, we don't think it would make sense nor are we able at any particular point in time to kind of estimate a one-time type of thing. We want to manage these as we go forward. Certainly the level is somewhat high, but it reflects multiple issues as we have talked about, in terms of completing all of the activities on that merger, if you will, of the securities brokerage firm. We do know they will have an end. We are just not able to predict exactly when that is going to be. I think the way we are managing it, which is aggressively resolving it and managing the expenses as quickly as we can is the right approach.

Great. If I could, I just wanted to follow up if somebody could just address Japanese sales growth excluding Gibraltar, which was about flat and at the same time Mark mentioned that financial planning growth is up and I was wondering why the two numbers seem to be a bit disconnected?

Yeah. And they are somewhat, as you are correct. The growth in life plan has always been a very good predictor of sales growth over the past, oh, at least 15 years or so. And life planning growth in Japan is actually up about 12% overall on the network up about 10% but in Japan it is up 12%. There are a couple of things that occurred in the second quarter. One, there was a major MDRT, or million dollar round table conference in Japan, and since we the highest percentage of those agents we had a lot of folks at conference. There were also additional holidays during the period as well in Japan. So, I'm still quite confident in our continued success in Japan. But you're correct the second quarter saw a slowdown. We do not anticipate that going forward. And believe that sales will more appropriately approach growth and life planner as well. So I think you're looking at an anomaly in the second quarter and one that should not continue.

Great, thank you.

Thank you very much Mr. Zucker. Representing Morgan Stanley we go to the line of Nigel Cayley. Please go ahead.

Great. Thank you. Just to follow up on Jason's question with Japan sales. Hopefully you can discuss the competitive environment. My concern is that the declining productivity of the agents could that also be a function of some change in the competitive environment. Then, just second, on the litigation expenses, hopefully you could provide us an indication of whether the number of cases pending arbitration has been increasing or decreasing last quarter and also year-to-date? Thanks.

In terms of the productivity, no, we are not seeing any substantial change in productivity in our life planners in Japan. And nor are we seeing any substantial change in the competitive level. As you know, there is only one other company in Japan that has a life planner system and that is Sony life. And there has really been no change in the competitive framework versus them. So, no, as I mentioned in answer to the earlier question, we believe the second quarter was a bit of an anomaly for a number of the reasons I mentioned. We are quite optimistic that the continued growth in life planners will cause greater increases in sales. I should point out on the Gibraltar side if you take those one-time -- excuse me, the single premium business that MarK referred to, that we increased the crediting rate and basically eliminate it from our product line from absence of strong profitability, from my perspective. Gibraltar sales are actually up 14%, and that would be more in line with what what we would have normally expected. I don't think there is anything in the market that the point that concerns me. Obviously one quarter we look at and we will be following it very, very closely. I'm quite confident on the business at this point.

Nigel, on your second question, we're not going to comment on any of the details related to these, recognition of legal expenses.

Okay. Sounds fair. Just a follow-up on Gibraltar. As you mentioned you did have good sales growth there. Should we expect that growth to continue? Can you discuss what is driving that? And if so, whether we should be getting more aggressive about potential future earnings growth at Gibraltar as well.

I think we should be cautiously optimistic. What I'm pleased with is we stabilized the sales force there. We had excellent policy retention. In fact, for a number of quarters in the prior two years that cost us some money, if you recall, because we didn't make the money on the redemption side, so we are comfortable with our relationship with our customers that we acquired in that deal. The life plan adviser channel is modestly growing which is also important. More than 50% of our sales come from our affinity relationship, principally with the teachers association, and that's still very, very strong. I would use the word, yes, cautiously optimistic that we will turn this, as we have said, into not only a fabulous investment, but one that we can see modest growth out of going forward as well.

That's great. Thanks for your help.

And our next participant is Andrew Kligerman representing UBS Securities, please go ahead.

Yes, good morning. Question on Wachovia Securities operation, I believe when the transaction was announced they indicated that in '05 it would be roughly $220 million in cost savings. Could you let us know if that is still on track? And when the transition costs end? I believe that they end at the end of this year but I just want to get some clarification on that. And then the second question is on, your appetite for acquisitions, have you changed at all? What are you seeing out there? What is some color on your acquisition appetite?

