保德信金融集團 (PRU) 2005 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the first quarter 2005 earnings call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Head of Investor Relations, Eric Durant. Please go ahead.

Thank you, Cynthia. And thank all of you for joining our call. This is the Prudential's 14th earnings conference call as a public company and the first one we've had on a Thursday. Obviously, you found us and I just wanted to let you know that we do expect to maintain Thursday as our date for our conference calls in future quarters.

Our participants today are Art Ryan, Prudential's CEO; Mark Grier, Vice Chairman of Enterprise Financial Management; Rich Carbone, Chief Financial Officer; 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 first quarter of 2005, 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 other than those associated with terminating hedges of foreign currency earnings and current-period yield adjustments and related charges and adjustments, as well as 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 first 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 website.

That's my nickel. Now I yield to Art Ryan.

Good morning, everyone. I'm going to provide an overview for the results of the quarter, and then Mark will review these results in greater detail. Overall, I'd characterize our results as very good and on track to achieve our goals for 2005 and thereafter. One of our goals, as you know, is to achieve a return on equity of 12% this year. While we are not declaring victory yet, we are pleased to report that our first quarter return on equity exceeded that level.

We believe that the quarter demonstrates excellent balance in our business mix, as well as overall improvement in performance. Each of our divisions contributed to our earnings growth, which resulted in a 59% increase in earnings per share. We are benefiting from our strengthened position in the retirement and savings market. The Retirement business we acquired last year from CIGNA is performing well. Integration continues on schedule. Novation is nearing completion and more than half of all integration milestones are complete. While we have been experiencing some shock lapse, retention of business continues to exceed expectations.

Earnings from the acquired business are also on schedule. We are confident that this business will contribute 150 million to after-tax earnings this year. This is net of the relatively modest returns we were earning on assets we sold to finance this acquisition. And in line with the original expectations we first shared with you in late 2003.

We have now owned American Skandia for two full years. And it has fulfilled our expectations from the beginning. With the integration now behind us, we have introduced new products and are expanding our distribution. It's too early for these efforts to be evident in our results, but we are encouraged. Our new products are receiving good, initial acceptance from customers and distributors, and we have gained entry to two new wirehouse platforms.

Domestic protection businesses, Individual Life and Group Insurance, each contributed to our growth this quarter. Our other domestic businesses are also making good progress. Our Financial Advisory segment has turned into the black. Moreover, our Asset Management business had particularly strong results this quarter.

We are a leading manager of commercial real estate investments, principally for institutional investors, and market conditions in this asset class have been especially favorable lately. A single sale within our principal investing business, as well as higher than usual performance-based fees associated with commercial real estate drove the improvement in results.

The International division, which includes Gibraltar Life, our Life Planner businesses, as well as International investments also continues to perform well. The Aoba Life block of business, which we acquired last November and bolted on to our Prudential of Japan operation, added to the already strong earnings performance of our Life Planner businesses. Gibraltar continues to produce exceptional returns on equity and our International Investments business is benefit from our acquisition of Hyundai Securities last year.

Let me now turn to capital management. We acquired American Skandia, CIGNA retirement, Hyundai, and Aoba by reinvesting capital that was under-employed. In addition, we use share repurchases to manage our capital. In the first quarter we repurchased 367 million of common stock.

We still have dry powder. We believe that our excess capital, including untapped borrowing capacity, now exceeds $3 billion and our business generates significant free equity, as well as excellent cash flow. In short, we continue to be able to pursue opportunities to improve Prudential's businesses and financial performance. At the same time, we have maintained a superior balance sheet and capital position and we intend to continue to do so.

Our repurchases during the first quarter were made under a current Board authorization to purchase up to 1.5 billion this calendar year. While we will review this activity under this authorization with the Board regularly, we continue to believe that repurchases of roughly 375 million per quarter remains a realistic base case for Prudential at this time.

