保德信金融集團 (PRU) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by. We appreciate your patience today and good morning, good afternoon or good evening. Welcome to Prudential's fourth quarter and full year 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 your questions, and those instructions will be given at that time. Just as a note, should you require any assistance during the call, you may reach an AT&T operator by pressing star then zero on your phone keypad. As a reminder, today's call is being recorded, and with that being said, let's get right to this quarter's agenda. Here with our opening remarks is Prudential's head of Investor Relations, Mr. Eric Durant. Please go ahead, sir.

Thank you, Brent. Good morning and thank you for joining our call. We know that many of you are even more busy than usual today, so we're going to do our best to stay on schedule. Our presenters this morning are Art Ryan, Prudential's CEO, and Mark Grier, Vice Chair responsible for executive-- for enterprise financial management. And for the Q and A, Art and Mark will be joined by Rich Carbone, Chief Financial Officer. Peter Sayer, Controller, and Dennis Sullivan, Principal Accounting Officer.

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 fourth quarter 2004, which can be found on our website at www.investor.Prudential.com. 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 inure 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 fourth quarter 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 web site. With that, here's Art Ryan.

Thank you, Eric. Mark will be giving you a review of fourth quarter results, so I'll focus on the full year, as well as talk a little bit about the future. Our earnings per share for the year increased by 43 percent, based on after-tax adjusted operating income. Just as importantly, we believe we have made substantial progress toward our goal over 12 percent ROE, which we expect to achieve during 2005. For all of 2004, our return on equity was 10.2 percent, compared to 7.6 percent in 2003, again, based on adjusted operating income. These results reflect actions we've taken in our first three years as a public company to strengthen our core businesses.

Two acquisitions have enhanced our position in the broad savings and retirement market. American Skandia, which we acquired in May of 2003, has fulfilled our expectations from the beginning. During the fourth quarter, we reached an important milestone when the systems integration of our annuity business was successfully completed. Now we have two strong brands in the annuity market, but one business. Integration of the retirement business we acquired from CIGNA last April is on schedule. Through December we had completed approximately 40 percent of all integration milestones and we expect integration to be complete by the end of 2005. While it is still early in the integration process, the novation process is well underway and our retention of business has been more favorable than expected.

Our domestic protection businesses, individual life and group insurance, each contributed to our earnings improvement last year. Individual life has made great strides in improving the efficiency and quality of our career agency network. In group insurance, effective risk selection has contributed to improving results in our life block. In group disability, we feel that our enhancement of claims management capabilities last year will contribute to results going forward.

Our international division also continues to perform well. Gibraltar and Prudential's Life Plan of businesses achieved 9 percent and 15 percent growth in adjusted operating income for the entire year. In addition, our international investments business benefited from the acquisition of Hyundai Securities, which closed in February of last year. We were able to finance most of this acquisition by redeploying capital from our international insurance operations, capital that was earning relatively low returns. So, the acquisition was immediately accretive to both return on equity and earnings per share.

As you know and have heard from me many many times, capital management has been central our plan to deliver our 12 percent return on equity. We were able to acquire American Skandia, CIGNA Retirement and Hyundai by reinvesting capital that was under-employed. In addition we have used share repurchases to manage our capital. Last year we repurchased $1.5 billion of common stock and a Board authorization to purchase up to 1.5 billion is in effect for 2005. We believe that repurchases of roughly $375 million per quarter is a realistic base case for Prudential at this time.

Turning now to our earnings guidance for 2005, we continue to believe that Prudential Financial will achieve common stock earnings per share in the range of $4.20 to $4.40 for the year 2005, based on adjusted operating income. This guidance assumes appreciation in the S&P 500 index of 8 percent for the year. We will give all of our efforts to deliver our 12 percent return on objective -- excuse me our 12 percent ROE objective in 2005.

So what happens next? We believe we should be able to deliver attractive longer term returns for shareholders as a result of effective business execution, and equally as important, our particular mix of businesses. We believe that Prudential has a superior mix of businesses between domestic and international, between insurance and investment businesses, and between captive and third-party distribution channels. This diversity is reflected in the balance among the risks we manage and profit from, including exposure to mortality, interest rate and equity market risk. Among our markets we believe we have two substantial growth opportunities.

First, there is no question that the international marketplace is offering faster growth opportunities today than the U.S. market. Our international operations are well positioned to produce double-digit growth in earnings and to maintain their returns on capital as they grow. Within the United States, we are also positioned in the faster growing retirement and savings market through our annuities, retirement and asset management businesses. Our individual life and group insurance businesses, although relatively mature, are competitive and sound.

In terms of distribution, we continue to evolve towards a multichannel strategy. In the United States, where we had a relatively late start in developing third-party capabilities, we've made important strides and are headed towards an appropriate mix of captive and third-party. When I talk about multichannel strategy, I'm not simply talking about third-party in the United States. If you look outside the United States, you see our life plan of business has been successful pursuing a distribution model that is virtually unique in the markets. On the other hand, we are also enjoying good success in Japan with Gibraltar, where we've welded some of the features that have made our Life Plan distribution channels successful to the chassis of a traditional Japanese life distribution model. To cite a third example our international investments in Korea, the former Hyundai, emphasizes proprietary distribution to a network of about 90 branches throughout the country.