In terms of the first, I mean obviously as part of the transaction Wachovia retains the operating responsibility for the entity. We remain very close to them. We are part of the advisory board to support it and frankly, our dialogue and relations with them is excellent, including some of the product sales that we have begun to see we mentioned earlier, on the fixed annuity side which was heavily influenced by the Wachovia bank channel. There is strong confidence on both sides, that's expense savings will be achieved.

There is major conversion of systems scheduled to be done over the Labor Day weekend and right now everything is on the go and people are quite confident with it. And our expectation would be that the costs for the transition would be completed by the end of the year. I think if there is any risk at times they do spill over a little into the first quarter. I have no reason to believe that is going to happen, but having seen a lot of systems conversions in my life that every now and then occurs. But right now we see everything on track as we had talked about, and I think that reflects the comments of the Wachovia personnel as well, in terms of their discussions of the transaction. So on target. The second question? -- acquisitions. Well, as I stated earlier, we would continue to look for acquisitions that added to our current lines of business. We have little appetite for expanding our existing businesses. We are approaching 2005 and we have a target for return on equity and we will not sacrifice that target. So if there are acquisitions that we can effectively deploy some of our additional capital in ways that enhances our businesses and does not deflect away from us achieving our near term financial targets, they would be considered. I don't expect any significant transactions.

Excellent. Thanks.

Thank you very much, Mr. Kligerman. Next in queue, we go to Suneet Kamath with Sanford Bernstein. Please go ahead.

Great. Thank you. Two questions. First, on Japan again. Is there any move to start selling more asset accumulation products as the market there improves? Perhaps there is is a shift away from life insurance towards those in terms of consumer demand? And then second, you know, is there any update that you can give with respect to the market timing investigations? Whether it is from the SEC or your own internal reviews that you discussed in the past. Thanks.

In terms of Japan, if you look at this whole issue of additional product sales. Specifically in things around annuities or investment-like products. I think there are a couple of things that would temper our entry into those markets. First, it is my belief that the Japanese consumer is still - I'll use the phrase "undereducated" as it relates to the more sophisticated financial service products. This is not an absence, obviously, of intelligence but one that has existed in the market and their propensity for very conservative investing. It is still the postal savings bank that acquires most of the savings deposits and they are still paying less than 1% on it. I think that reflects the extraordinarily conservative nature of the Japanese people. There are some changes obviously, as other companies have sold annuity products, but I do not yet believe that it is as widespread that would warrant our investment in that particular business.

Second, if we did it, we would most likely start with our Gibraltar operations, where at length's end with some of the activities we have, in those affinity programs with teachers' associations. That is because they are, A, more likely and assuming we can make attractive returns on the product, and I'm not yet convinced that can be done. That is would be the likely entry point if we were able to do it. It is unlikely, in the near term, we would expand our life planner capability to include that. We built that sales force to sell protection life insurance and we intend to stick with that. I believe our success to date can continue going forward even if there is a shift to other products because of the uniqueness of the combination of our organization, our sales organization, the products we offer and the extraordinary service levels that we provide to our customers. That is kind of the way I would look at it going forward.

On market timing, we have nothing new to report. We have filed the 8-Ks actually a while ago on this, with basically anything that we would say again today.

Did you have any follow-ups, Mr. Kamath?

Only if you wanted to talk about your own internal investigations. I think you have in the past given some.

There is nothing new to report.

Okay. Thanks.

Next we go to the line of Saul Martinez representing Bear Stearns. Please go ahead.

Hi, good morning, gentlemen. Two questions. Just one firstly on the Wachovia joint venture. Obviously even if we exclude the transition and legacy costs, earnings came down as you mentioned, on lower trading volume. If you could give us a little color on how you view the quarter? Would you view it as a sub par quarter and what we should expect going forward in that business as least through this year? And secondly in terms of annuities by channels, wire house sales came down or were some what low in the quarter. I know you mentioned it has been a priority to increase sales via that channel. Give us color on what happened there and what you are doing to wrap up sales.

Obviously it is very, very difficult to predict the operating earnings in the securities activities because of the dependence on volume, as opposed to market direction plus or minus. I guess I would answer it by the good news is -- is that on an operating basis we went from $54 million in earnings positive to $36 million in earnings positive under Prudential Securities, given the scale disadvantages we had, it is more likely that number would have been negative if we had not done this particular transaction, because historically with lower volumes we tended to not simply make less money but actually lose money. That alone gives me a high level of confidence that we are on the right track. Second, we are not really building in a lot in our future in terms of robust markets.