Finally, I'll address our earnings guidance for the full year. We continue to believe that Prudential 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. Our first quarter results suggest that we may be at the high end of this range. This guidance assumes appreciation in the S&P 500 index of 2% per quarter for the balance of the year.

Now I'll turn it over to Mark.

Good morning, everyone. Thanks for joining our call. I'll start with an overview of first quarter results for the Financial Services Businesses. We reported common stock EPS for the Financial Services Businesses of $1.18 for the first quarter compared to $0.74 per share for the year-ago quarter. These results are based on after-tax adjusted operating income and amount to a 59% increase in earnings per share.

I would characterize this quarter as very strong in terms of business results. And well on track with our expectations for the full year. In addition, the quarter includes an incremental contribution from a relatively short list of items that we would consider nonrecurring or do not expect to be sustainable. Before I get into the business discussions, I'd like to go through these items.

First, our recovery of $30 million of investment income during the quarter on a bond that had been in default, together with mortgage prepayment income, contributed a total of $0.06 per share. In addition, income from a single transaction in our Asset Management business contributed another $0.05 per share.

An additional $0.04 per share came from mortality and expenses more favorable than our average expectations in Individual Life. From updating of reserves and the retirement business based on client census information, and from an initial contribution from the Aoba Life business, which we recently acquired in Japan that includes a two-month catch up of earnings in the current quarter.

Going the other way, our effective tax rate this quarter was higher than the 31% rate we now expect for the full year, with a negative effect of about $0.02 per share. Transition costs are not a major item this quarter, amounting to $0.03 per share for both the combination of our retail securities brokerage business with Wachovia and the integration of CIGNA's retirement business.

Now I'll review our business results for the quarter, starting with the insurance division. Adjusted operating income from our Individual Life Insurance business was $117 million for the current quarter, up $30 million from a year ago. About $10 million of this increase came from improved mortality experience, and another 10 million from Individual Life's share of the recovery of investment income on the defaulted bond that I mentioned earlier. The rest of the increase came mainly from lower expenses this quarter than what we would expect on average.

Sales in Individual Life, excluding COLI, amounted to $99 million in the current quarter, a 10% increase from a year ago. Our Universal Life products drove the sales increase, reflecting the markets continuing emphasis on that line and the traction of our products.

Our Prudential agent count stood at about 3,500 at the end of the first quarter. A decline of about 600 from a year earlier, reflecting our emphasis on cost effectiveness. The decrease came mainly from attrition of some of the lower producers as we have implemented measures to increase cost sharing by our agents consistent with industry standards, and we reduced the number of regional agencies. We are also continuing to recruit new agents selectively. At the same time, we have been growing third-party distribution, which registered a sales increase of about 40% over the year-ago quarter.

Our Annuity business reported adjusted operating income of $100 million in the first quarter compared to $98 million a year ago. Current quarter results benefited from growth in asset-based fees, tracking market appreciation and from increased spreads on general account products. Increased spreads reflect the abatement of the downward pressure on our investment portfolio returns, as well as crediting rate reductions earlier this year.

Annuity business results also benefited by $9 million from the investment income we collected on the defaulted bond in the current quarter. However, these benefits were largely offset on the expense line, as we are investing in this business for organic growth now that the integration of American Skandia is behind us. Wirehouse distribution, where we have had a limited presence, is a major opportunity for us and our current expense level reflects the cost of entering two new major wirehouse platforms. We believe that growth in the wirehouse channel will compliment our established leading position in the independent financial planner channel, and our annuity distribution through Prudential agents.

Gross annuity sales for the quarter were $1.5 billion, down from $1.8 billion a year ago, but representing a 6% increase over the quarterly average for the second half of last year as we are regaining market share against the backdrop of lower retail market activity. Over the past few quarters, we essentially suspended the ongoing process of product retooling and enhancement as we focused on completing the integration of the Prudential and American Skandia administrative platforms.

With the integration complete, we introduced two new major product features in mid-March. 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. Although it's early to share any statistics, we are encouraged by the favorable initial response to these new features by our distributors and customers.