To sum up, looking ahead to the 2005 through 2007 period, we expect to achieve ROEs in the range of 12 to 14 percent, double-digit average annual growth in both adjusted operating income and earnings per share, and reasonably consistent results due to the diversity within our portfolio of businesses. We expect strong parent company cash flow, which would facilitate our capital management activities, and now that our credit rating has been restored to AA, we plan to keep it. Now let me turn it over to Mark.

Thanks, Art. Hello, everyone. Thanks for joining us this morning, and as Art said, I'm going to emphasize fourth quarter results in my discussion. We reported common stock earnings per share for the financial services businesses of $0.96 for the fourth quarter, compared to $0.46 per share for the year-ago quarter -- I'm sorry $0.64 per share for the year-ago quarter, an increase of 50 percent. These results are based on after-tax adjusted operating income, which includes the absorption of $0.09 per share of transition costs relating to the combination of our retail securities brokerage business with Wachovia, and another $0.03 per share of transition costs from our acquisition of CIGNA's retirement business.

The list of major unusual items affecting the quarter's results is not very long. We had a favorable [DAC] unlocking in the annuity business, which contributed about $0.06 per share. And we had a slightly lower effective tax rate in the quarter than our expected 30 percent rate, which contributed about another $0.02 per share. Other one-off items, combined with the benefit of better mortality in individual and group life, would be about a wash.

The headlines of our EPS increase for the quarter are the following -- earnings growth in our retirement business, driven by a contribution from the CIGNA retirement acquisition, in line with our initial expectations; second, more favorable claims experience compared to a year ago in both individual and group life; and finally, continued strong results from our international businesses, with a benefit from our acquisition of Hyundai Securities in early 2004.

Turning to the businesses, I'll start with the insurance division. Adjusted operating income from our individual life insurance business was $104 million for the current quarter, up $41 million from the year-ago quarter. The increase was essentially driven by improved mortality experience, compared to a year ago when we had an unfavorable fluctuation. Current quarter results include an $11 million benefit from mortgage prepayment income, but also absorbed greater expenses associated with cost reduction efforts that roughly offset this benefit in the comparison to a year ago. Sales, excluding [COLI] amounted to $106 million in the current quarter, compared to $110 million a year ago, which included about $18 million from two large universal life cases sold in the third-party distribution channel.

We finished the year with just under 3,700 Prudential agents, a decline of about 600 from a year earlier. We are continuing to emphasize cost-effectiveness in our own distribution channel through selective recruiting and have announced measures to increase cost sharing by our agents, consistent with industry standards. As part of this strategy, which resulted in an increase of agent productivity from 40,000 in 2002 to 42,000 in 2004, we've increased the minimum production requirement to $26,000 for first year commission as of January 1, 2005.

At the same time, we have been growing third-party distribution, which registered a 40 percent sales increase for the year. Our annuity business reported adjusted operating income of $139 million in the fourth quarter, compared to $96 million a year ago. Current quarter results include a $44 million favorable DAC unlocking, reflecting strong persistency in recent market performance which both have a favorable impact on future fees. The annuity business also absorbed costs in the current quarter of about $6 million from the wrap-up of the American Skandia integration.

Results for the year-ago quarter included a favorable DAC unlocking of $39 million and a reserve strengthening that was roughly offsetting. Stripping out these items, annuity results would be $101 million for the current quarter versus $93 million a year ago, reflecting growth in fees and increased investment income spreads. Our gross annuity sales for the quarter were $1.4 billion, down from $1.6 billion a year ago. This downtick in sales reflected our focus on the integration of the Prudential and American Skandia administrative platforms, which in effect caused us to suspend the ongoing process of product retooling and enhancement.

Now that the integration is complete, we are on track to roll out two major new product features shortly -- our lifetime five guaranteed withdrawal benefit, which combines a lifetime income guarantee with the flexibility and control of principal offered by GMWB benefits and a highest daily value death benefit product. The group insurance segment reported adjusted operated income of $54 million in the current quarter, up $7 million from the year ago quarter. Life claims experience was favorable in the current quarter. And in disability, where we recently enhanced our claims processing capability, the current quarter experience improved from a year ago as well.

The benefit of improved claims experience in both life and disability was partly offset by costs we incurred during the current quarter relating to legal and regulatory matters. Turning to the investment division, in total, the business we acquired from CIGNA contributed $57 million to the division's adjusted operating income for the fourth quarter. The integration of the business remains on track with no major surprises, and business retention remains consistent with our expectations. Since the acquisition brought us about $28 billion of proprietary assets to be managed by the asset management segment, the acquisition is contributing to the adjusted operating income we report for both retirement and asset management.

The retirement segment reported adjusted operating income of $96 million for the fourth quarter, including a $46 million contribution from the CIGNA business. The segment's original retirement business reported adjusted operating income of $50 million for the first quarter, compared to $55 million a year ago when our guaranteed products business benefited from $9 million of prepayment income on investments. The asset management segment had adjusted operating income of $90 million in the current quarter, up $22 million from the year-ago quarter. The segment's current quarter results included the remaining $11 million contribution from the CIGNA business and benefited from increased mortgage securitization activity.