Remember it is the extraordinary expense saves, that will be added to those operating earnings that I think give us the confidence in the appropriate or the desirable returns that we will get out of the transaction. Yeah, it is going to go up and down to some degree because of the nature of the beast, but we also have yet to recognize very sizeable expense saves that should begin later in the year or actually in 2005 relative to the transaction. I still have a level of confidence that I believe this is an appropriate deal and as you know, from the deal structure, we have various points in time when we can relook at it in terms of our comfort with the amount of capital that we have invested in this deal.

Saul, it is Mark. This is just a retail brokerage business. And is doesn't have investment banking, or proprietary trading activity, for example, that might occasionally go the other way in certain markets. So we will see sensitivity here to, sort of the very direct straightforward volume and market conditions.

Saul, it is Eric. In terms of the wire house sales of annuities let's keep it in perspective. They represent 6% of our total annuity sales. They are down slightly in absolute dollars. They are really pretty much unchanged as a proportion of the total. Importantly, we are hopeful that we will be able to increase our capabilities in this channel and my suggestion would be to stay tuned.

Okay. Fair enough. Thank you. That's great.

Next we go to the line of Colin Devine. Mr. Devine represents Smith Barney. Please go ahead.

Thanks. I have a couple of questions. I was wondering if we could focus on Korea and both get an update on how you are making out on the sales office expansion you started in the first quarter, as well as a little more color on what is happening with the Hyundai business. Secondly, if you could talk a little bit about the sensitivity of your earnings to rising rates in Japan and then I'll follow up with one more question on securities.

Korea is going through a bit of a rough patch. I speak now of the country, not of our business and it principally deals with the overhang from the credit card phenomena of a few years ago. They basically, the government encouraged people to spend using a credit card when the economy was in a recession. The economy while not technically in a recession because of growth in exports is suffering on the domestic side because the overhang on the debt is very, very high.

So you are seeing a very significant slowdown in consumer spending, and so the reduction in sales is in our case in -- well, the slowdown in sales in Korea is really two factors. The first is the slowdown in the market in general. The second and I might add there, every indication we have and then looking at competitors data we are gaining market share, so even though sales are down on a year-over-year basis, principally because of the domestic economy, our share is growing.

The second part is the changes we made as you mentioned in the first quarter and it going well. We opened 17 new agencies. That was on a base of about 70 agencies. And so that is a big change. When we do that, we take a number of our senior life planners and put them into sales manager positions, and a number of our senior sales managers into agency manager positions, and then we have to recruit obviously to fill out during the rest of the year. I would look at that as a continued investment in the business.

I think absent the other phenomena are the slowdown in the domestic economy it wouldn't be as noticeable but I think the two factors are what has contributed to a year-over-year modest decline in sales but I do want to reassure everyone that our market share is actually growing in Korea. So I'm quite comfortable. They will get through this problem and we will then have an even larger sales organization upon which to grow our business.

In terms of Hyundai, it got off to an excellent start. We've just closed the deal obviously. It is contributing to earnings. If you took the earnings and annualized it we probably got about a 13% return on equity out of the box which you might expect out of deals where you are coming out of restructuring deals, as opposed to straight-out acquisitions so we are off to a good start.

Colin, on interest rates in Japan the simple straightforward answer is is that we will benefit from rising rates and there are couple of reasons for that. One is that at least within a pretty substantial range of rate increases there would be little or no sensitivity to crediting rates while our asset yields would improve as we reinvest. The duration of these assets is fairly long, so it wouldn't be happening overnight but we certainly would see improving yields on the portfolios. Secondly, we are adding about a billion dollars of new assets in Japan every year so those assets going on the books at higher rates will also basically go directly to the bottom line.

Okay. And then with respect to Pru Securities. How many F's brokers did you contribute in that to roughly? Into the Wachovia JV?

About 4,000.

About 4,000.

If we look at that, you're now averaging 56,000 per broker in these retained legal costs. How do we get some comfort that, you know, this is just regular, you know, routine business? That strikes me as a pretty high number.

Well, it is. Because I don't think we said it is just simply regular routine. There were two parts to it. One deals with the I'll use it ,the completion of any and all arbitrations that are out there and that is likely to go up, at a point where they view people moving to another company and they want to talk to the last company which had the name Prudential on it. So you are going to see a spike in that area.