Risk management is a key consideration in developing products that meet the market's demand for guarantees. In particular, the living benefit features on today's annuity products, and was integral to our development of the new annuity features. In addition to risk management built into the product design, such as the required use of an asset allocation model within Lifetime Five, we have a comprehensive hedging framework in place to address the range of risks associated with the guarantees including equity market level risk, volatility risk and interest rate risk.

By far, the most prevalent living benefit we now have on our books is the grow feature, which is essentially self-hedging, since the minimum accumulation benefit guarantee is supported by automatic daily reallocation of the customer's funds between fixed income and equity investments.

The Group Insurance segment reported adjusted operating income of $38 million in the current quarter, up $12 million from a year ago. The increase came mainly from more favorable life claims experience in the current quarter. Unfavorable disability experience in the quarter was a partial offset. Most of our Group Insurance sales are registered in the first quarter based on effective dates of the business sold, and amounted to $350 million for the current quarter, up 61% from a year ago. Nearly three-quarters of this increase came from a single large case.

Turning now to the investment division, before I get into the first quarter business results, I'd like to comment on some headlines that are in the market this morning. You've seen discussions of GE's sale of Storage USA to Extra Space. Prudential has been prominently featured in these headlines, and I'd like to make it clear to everyone that we're acting as an advisor to Prudential Real Estate Equity Investment clients in this transaction. This deal does not represent Prudential Financial getting into the storage business, but rather is a significant event for our third-party Asset Management business.

Turning now to Investment division operating results. In total, the business we acquired from CIGNA contributed $66 million to the division's adjusted operating income for the first quarter. Since the acquisition brought us proprietary assets to be managed by the Asset Management segment, this contribution is reflected in both Retirement and Asset Management.

The integration of the business remains on track. The novation process, representing the legal transfer of client contracts from CIGNA paper to Prudential is 90% complete. And the overall transition is more than 50% complete, with wrapups still expected by the first quarter of 2006.

The Retirement segment reported adjusted operating income of $155 million for the first quarter. Including a $56 million contribution from the CIGNA business. The segment's original retirement business reported adjusted operating income of $99 million for the first quarter, which is an increase of $47 million from a year ago.

This increase reflects $28 million of items that we would consider of a one-time or non-sustainable nature. Including $21 million from mortgage prepayment income and reserve releases based on client census data for a block of group annuity business, and also $7 million representing the segment's share of the income we collected on a defaulted bond. The rest of the increase, $19 million, came mainly from improved investment results and case experience.

The segment, including the CIGNA business, had positive net sales of approximately $500 million for the first quarter, with gross sales just over $5 billion. Lapses on the business we acquired from CIGNA has been well within our expectations. But case turnover is not linear over the course of a year, and we still expect a higher-than-normal level of lapses arising from the transition to result in net out flows for the year as a whole.

The Asset Management segment had adjusted operating income of $134 million in the current quarter, up $76 million from a year ago. This increase includes $35 million of income from a single sale in our principal investing business where we acquire investments to be sold or syndicated to institutional investors or placed in funds we manage. The rest of the increase, or $41 million, includes the remaining $10 million contribution from the CIGNA business, and the benefits to current quarter results from increased transaction and incentive fees and higher fees from the administration of managed accounts.

The Financial Advisory segment moved into the positive column this quarter, with adjusted operating income of $15 million compared to a $14 million loss a year ago. In our retail securities brokerage venture with Wachovia, transition costs have abated and we are starting to see the realization of the expected expense saves. Our 38% share of the results of Wachovia Securities before transition costs, resulted in pretax income of $50 million, compared to $54 million a year ago. With reduced retail brokerage activity essentially offsetting the benefit from expense saves in comparison.

The segment's results absorbed expenses of $27 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 $11 million of remaining transition costs. After absorbing a total of $38 million in these retained and transition costs, the retail securities brokerage operations reported adjusted operating income of $12 million for the quarter.