The financial advisory segment had a loss of $75 million in the current quarter, as we continued to absorb retained costs and and transition costs related to our retail securities brokerage venture with a Wachovia. Our 38 percent share of the results of Wachovia Securities resulted in pretax income of $54 million before transition costs. This compares to $41 million a year ago. The segment's results, absorbed expenses of $70 million in the quarter from obligations and costs we retained in connection with the contributed businesses, primarily from retained litigation and regulatory matters, as well as $67 million of transition costs. With the transition process nearing completion, we expect future results to benefit, as cost savings emerge within the venture and run rate legal costs diminish. After absorbing this total of $137 million in these retained and transition costs, the retail securities brokerage operations reported a loss of $83 million for the quarter. The segment reported a $67 million loss in the year-ago quarter.

Turning now to the international insurance and investments division, the international insurance segment reported adjusted operating income of $219 million for the current quarter, compared to $222 million a year ago. The segment's results included adjusted operating income of $93 million from Gibraltar Life in the current quarter, unchanged from a year ago. Gibraltar's results benefited by $4 million in the comparison from a strengthening yen, but absorbed higher expenses in the current quarter relating to a cost reduction program. Sales from Gibraltar Life, based on annualized premiums in constant dollars, were $66 million in the current quarter, compared to $70 million in the year-ago quarter. This decline reflected a drop in the sales of limited payment life insurance business. We have been transitioning Gibraltar's product portfolio to place greater emphasis on policies with a larger protection element and a smaller savings element, generally meaning lower premiums but also higher margins.

Accordingly, we cut crediting rates on endowment business during the third quarter of 2003, which negatively affected the sales comparison earlier in the year. Similarly, in late 2003 we reduced commissions on limited payment life products. Single premium and limited payment business contributed just $8 million to Gibraltar's current quarter sales, compared to $18 million a year ago. This shift in product mix is allowing us to add new business with margins comparable to, and in some cases greater than, the older business running off, as the $30 billion block we acquired ages. Gibraltar's life advisor count increased by about 200 in the fourth quarter. During the third quarter we experienced some expected attrition of lower producers, as we completed our phase-in of minimum production requirements. With that process complete, we increased our recruiting in the fourth quarter and ended the year with just under 5,000 life advisors in Gibraltar, our first annual increase since the acquisition.

Our life planner businesses, the international insurance operations other than Gibraltar Life contributed $126 million of adjusted operating income in the current quarter, compared to $129 million in the year ago quarter. These operations benefited from continued business growth, with insurance revenues for the quarter up 13 percent on a constant exchange rate basis from a year ago, accompanied by a modest benefit of about $4 million from foreign currency fluctuations. However, current quarter results included an $11 million charge to true-up investment income in our Japanese operations, based on an analysis in the quarter, and the level of policy benefits and expenses was less favorable than a year ago.

On a constant dollar basis, life planner sales in Japan based on annualized premiums were $125 million in the current quarter, up 12 percent from $112 million a year ago. We ended the year with 2,550 life planners in Japan, up 9 percent from a year ago. Also on a constant dollar basis, sales from other countries were $66 million in the quarter, compared to $64 million a year ago. Our sales outside of Japan mainly reflect our operations in Korea, where we continue to feel some negative impact on sales from the economic downturn in that country and the redeployment of many of our best life planners into agency management in connection with our expansion of the agency system in 2004.

The international investments segment reported the adjusted operating income of $34 million for the quarter, compared to a $31 million loss a year ago when we recorded a $34 million charge to write off an investment related receivable in Korea. Our acquisition of Hyundai Securities in early 2004 contributed $18 million of adjusted operating income in the fourth quarter, with results continuing in line with our expectations The contributions from the Hyundai business was accompanied by more favorable results from the segment's other operations.

Turning now to corporate and other, corporate and other operations reported adjusted operating income of $18 million for the fourth quarter, compared to $42 million a year ago. We incurred expenses of $26 million in the current quarter for supplemental benefits to policy holders. This charge resulted from a decrease in the policyholder dividend scale for our older participating business, which triggered obligations we retained in corporate and other under previous contractual settlements related to sales practices in the 1980s and early 1990s.

Now let me comment on net income. Net income for the financial services businesses was $317 million for the fourth quarter, compared to $481 million in the year -ago quarter. Realized investment losses before taxes were $158 million in the current quarter after related adjustments. The reported realized loss came from a downward fluctuation in the market value of the hedging instruments we use to cover our foreign currency risk, reflecting the strengthening yen. Impairments and credit related loss were insignificant in the quarter, amounting to just $39 million.

Our gross unrealized losses on fixed maturities stood at $532 million at the end of the year, almost entirely on investment grade securities and essentially interest rate related. Non-investment grade fixed maturities comprised just 6 percent of the financial service's businesses fixed maturity portfolio at the end of the year. Net income also included a $57 million loss from divested businesses before taxes, mainly from a goodwill write-off related to our exit from the private client wealth management business in Europe and Asia, as we announced last week.