And number two, we have included in there some of the issues related to the market timing are also included in there so I would call it anything but routine, Colin. And as I said, it is hard for me to predict but we are managing it aggressively. We want to get rid of it as quickly as we can. It is just I don't have that kind of a crystal ball that can forecast it, but it will end at some point, and we will do it quickly, but routine is not a word I would use.

Colin, we expect the market timing to be a discrete event where we will settle and there will be whatever resolution ultimately affects us. And the ongoing client-broker types of arbitrations and settlements will run their course at some point. As Art said, we're not going to forecast how much and when.

Should I read into Art's comment, I want to be very careful at this, that you still think it going to get worse before it gets better referencing and I think quote that its still going to spike up.

No, I don't think you should read that into my comments.

Okay, thank you.

Thank you very much, Mr. Devine. And next we go to the line of Vanessa Wilson with Deutsche Bank. Please go ahead.

Thank you. Good morning. I want to talk a little bit about the spread in the retirement business and also in the annuities business, helped the comparison this quarter and I just wanted to get a feel for sort of the different sides of the equation. What is going on with the yield side and what kind of liability flexibility you have going forward?

This is on the annuity business, Vanessa?

On both annuities and retirement. The non-CIGNA retirement business.

Let me ask Eric to give you some of the numbers and then we can comment on it.

Well, let me give you the annuities numbers, Vanessa. I don't know that I have very good numbers on the retirement spreads to share with you today. But the annuity spread in dollar terms, was $39 million in the quarter which is the same as it was last quarter. Okay.

Um-h'm.

That was 2.10% in the quarter of which compares to 2.12% in the prior quarter, so that is also essentially flat, and the average crediting rate which includes the amortization of bonuses so it is a little bit inflated, but I don't know by exactly how much, was 4% on the quarter, so we still have some room to reduce the areas that is appropriate to do.

Okay.

And spreads and retirement went up about 45 basis points year-over-year.

Okay. So it sounds like I guess I -- I understood from your press release that there was an increase net interest spread on general account annuities. It sounds like it wasn't material at all.

The increase in general account annuities on a year-over-year basis was from $25 million in the second quarter of '03, to $39 million in the second quarter of '04 so that is a meaningful.

What Eric gave you earlier, Vanessa, was first quarter this year to second quarter. Sequential quarters. I think your question was year-over-year. Year-over-year it is a meaningful increase.

Right, but the sequential is interesting. It sounds like the sequential spread south 11 basis points. Is that right, Eric, 212 down to 201 is a sequential number.

212 to 210 - only 2 basis points.

Sorry. I'm sorry. I wrote the number down wrong.

I don't think that's a meaningful change. The average crediting rate went up by a basis point.

Okay. And then on the capital in corporate the $3.8 billion, I realize it has come down very quickly from the $6 billion. What should we think about in terms of that declining over time? How quickly and what is the limitation?

It is not 3.8. I'm sorry. It is 3.0. We will see that go down as we lever the company. The next impact on that item will be the continued buyback of shares and issuance of debt to achieve what we've called our market capital standard structure and that will be reflected in corporate and other.

And then the supplement it's 38-28 that there is some other piece in there that --

I have no idea what you are referring to.

On page 8.

I think what you may be referring to is the -- I'm just guessing. What page are you on?

Page 8, the allocated equity.

What page are you on?

Page 8.

8.

Bear with us a minute.

Please. Mark, as you are looking that up. I remember there were some I guess investments or some areas where the equity would be released over time.

The legacy investment.

We have released a substantial amount of that equity. We have to call you back with the exact number, but most of the what we set out to do with that has been done, and the remaining equity in there is principally associated with the asset tied to the over funded pension plan, and also items that we hold centrally related to things like furniture and fixtures.

The 3.8 would include, Vanessa, the required equity for corporate and other would be $3 billion, that is what we are referencing. The 3.8 is the actual equity in corporate and other, which would mean it's approximately $800 million of redundant equity.

Sorry. That was the -- I was talking about the recorded equity and not the actual. Sorry.

Okay. And so as we think about that segment that is -- that is --

Right.

That is reporting a loss over time and we think about to get that to a return, so the other businesses don't have to work so hard, is that possible or is that unrealistic.