Turning to the International Insurance and Investments division. The International Insurance segment reported adjusted operating income of $285 million for the current quarter, compared to $215 million a year ago. The segment's results included adjusted operating income of $106 million from Gibraltar Life in the current quarter, up $12 million from a year ago. Current quarter results benefited from improved mortality, and a lower level of expenses. Partly as a result of actions we took last year to reduce the cost structure.

Gibraltar's results also benefited by $6 million in the comparison from a strengthening yen. Sales from Gibraltar Life, based on annualized premiums in constant dollars, were $69 million in the current quarter, up from $62 million a year ago. About half of the increase came from greater sales of single premium products that we offer to meet customer demands for reinvestment of funds rolling out of maturing endowment-type contracts from the business we acquired. The remainder of the increase was mainly driven by sales of a recently-introduced whole life product.

Our Life Planner business, the international insurance operations other than Gibraltar Life, contributed $179 million of adjusted operating income in the current quarter. Up $58 million from a year ago. The increase includes an initial contribution of $17 million from Aoba Life, the Japanese life insurance company that we acquired in November of last year, which includes a catchup of two months of earnings along with the current-quarter results. The Aoba business is now fully integrated with our Prudential of Japan operation.

The rest of the increase, or $41 million, came mainly from continued business growth. With insurance revenues for the quarter, excluding the contribution of Aoba, up 14% on a constant exchange rate basis from a year ago, accompanied by more favorable mortality and improved investment results. In addition, our Life Planner results benefited by $7 million in the comparison from foreign currency fluctuations.

Sales from our Life Planner operations, based on annualized premiums in constant dollars, were $228 million in the current quarter, up 28% from a year ago. A major portion of this increase came from our recent introduction of new products in Japan and Korea that combine a protection element, similar to our whole life policies, with a retirement income feature. The strong appeal of these products to the customers of our Life Planners resulted in an initial sales bulge.

While there are fluctuations in sales from quarter to quarter due to product introductions, rate changes, and other factors, when viewed over time, our Life Planner sales have broadly tracked our growth in the Life Planner count. We ended the first quarter with more than 5,500 Life Planners up 11% from a year ago. This is somewhat ahead of the increase we would ordinarily expect, and reflects a change in our recruiting cycle that we implemented in the current quarter.

The International Investment segment reported adjusted operating income of $26 million for the quarter, up $20 million from a year ago. Our acquisition of Hyundai Securities early in 2004 contributed $19 million of adjusted operating income in the current quarter. Its impact on the year-ago quarter, representing just the first month of operations, was insignificant. The contribution 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 $16 million for the first quarter compared to $22 million a year ago. Among a number of moving parts, investment income trended down as we utilized capital for the CIGNA retirement acquisition and in share repurchases.

Now I'll comment on net income. Net income for the Financial Services Businesses was $766 million for the first quarter, compared to $290 million in the year-ago quarter. Realized investment gains before taxes were $236 million in the current quarter after related charges and adjustments. The reported realized gains came mainly from an upward fluctuation in the market value of the hedging instruments we use to cover our foreign currency risk, and our recovery of principal that we had on an impaired defaulted bond.

Impairments and credit-related losses were insignificant in the quarter, amounting to just $26 million. Our gross on realized losses on fixed maturities stood at $649 million at the end of the quarter, almost entirely on investment-grade securities and essentially interest rate related. Non-investment grade fixed maturities comprised less than 6% of the Financial Services Businesses fixed maturity portfolio at the end of the quarter.

And 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 $163 million for the current quarter, compared to $111 million a year ago. We measure results for the Closed Block business only based on GAAP rather than adjusted operating income. The increase over last year reflects the reduction in the dividend scale.

Turning back to the Financial Services Businesses and summing up. Our domestic investment businesses benefited from strong retirement results, including the contribution from the business we acquired from CIGNA. Asset Management results contributed to the quarter's earnings growth with strong transaction and incentive fees in the current quarter.