And briefly on the closed block, the results of the closed block business are associated with our Class B stock. The closed block business reported net income of $261 million for the current quarter, compared to $94 million in the year-ago quarter. We measure results for the closed block business only based on GAAP, rather than adjusted operating income. And the increase over last year reflects the reduction in the dividend scale and improved investment performance.

To wrap up, I'd like to sum up where we came out for the year 2004. Our after-tax adjusted operating income reached $3.61 per common share, registering a 43 percent increase over the $2.53 per share earnings in 2003 and translating to an after-tax ROE of 10 percent. Our full year results for 2004 absorbed transition costs of $0.33 per share from the Wachovia and CIGNA transactions, as well as about $0.30 per share of costs from obligations we retained relating to the retail securities brokerage operation. The headlines in our 43 percent increase are the benefit of the first nine months of results from our acquisition of CIGNA's retirement business, a full year's contribution from the American Skandia acquisition, improved mortality results in our domestic insurance businesses, and continued strong performance in our international businesses. Thank you for your interest in Prudential, and we look forward to hearing your questions.

[OPERATOR INSTRUCTIONS] And first in queue is Jason Zucker with Fox-Pitt Kelton.

Thanks and good morning. I wanted to broach the topic of M & A and a couple of things that I wanted to list off. But first, I was hoping you could comment as to whether you either bid or were interested in the Traveler's property. But then aside from that, a bit bigger picture. Do you think the deal was a one-off transaction because we had a willing seller or do you think it's going to prove to be the beginning of an accelerating M & A environment? And then lastly, with respect to yourself, you didn't mention in your four points looking ahead -- ROE earnings growth consistency and cash flow -- you didn't mention acquisitions which has been a key to the strategy, and I wonder how that fits into your thinking beyond 2005?

Okay. This is Art Ryan. Thank you for the question. First, we did not view Traveler's Life & Annuity as a good fit for Prudential and therefore did not bid on the property. In terms of the -- is this a market trend, that's hard for me to say. I mean, I think there has been enormous discussion relative to consolidation and financial services. But in this case, I think it's the other direction, namely that CitiGroup decided that they had other opportunities for their capital and did not want to deploy it into -- into the life insurance business. So I'm not sure there are other occasions where that would necessarily set about a trend. So I think consolidation is always part of the game plan, but I don't think it necessarily signaled any trend at this point in time.

Lastly, it was acquisitions are always part of our capital management plans. We believe that we have a good discipline as well as a good process as it relates to acquisitions. It always includes a willing seller and a good price. And so I do see it as part of our activities, and it complements our organic growth. I don't think you want to do one or the other. We want to continue to do both, but the opportunities must present themselves in the market, and as they do, we will respond accordingly.

And do you feel like you're in a position today to be able to react to something like that, given that you do have some integrations going on?

We do because the American Skandia one is complete. We're about, as I mentioned, about 40 percent into the retirement. We would have to be selective in doing that where we have an acquisition that we have not fully integrated. I think that's a very fair comment. You don't want to jeopardize one just at the expense of doing another, but across all of our businesses we constantly look, and that would be a factor along with the factor of price availability and relative importance to us. So I would call it a factor, not an inhibiting factor, but one that would be included in our analysis.

Great. Thank you very much.

And thank you, Mr. Zucker. And next, representing Bear Stearns, we go to the line of Saul Martinez, please go ahead.

Good morning. A couple of questions, just to stay on the M & A trend, just speaking of the Met Traveler's deal specifically, does Pru see any opportunities there in terms of being able to capitalize on some of the displacement that may occur on the aftermath of that deal? Secondly, I wanted to go into the CIGNA retirement business a little bit and just ask you, have you changed your view at all about how much this -- this business can contribute to earnings?

Correct me if I'm wrong, I think at the time of the transaction you had mentioned contribution of $150 million to earnings. But without going into too many of the numbers it seems like CIGNA's contribution to both the retirement and the asset management earnings is pretty strong at this stage, given where you are in the integration process. So I guess my question, is it fair to say that there's upside of the $150 million target? And if so, is that embed in your 420 to 440 guidance for next year?

Let me answer the first question. Obviously, it's in the very early days of the announcement of MetLife's acquisition, but -- so no, I don't anticipate any displacement activities occurring. I believe that, you know, we have established our strategy and established the channels in which we will execute the balance between our insurance, our investment and international is what we'll execute against and not look to take advantage of any opportunities related to someone else making an acquisition. We make too many acquisitions ourselves to -- to want those types of things to become drivers of what people do. I'm going to ask Eric to talk about your 150 number.

Saul, it 's a little bit a case of right church, wrong pew. The $150 million number was the expected accretion in 2005, so that's after our financing cost. It would compare to a fourth quarter 2004 number of $33 million, but bear in mind, that's after taxes.