Some of it is. We will have the pension asset in there, which will be $2 billion of it or so and that obviously does produce a return that we disclosed to you. We also have some other costs in there like furniture and fixtures and the like. There is some more we can do but there will be a level, especially around the pension asset that will keep it at a reasonably high number.

Thanks very much.

Next we go to the line of Tom Gallagher representing Credit Suisse First Boston. Please go ahead.

Just to start out, with the litigation expenses, I know you can't comment on when you think it will end. Art, in response to one question you mentioned that you don't expect it to spike. Can you say whether you think we have seen the high there or directionally speaking whether or not it is likely to come down?

No, you know, I can't comment on that. Nor would it be appropriate. As I said, I think we have given you fairly specific categories of what we are dealing with in terms of ongoing arbitration that I think can have a reasonable endpoint. And as Mark mentioned, there would be a point in time in which we probably undoubtedly have a settlement as it related to the market timing. I really don't want to go much beyond that.

Can you just remind us just in ballpark terms, how much of the expense has been arbitration versus market timing?

No, we have not broken that out at this point in time. As I said, we will combine the two and talk about our legal expenses on an ongoing basis there and provide you as much clarity as I possibly can, but recognize we have some events we still have to deal with.

Okay. Then just a follow-up question on the interest rate environment in Japan. Mark, I know you commented that your, I guess liability costs are essentially fixed meaning that as rates go up, the higher investment income falls to the bottom line. Does that suggest that as rates rise you're not adjusting pricing on new business? How quickly would you adjust pricing on new business? Thanks.

My introduction to that was within a decent range of the possibility of rates going up there won't be much liability sensitivity and we believe that. The crediting rates are still, you know, reasonably competitive with the current level of interest rates in the market. I can't tell you how high we think they would have to go before we start to look at that time. Some of it would depend on what the market does. But everybody is under water on spreads. I would not expect to see an aggressive reaction until an increase lasts for a while and companies get their heads above water again on the investment side.

Okay, thanks.

Our next question is from the line of Jeff Hopson with AG Edwards. Please go ahead.

Hi. A couple of questions. In the asset management segment you picked up $6 billion of wrap assets. Curious about the economics of that business going forward? And then in regard to the retirement flows, when we would expect to see some leveling out of any future new business versus any business that you are losing on the CIGNA side?

On the wrap assets that has been a very positive story for us and it is principally through the distribution through Wachovia securities, where we do manage the wrap platforms, the managed money platform in particular and that has been a very positive story. Sales have been good and the economics are in line with our expectations in terms of our various investment products. So while we had reported some decline in mutual fund sales the sales on the wrap side have been very, very positive to complement the sales of annuities through the Wachovia channel.

According to the supplement I thought there was an extra balance that you picked up though --

That was part of the contractual arrangement and it moved over effective July 1, and that was part of the deal where we basically manage all of the wrap accounts, and the final transfer occurred on July 1.

In those new assets, will they have good economics on them, or has that already been reflected somewhere else.

In phases as on our existing wrap accounts so no change in the pricing there. Yes, it will be positive to us.

Thank you.

On CIGNA, the retirement flows one they are very much in line with what we would expect. And if you look, I'll call it the old Prudential book, we had positive flows again in the second quarter in that business. There was some negative flows on the 'CIGNA' book but very much in line with what we had expected. We will be going through what is called, a novation period, over the next 6 months or so, transferring that on to our books. And at the moment we believe that those transfers will occur according to the plans we had in place at the time of the acquisition. We are feeling good at this point. Especially when you're in the middle of this kind of a transition, and very much in line from an economic point of view, for what we had planned when we did the acquisition.

Great. Thank you.

Thank you very much Mr. Hopson. Next in queue, we go to the line of Ed Spehar with Merrill Lynch. Please go ahead.

Good afternoon. A couple of questions. Could you talk about the revenue line in the international insurance excluding Gibraltar? And I'm just trying to understand if you look at the sequential change in revenues in that line it looks like it was down if I have the correct numbers here, 10% sequentially when in the last few years, it has been more like a business where sequentially there might be 0 to 3% kind of decline. I just was wondering is there something unusual in either the premium number or anywhere else. I guess it would have to be in the premium number. And then the final question is could you give us some idea of what type of sales growth you think is necessary at Gibraltar Life to maintain earnings at the current level let's say for the next five years.