We are beginning to see a positive contribution from our Financial Advisory segment, which is benefiting from the integration of the retail brokerage business in our venture with Wachovia. The insurance division's protection businesses were a positive for the quarter, with favorable mortality in both Individual and Group Life.

Our International businesses reported a significant earnings increase for the quarter and continuing growth of our Life Planner insurance business, more favorable mortality and expenses, and the contributions of our recent Aoba Life and Hyundai acquisitions. And finally, the strong results from our domestic and International business operations were complimented by several items of note that were a net positive to the quarter.

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

[OPERATOR INSTRUCTIONS] Our first question will come from the line of Jason Zucker with Fox-Pitt and Kelton. Please go ahead.

Thank you and good morning.

Good morning.

A couple of questions. The first, I was wondering if you might comment on the Wachovia litigation expenses and whether or not this lower level of expenses might signal a trend? And then, the other thing I wanted to touch on was mortality in the life insurance segment, which has been very favorable for several quarters. Nobody else in our group seems to have some of the same results that you have had and perhaps what you're seeing is sustainable, and I was hoping perhaps you can -- you could comment on that.

Yes. On the -- this is Art Ryan, Jason. On the legacy costs, trend is probably too strong a word, but certainly over time we expect to see those numbers continue to come down. The reason I -- I'm not trying to hedge on that answer. It's just that it is so unpredictable because of the nature of what's in there, namely claims coming out of -- of client disputes, but there's no question that we believe that it will continue to go down. Hopefully it becomes a trend that I can better forecast it for you, but certainly the direction that it has been going, we expect it to continue to go in that direction. On the life side, I'm going to ask Mark to answer it.

We would love to conclude that it's a sustainable result, and obviously we're gratified to see some sort of continuing positive mortality variances there. But as you know, this is a long-time horizon business and it takes a while to draw the conclusion that we're actually doing better than we expected to do. So I would say we have not yet concluded that it's sustainable. We're very pleased to see those results, but it's going to take a while before we decide that we really have an edge and are doing consistently better than we expect.

Okay. Thank you.

Our next question will come from Colin Devine with Smith Barney. Please go ahead.

Good morning, gentlemen. A couple questions. First I was wondering if we could talk about long-term disability. The benefit ratio, obviously, was way up, as well as the expense ratio this quarter. And that seemed to follow exactly, I guess, the four quarters after we had the big sales increase last year and I was wondering was the business -- was it tied to the business you put on last year? Was there a problem with that?

Secondly, with respect to capital, Art, I gather Prudential's risk-based capital ratio ended last year at 531, that was up from, what? About 440 at the end of '03. When you're talking about stock buybacks is there any reason to think that the current 375 pace per quarter shouldn't now continue beyond this year and certainly into '06?

And then finally, on the annuity business, why were its earnings, ex the bond default recovery, down? Particularly, given I guess the Skandia aggression expenses are now behind you, what was driving that? Thanks.

Okay. Let me start with the first one on the group disability loss ratio. We still don't see anything in the frequency or severity numbers that indicate that any of the business that we added last year, or any other business, is out of line with what we expect. We still are not resolving cases as effectively or as efficiently as we should. And I agree with you. It is taking longer than it should. It is not a significant item for us, but is one that we will give even more attention to to ensure that we can get the cases resolved. But at this point we do not see anything inherently wrong or fundamentally different in the business.

In terms of the stock buyback, I think your conclusion is right. I don't see any reason why we wouldn't be able to sustain that level of buyback, but importantly, we want to maintain the flexibility based on other opportunities that might present themselves. I think we've demonstrated that we will use that capital. What is ever in the best interest of the shareholders and we expect to continue to do that. But you're right, there would be no reason why we shouldn't be able to sustain that level beyond what we've even said to date.