That $33 million number includes 21 million pretax of integration expenses which is a relatively high number. Then after everything is said and done and the integration is complete and the novation process runs its course, we indicated and still believe that this business will produce an ROE in the range of 12 to 13 percent on our original purchase price of $2.1 billion. So that would suggest 250 to $275 million after taxes. That's before financing costs.

No, I got you. And the 33 that you gave for the quarter, that's also after financing costs and that's also after the opport-- or the finance-- it's also after restructuring costs as well, which should be lower going into next year, if I'm not mistaken.

The $33 million is $46 million of AOI in the retirement segment , plus $11 million of AOI in the asset management segment, minus expected -- or estimated financing costs of $10 million. So you're at $47 million, tax-affected at 30 percent, the after-tax number is 33 million. But the $57 million we gave you before financing costs is inclusive of $21 million of integration expenses.

Got you. Okay. Well, it seems if you annualize the 33, which already has the costs, its -- you're close to the 150.

If you annualize the 33, you're at $132 million.

Yes, and you're 40 percent of the way done, so okay maybe we can go into the numbers off line a little bit more, but thanks for the detail.

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

Great, thank you. Two questions, first on Prudential of Japan, the number of policies in force were up 44 percent, while the face amount of policies were up just 16 percent. Does that mean your life planners are beginning to perhaps shift their focus away from the outflow market at all or are there other factors explaining the big jump in the number of policies in force? Second, with respect to market timing, Hartford said that they've been making some progress with the regulators. Possible to get an update on whether you've also seen any progress?

Let me take the second one first. In terms of the market timing, we continue to -- to work effectively with the regulators. And I really don't have very much new to report. And basically the pace at which things occur is really under their discretion and their control. So we continue to make progress, but at this point there's nothing really new to report. On the policy count in Japan, that really deals with the sale of some -- of a larger than normal number of term policies, if I'm not mistaken. Do you want to add to that?

Yes, Nigel, the mix there between policy count and premium dollars does reflect the sale in more term insurance products. And if you recall from our investor day discussions of this topic, the margins on term insurance for us there are very attractive. So you do see a difference, but it's a good difference.

There's another thing that we should mention and that is that we closed the [AOBA] deal, and AOBA is included in the number of policies at the end of the year. It's not yet included in the earnings. There's a two-month lag for reporting purposes.

Okay, and how many policies were there? Do you have the number?

I don't have the number, but most of the increase from the third quarter to the fourth quarter would reflect the impact of AOBA.

Okay, that explains it. Great, thank you.

And thank you very much, Mr. Dally. The next participant in queue is Colin Devine with Smith Barney. Please go ahead.

Good morning, gentlemen. A couple questions. First, could you talk about agent recruiting trends at POJ and POK in Taiwan? Secondly, if you could talk -- I thought the group life and group disability sales seemed a little soft this quarter. Can you just talk about what's going on in that market? Has there been any sort of, I guess, impact from the attorney general investigations into the lengths of time in the RFP process?

Are we going to see sales perhaps slow down as we head through '05 and then perhaps that applies also to your 401(k) business. And then lastly, in something that I thought was a great quarter and I hate to nit, but can we talk a little bit about your mutual fund businesses? Your assets under management there are down frankly half from what they were a few years ago. And I appreciate part of that's markets, some of it's sale per securities, but you've also had an acquisition in there. What's going on with that business, because flows remain, you know, extremely negative?

Okay. Let me try them in a somewhat different order. First, let me talk about group life. We have always booked the sales in the quarter in which the deal is effective, not necessarily when it is sold. I don't think that's necessarily the practice of all companies, and that might reflect somewhat on some competitors' fourth quarters versus ours. The process for selecting business is slowing down. I think that's a rather normal reaction in the marketplace, when it's happened. But the bottom line is I'm very confident on our sales outlook for 2005 in the group life business, and I believe that we will be quite successful in meeting our objectives there.

In terms of recruiting, recruiting is going well in those markets. We continue to look at a double- digit growth rate in the life planner. As was mentioned in Mark's presentation, in Korea we shifted a fair number of our most senior life planners to open new agencies throughout Korea. But if I'm not mistaken the growth in POJ was 9 percent. So, I'm -- I'm cautiously optimistic that we will continue to meet our growth plans, even as we get much larger. And that will translate into the double-digit growth that we have talked about. Taiwan had a particularly good year in 2004, and we're looking for it to continue to be strong in 2005. The weakest of the markets in Asia was Korea, and that was more driven by the economy and in our own case by the opening of lots of new branches in that case.

In terms of the mutual fund business, you know, a lot of movement has occurred between ourselves and Wachovia Securities, as it looks in the joint venture in money market a accounts which are recorded in the joint venture, versus managed accounts which are included in our business. The mutual fund business, itself, the net outflows we saw in the fourth quarter were not unusual, if you extract the other items I just talked about. This, of course, was offset by extraordinary growth in the institutional side of the business, where we saw net inflows of -- not into mutual funds obviously -- but in asset management that were quite high.

And we still have your line open Mr. Devine.

That's fine. Thank you.

Okay. Well, you're very welcome, sir. Thank you. And our next question comes from the line of Ed Spehar with Merrill Lynch. Please go ahead.