Let me take the second one while folks are looking up what page you were referencing on the first one. I think what we would look for going forward on the Gibraltar side in order to have continued good earnings with some modest increase would be mid to high single digit type of sales growth. Again, we have been quite cautious in the acquisition, given the fact that it was a more traditional life insurance company than one that we had built on the life planner side. But A, we have seen very good increase in productivity on the life planners that and life advisors that we have, so the key would be our ability to continue to modestly grow the business, and sales will be in line with, as we modestly grow the life advisor business and I believe that those are the same types of expectations on earnings that one could expect going forward. We have a reasonable level of confidence in the stability of the business, we do need modest growth in order to maintain that.

In constant dollars the principal interest on first quarter to second quarter revenue was seasonality in Japan. The first quarter is traditionally high.

But I guess is -- when you think about the impact of currency year to year is there -- if I'm just looking in dollar terms from the income statement here is there really -- is there much influence from currency Q2 versus 1Q? I don't have the data. Doesn't seem like we have had that kind of a decline sequentially in prior years.

This is Eric. Let me take a stab at it. If you turn to page 29 of the QFS you get a yens denominated page that shows that for Japan ex-Gibraltar revenue is up 10% year-over-year on the second quarter, 10% year-over-year for the year-to-date.

Okay, thanks.

Our final question today comes from the line of Eric Berg with Lehman Brothers. Please go ahead.

Thanks very much. And good afternoon to everyone. Two questions. One, very similar to Ed's and one in the individual life insurance area. My question regarding Prudential of Japan is that I certainly heard the discussion about new sales, but why on a constant dollar or constant exchange rate basis? I'm referencing page 30 of the statistical supplement. Why would your revenue, premiums, charges and fees be up only 4% if you've had such strong planner growth and such strong sales? There is a piece I'm missing. And then I have a question just regarding your individual life business.

We answered that a moment ago Eric. You said it was up 10%.

I don't think so. I'm looking on page 30 and I calculate the premiums policy charges and I think what Eric was referencing was page 29, and I see that percentage change and I calculate the same one. But when you show on a constant exchange rate basis, premiums policy charges and fees excluding investment income, just your premiums policy changes and fees we are getting 4% growth there year-over-year excluding the impact of currency. Page 30.

Oh, I see. On a constant exchange rate basis. Is that what --

Yes, sir.

I don't think we an answer for you.

I don't know the answer.

Okay. Okay. We can circle back. My question -- that's fine. My question on the life side is I -- I know you have been working hard to have fewer but more productive agents. At this point, the two key revenue items -- premiums and policy charges and fees for traditional products and investment oriented products respectively, look pretty flat for the six months. Would you anticipate that sometime soon your individual life business would be showing growing revenues?

I think there is a couple of things in there. One is obviously you have got a little mix of business in there. The so-called extended term which will cause it to change a little bit or if you will, not show the necessary growth in different market and interest rate environments. But I think the answer to the question is, over time we would certainly like to see growth. Which is why we have obviously invested in our agency system, and also significantly invested in third-party where in the past we had not been significant players. But I have also said that our principal drive will be the returns we produce in the business. That this had traditionally been, frankly a very low return on equity business. If you look at the business now, we certainly are at or near our targeted return. Which is the low double digits and that will continue to be our over riding criteria. Over time as we see potential changes in the marketplace we would look for opportunities to grow, but our growth rate is I think more constrained on our own challenge or our own desire to maintain relatively high rates of return at this point in time, as measured by return on equity and that is the driver, not the topline growth. As opposed to some of the other businesses where we have made recent investments or acquisitions.

Thank you, Art.

Look we will get back to you on the other line, because it doesn't look consistent with some of the other data. I apologize for that Eric. We'll gets an answer out on it.

Thank you very much, Mr. Berg. With that, Mr. Ryan and our host panel, I will turn the call back to you for your closing remarks.

We do not have any closing remarks. We thank you very, very much for your time and attention, and look forward to talking to you at the end of the third quarter. Have a great day, thank you.

Ladies and gentlemen, your host is making today's conference available for digitized replays for one week, it starts at 4:15 pm eastern August 4th through 11:59 pm August the 11th. Dial (800) 475-6701 and enter today's conference ID of 737409. Internationally please dial (320) 365-3844 with the conference ID of 737409. And that does conclude our earnings conference 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.