In terms of the annuity, the issue there is increased expenses, not related to Skandia acquisition, but more market growth opportunities. As you know, over the years we have not had the same ability to go into the wirehouses as many of our competitors because of the fact that we owned a wirehouse firm. That no longer is the case as we have the joint venture with Wachovia, so we have been building ourselves up for -- during the first quarter to enter at least two new wirehouses and continue to prepare to go further.

This was kind of done in concert with our ability to introduce new product as well. As you recall, we froze the product during the systems conversions last year and we did in fact introduce new products in the middle of March. As I mentioned in my comments, early results are a little bit -- well, it's a little bit too soon to forecast success, but we're very encouraged by what has happened so far.

And lastly, I think we had a reserve credit in the first quarter of '04 that might have distorted the number as well, so I don't think they were actually down. But you're right, they weren't up as aggressively as one might have thought given our success with Skandia, but they're really due to the other issues that I've talked about, which is the building out of the platforms for additional sales in concert with the new product offerings.

Yes. Colin, it's Mark. I've used an expression in discussing other businesses before, and I use it now with respect to annuities, which is that the vital signs are very positive. We're optimistic about where we're going with the platform and penetration of the market and product.

Mark, one quick follow up. Thank you very much, both of you, for that. With respect to Aoba, and I gather this was five months earnings, but now that you've also got it on board, I presume there's some expense that has to come out of it. What's the sustainable quarterly run rate? Can you give us any idea?

About $10 to $12 million a quarter would be our best estimate, Colin.

Great. Thanks very much.

Thank you. And we'll next go to the line from Suneet Kamath with Sanford Bernstein. Please go ahead.

A few questions. First on the business mix, given your excess capital position, I was just wondering if there are any businesses that you are focusing on in particular in terms of what you'd like to augment with M&A? And then second, on the Life Planner recruiting trends, I guess you're moving to a new recruiting cycle, and I'm just wondering if you have the same -- or a big enough infrastructure in place to make sure that sort of training doesn't slip given that you're going to be bringing on presumably more people within a 12-month time frame. Thanks.

In the area of M&A, excuse me, our expansion interests are really very much in line with the businesses we're prosecuting at this point in time in the Insurance, the Investment and the International arenas. We're not looking to go outside of what we are doing at the present time. Certainly we've been able to find a number of International acquisitions. We would hope to be able to continue to do that.

As we get through the integration of CIGNA, we would certainly be looking to add to our retirement business, but that's not likely to happen in 2005 as we want to ensure the effective completion of the integration of CIGNA. So the answer really is, we'll continue to look for expansion in the areas in which we presently have capability, particularly if we can expand distribution capabilities, that tends to be of the greatest interest to us, and that's basically how we would use the capital. And short of that, obviously as I mentioned earlier, we'll continue the stock buyback program.

In terms of life planning recruiting, we're really not changing the number of Life Planners we're recruiting, we're really just changing the timing and the way in which we've done it. So, yes, we have the capability and the capacity in place to deal with the growth of Life Planners in each of the markets, but it was much more the way in which we timed it than any change in our strategy and how we recruit them.

The answer is, we always look to recruit as many as we can, but our standards don't change. You might have heard in the past that in Japan, for example, we basically hire two to three out of every 100 people we interview, so we think we're going as fast as is -- as is reasonable given the standards that we have for the business.

Okay. Thanks.

Thank you. We'll next go to the line of Andrew Kligerman with UBS Securities. Please go ahead.

Great. I have a couple questions. Let me just ask a big picture question first. You stayed with the guidance of 4.20 to 4.40, yet this quarter was incredibly strong. Any thoughts on why you wouldn't want to expand the guidance a little bit?

Did you want to do another question or you want me to answer that first?

Yes. We'll go with this one and then I'll follow up.

Okay. That sounds fine. I think you have described me periodically as being conservative. I think that's correct. I'm -- very frankly, one quarter results -- and I agree with you, the quarter's been good. I think we have a long year in front of us. I did indicate in my remarks that certainly with the first quarter results it would be toward the upper end of the range as opposed to the lower end. I always worry a little bit about markets and mortality, and as we get further into the year, I will continue to give my best guess as to where I think it's going to come out, but I think your characterizations are usually quite accurate.