Thank you. Good morning. I was wondering you could give us some sense of the retained liabilities that you have for the securities broker. What has been the total expenses, just roughly to date, for any of the legal or regulatory issues that you have that could be subject to some sort of settlement? Is there any way to give us a number? I think you have the 227 number and whatever it was for the full year. If we look back, is there a number we can get?

Ed, let me make a couple of comments just to clarify what's in here as we've discussed before. There are two sort of fundamental parts. One is the sort of run rate impact of broker/client disputes that are flowing through the system that are still on our tickets.

This relates to issues that arose while we were managing Pru Securities and represents part of what we recognize on this line item. And the second part, as we've mentioned, is the recognition of the market timing impact on us. I can't give you a specific number that you can tie back to everything that's going on here. There are moving parts in both of those buckets, but obviously you can add up the total for the year and Eric probably has it.

Well, the total for this year is 227, as you mentioned, and the total since the combination was effected is $334 million.

Okay, that's very helpful. And then also, on the Wachovia JV, is there any way to -- to tell us what the expense saves were that were -- that were in the fourth quarter number versus what the ultimate expense saves that they've talked about would be on a quarterly basis?

You know, I think -- I really think that that's a question you ought to ask Wachovia, and then take 38 percent of it to get our share. Wachovia's been very consistent in saying that the total expense savings to be achieved are $365 million, of which our pretax share would be $140 million roughly. And a small part of that was already included in fourth quarter results.

Okay. And then just finally, on the CIGNA acquisition, same question in terms of expense saves in the fourth quarter versus the ultimate expense save number on a quarterly basis.

Well, I'll take that one too. The -- the overall expense save in the CIGNA deal is $110 million, but about 30 to 40 percent of that represents old CIGNA parent company overhead that was allocated to the CIGNA retirement business when CIGNA owned it. Obviously, CIGNA can't do that anymore because they don't own the business anymore. So that expense went away immediately when the deal closed. Virtually all of the balance add won't really occur until the integration is complete, and so that's going to be a 2006 benefit as opposed to a 2005 benefit.

Okay. Then -- I'm sorry to follow up here, but if you -- if the ultimate target was 12 to 13 percent ROE pre-financing costs on 2.1 billion, and you said that was 250 to 275. Right?

Right.

The -- the earnings this quarter were 57 million pretax, plus the 21 million pretax transition, right? Is that correct?

Well, then you've got to add the asset management --

No it's in there.

Okay. So that's 57 and 21. And so after tax that's 55 -- $55 million. So that's -- that's $218 million, correct, like on an annual basis?

I'm not --

Well, I guess I'm just trying to figure out, I mean with the expense saves then, it still seems like you're already at a level where, you know, with the expense saves the ultimate number is more like 300 million

Well, remember that we've told you from the very beginning that we did expect to lose some business as we went through this -- this integration. We did expect shock lapses to continue at least through the end of this year and perhaps even into early 2006. We also effected some -- expected some adverse effect on our marketing efforts as we went through the integration. So if you go back and you look at the original presentation that we made when we announced this deal, I think you can reverse-engineer it and you'll see that the expected revenue when we reached steady state is only back up to where it was at CIGNA at 2002.

Okay.

Long answer, but --

All right. That's very helpful. Thank you.

Thank you very much, sir. Representing Sanford Bernstein, our next question comes from the line of Suneet Kamath.

Thank you. Just two questions. First, on the national business, I'm just looking at long-term interest rates in Japan. It looks like we're down below 2 percent again. Have you seen any increased opportunities in terms of being able to acquire blocks of business in Japan? And then second, on the corporate equity or the equity attributed that's sitting in the corporate segment of the 4.6 billion, can you just remind me where you expect that to be sort of at the end of the year? Is that where the 1.5 billion of share buybacks is going to come out of? And then any progress on the legacy assets and the related capital requirements that fit in that line? Thanks.

You're right on the -- in Japan, there's no question that there's -- it's been a bumpy road for their recovery. I think there are some positive aspects, but you're correct in terms of where the interest rates are. Clearly we had an opportunity at the end of last year when we acquired AOBA in terms of adding to our business in Japan. I'm not sure that there are others who have properties there and how and where they want to go with them, but we will always look for opportunities because having both businesses there, we have opportunities for consolidation. But again, it will reflect more on other foreign owners and their appetite for continuing to build and invest in Japan that will drive that decision. In terms of the 4.6 billion, the largest single number in there is the pension asset, if I'm not mistaken.

Absolutely.

Go ahead, Mark.

Yes, the largest single chunk of that is the pension asset. And as we increase leverage that required equity or equity held in corporate and other, which is sort of a residual number, will be decreasing.

So it's fair to think that they may go down by the 1.5 billion that you're buying back this year? Is that --

There are a few more moving parts than that. It will be trending lower as we increase leverage.

I wish it were that simple, Suneet.

Okay, that's fine. Thanks.

You have a question now in queue from the line of Tom Gallagher with Credit Suisse First Boston. Please go ahead.

Morning. Two questions. First is, Mark, you had mentioned that on Gibraltar that new margins are comparable to, or in some cases better than, the in-force ROE. And my recollection is the in-force ROE here is 35. Am I -- is that not a good apples-to-apples comparison or how should we think about that?

That's not quite a good apples-to-apples comparison. There's been some aggressive capital management within Gibraltar and we're doing a little better on the way the total business looks. I'm not sure I'd be thinking quite that high on new margins.

Okay. Would it -- can you give a little quantification of where we should be thinking?

No.

No. North of 20?

The very -- the very high return at -- at Gibraltar reflects the intrinsic profitability of the business, as well as the deal we did when we bought it. And I think it's fair to say that a lot of that 35 percent reflects the latter, rather than the former. So it really isn't realistic to think that we can write business today that will produce a 35 percent ROE. We wish we could, but that just isn't realistic.

Okay, that's fine. The next question is, are you still considering taking on some more investment risk in the Japanese portfolio? I know at the investor day there was some discussion there, and I'm just -- and I looked at the net investment income yield in Japan, and I think it actually went down slightly. So I guess it's fair to assume it hasn't happened yet. So I guess the question is, should we expect something on that in '05 or is that something that's maybe likely further out?

Well, the answer is we're still on the same track that we were on when it was discussed on investor day. We do view the opportunity to be more aggressive on the asset side of Japan, particularly as an earnings opportunity for us. It moves kind of slowly. There is a lot of money to deal with in terms of investments. and we're being careful about looking for the right options. But we will continue to focus on improving those yields there. I don't want to get more specific than that, but I guess to directly answer your question, we should see some of it in '05. It won't all be further out.

You know, one of the reasons you'll see a lower yield in Japan, Tom, is that true-up that we had at Prudential of Japan in the fourth quarter of $10 million. And the impact of that on the yield calculation is four times the amount in the P & L

Okay, got you. And then just one last follow-up. I guess just looking at the non-Japanese insurance business, earnings were down. Anything unusual going on there in the 4Q?

Well, there was something unusual in the 4Q a year ago. We -- we had the -- I call it a -- a DAK recapitalization. We had a $10 million increase in our DAK balance sheet item, which behaves financially like a favorable unlocking. And that was in Korea, so that's really what's driving that decrease in the life planner business other, than Japan.

Okay. I guess even just looking at quarterly trends, it looks low versus kind of the last four or five quarters.

The other thing that you have in there is you have some expenses associated with the expansion of the agency system in Korea.

Okay. Thanks.

And thank you very much, Mr. Gallagher. And next in queue is Andrew Kligerman with UBS Securities. Please go ahead.

Thank you and almost good afternoon. My first question, could you just state what your estimated excess capital is at this time and how much cash flow -- free cash flow -- you'll likely generate in '05?

We'll let Eric answer that so we make sure that we always give the same answer.

Well you know, first I have to admonish you not to do what I'm about to do, which is which is to add up untapped borrowing capacity and excess capital. But if you do that, if you add the untapped borrowing capacity, again solving for the amount we have left if we want to stay beneath 20 percent debt-to-capital is $1.4 billion. And the total of that and the excess capital in the business is it's still between 2.5 billion and 3. Cash flow, don't want to be too specific. We say it's in excess of $1 billion a year.

Okay. And then, it's been hit on during the course of this call, you've got over $330 million in litigation reserves now. What should we be thinking about? You just took another $70 million charge in the financial advisory unit. Should we be expecting further litigation reserving into '05 or do you have a pretty big war chest there?

Okay. Let me start on it nd then it'll let Mark. First, go back to Mark's comment that there are two items in there. One , they deal with legacy costs which would be arbitration cases. So they're, I think, adding it up and assuming that it's a reserve would not be appropriate.

Okay

Part of it is just ongoing arbitration cases, for which we have responsibility through the date of the joint venture. And as we have said, we would expect that to slow down and continue to slow down. In terms of other activities around market timing and reserves and related matters, again we cannot predict or forecast how that is going to occur. But we certainly would expect to see a continued slowdown throughout 2005 in that arena as well.

Okay. I think that's fair. Slowdown is probably the best way to state it. And then the last question in the group operations, I finally got the group disability benefits ratio down to 92.6, down from about a 95, 96. To what do you attribute the improvement in the benefits ratio, and have you finally stabilized it?

Well, we've talked over the past several calls about improving our claims management capabilities, particularly opening a new claims management center . And I think we're seeing the impact of those initiatives finally flowing through the income statement. And we do believe that we can do better. I'm not going to give you a specific quantitative target , but we do think there is still some room for improvement.

Great. Thanks a lot.

Representing Deutsche Bank, our next question comes from the line of Vanessa Wilson. Please go ahead, ma'am.

Thank you. Could you talk a little bit about how sales have gone with the Wachovia joint venture? As those distributors have gone from being proprietary distributors for you to being really third-party, have things worked out according to what you would have expected?

This is Art Ryan. Good morning, Vanessa. Interestingly, of course even before the joint venture there was open architecture, not only in Prudential Securities and others, but I think particularly in Prudential Securities. So I don't think we would have viewed it as a, quote, proprietary distributor. We owned them, obviously. But more specifically, there were three principal products that we look at.

The first is in terms of annuities, our annuity sales through the Wachovia channel have continued to be very good. And in fact, if you saw the uptick in fixed annuities, that was principally due to the joint venture, though much of the sales occurred through the bank channels. So that has gone well. In the wrap account area, sales have continued to be strong in going forward. And in relation to the earlier comment on mutual funds, they've been somewhat neutral to negative. So that would be the result. So we're quite pleased in terms of the overall results, but that's how it would look on a product-by-product basis.

Thank you.

And thank you very much, Ms. Wilson. And next, representing AG Edwards, we have a question from Jeff Hobson. Please go ahead.

Yeah. Two quick questions here. On the international investments, you mentioned Hyundai and then the other and the improvement there. Curious if you think that other improvement is sustainable? And then on the asset management side in the U.S., what was the bottom line for actual -- the securitizations?

On the international investment business, the answer is yes. We believe we're on the upswing there in terms of the basic trend. And other than than the items we discussed, there shouldn't be any more unusual noise going either way in that business. We do see improving fundamentals there. On the asset management business in the U.S., with respect to mortgage securitizations, the number for the quarter was about $39 million.

That's kind of a lumpy business, so you don't want to multiply that by four and conclude that we're going to do that all the time. The market was good, we had some good execution in the quarter, but that will move around

Okay. Very good. Thank you.

And thank you very much, Mr. Hobson. And our final question today comes from the line of Joan Zief with Goldman Sachs. Please go ahead.

Thank you. My question just relates to your ROE target for 2007. Would would need to happen in your mind for you to actually be at the low end of that range, given that we're going to hit that 12 percent ROE this year?

That's my first question. And then the second question relates to your view on the international insurance growth. And I guess my question there, too, is what gives you such confidence that you're going to be able to maintain a double-digit earnings growth rate in constant dollars? You know, Japan is very large. The -- it's -- it's interesting to -- to understand if you expect life planner growth at that robust rate. Does it basically require an acquisition?

Let me take the -- the second one. In terms of -- of the international insurance, you know there's a very high correlation with our ability to recruit life planners and the ongoing growth. And we will continue to target and expect to have double-digit growth in life planners. Obviously Korea and Japan are the drivers. We hope to see some improvement certainly in Taiwan and elsewhere, but the first two are clearly the drivers. And given the uniqueness of our business system we believe, even at these higher numbers, that high single-digit, double-digit growth in life planners is certainly plausible and possible.

And that will directly correlate to double-digit growth in the sales and earnings that we produce there. Clearly, we would look for add-on acquisitions of a modest size, as we saw in the AOBA deal, which would facilitate that going forward. But we believe the uniqueness of the system is what allows us to have these aggressive growth targets and to continue to meet them.

In terms of your first question on the 12 to 14 percent, if it's still at the low end of the range at the end of the period, we didn't grow at the rate I expect us to grow. And therefore, you know, you've kind of going to stay still in the water. That's not an acceptable outcome. Our business mix is an equal part to what we have to do, so we really come down to execution. If we execute in each of the businesses and we grow at market rates in the expected businesses we are in, we will have a higher ROE at the end of the period.

Do you think that, when you look at what your earnings target is for 2005 the -- the 420 to 440, that range, don't you think that is -- is very conservative because of all the technical items that helps incremental growth looking into 2005, your share buybacks, you know, the elimination of come of these -- the transition costs, the strengthening yen, things like that, that to get to 420, to 440 doesn't really imply a significant amount of organic growth. And so I just was interested if you felt that it was a conservative range.

Well, I think -- I historically said that -- that I produce these forecasts from a conservative point of view. I wouldn't use the word very conservative. I try to look back to three years ago when we made the prediction, and obviously there was a great deal of skepticism relative to what we had done. And as we go forward, I believe the confidence has grown inside the company , and hopefully outside, that what we predict will occur. The only reason that I don't move it around frequently is -- is the following. One, we're more than a one quarter business.

I mean, you can just look at mortality trends, and we certainly had very positive mortality trends in 2004 while we had somewhat negative trends in 2003. And if you add that up, it's a reasonably significant number. Similarly, in terms of how markets and interest rates are behaving, so conservative I would agree, Joan, but I'm not trying to be -- other than truthful and directly tell you what I believe and how I feel about what's going to happen in our businesses and our markets. It really does reflect my confidence in the long-term growth that we predict will occur in our -- in our company through the 2005 and 2007 period.

Thanks, art.

And thank you very much , Ms. Zief. And ladies and gentlemen, your host is making today's conference available for digitized replay. It's for one week, starting at 4:15, Eastern Standard Time February the 9th, all the way through 11:59 p.m., February 16th. To access AT&T's executive replay service, please dial 800-475-6701, and at the voice prompt enter today's's conference ID of 765306. Internationally, please dial 320-365-3844, again with the conference ID of 765306. And with that, ladies and gentlemen, we would like to thank you very much for your participation today, as well as for using AT&T's executive teleconference service. You may now disconnect.

Thanks, Brent.