Thank you. With regard to just a couple of drilling down items, just back on the long-term disability combined ratio, and I know it's a very small piece of the business, were you disappointed in the new startup operation that I think was fully online in the fourth quarter up in Portland, Maine, that they didn't get the ratio down? Or do you think over time that will -- that will find its way down?

I think over time it certainly will come down. I'm not disappointed in any single component, but I am disappointed that we haven't resolved this issue, as modest as it is, in a more timely fashion. I would agree with you.

And then shifting over to Aoba, I was just kind of curious, what was their contribution to actually ongoing life sales in the financial planner unit? Did they have a robust operation in terms of financial planner group and -- ?

The sales were zero.

Okay. So this is more of just a runoff-type mode.

Well, you see what happened is -- and the reason we could put it into the Life Planner is they did not have a sales organization. But what they had was an extraordinarily attractive book of clients. They have 350,000 active clients and some 2 million inactive clients. We put them with the Life Planner business so that those clients can be better served by our Life Planner offering some additional opportunities. The earnings we received so far are the consolidation benefits bringing that book of business on to our systems.

There actually are some good sales prospects, its just not the sales distributions?

That's correct. And so we've seen none of those benefits yet since we just did it, but we do see the benefits of the consolidation, as well as the opportunities on investment income.

And then just lastly and quickly. A little color on the strength of the Mutual Fund and RAP fee of sales, particularly the RAP fee area, what's driving that and can we expect to see more of the same?

Right now it is still principally driven by the Wachovia organization. We have the basic product responsibility for the distribution to what was Prudential Securities and separately Wachovia Securities, which is now one Wachovia Securities, and sales have been very, very strong through that distribution and we expect it to continue. I think we've got very good product performance, which obviously it represented in the sales and, of course, we'll look for other opportunities to distribute that capability as well. But it's really being driven by Wachovia.

Thanks a lot.

Thank you. We'll next go to the line of Edward Spehar with Merrill Lynch. Please go ahead.

Thank you. Mark, I think, if I heard you correctly, you mentioned that there was the abatement of downward pressure on the portfolio yield. And I guess the first question is, is that specific to the annuity business? And could you talk about how -- how there has been -- sounds like new money yields are close to the portfolio yield. I'm wondering if you could talk about what your investing is, has there been some change? Any color on that would be helpful. Thanks.

The broad answer in terms of the earnings dynamic is that our spreads are generally improving as we've been reducing credit rates and also, as I said in my comments, seeing less downward pressure on yields. We have extended maturities somewhat within a still a very conservative risk profile and made modest changes in asset mix again against a very conservative risk profile. So it doesn't reflect any dramatic changes in terms of our approach to either investing or crediting, but rather reflects the stabilization in the markets less of a downward trend in market interest rates, and the fact that our crediting rates are catching up. So again, broadly, our spreads are improving across the Company from a year ago.

And just roughly, how much would you say the gap is now between new money and portfolio yield?

That varies a lot by portfolio.

You mean just the gap between the --

The current investing rate and the --

Well, the five-year new money rate -- hold on one second. The five-year new money rate is about 5.05 to 5.15 and the ten-year new money rate is about 5.55 to 5.65, and the domestic general account portfolio yield is very roughly 6% and our duration is five years.

Okay. Thanks. Very helpful.

Thank you. We'll next to go to the line of Tom Gallagher with Credit Suisse First Boston. Please go ahead.

Just a follow up on the yield question, but in a different angle. Looking at the Japanese portfolio, I believe you're repositioned more into dollar securities for the quarter. Can you just comment on what was happening there and whether you've saw the full yield pick up this quarter, or whether that's to come in future quarters because of the timing lag.

Yes. The broad picture there is that we're using dollar denominated securities against our equity investment, which is also dollar denominated in Japan. So the bulk of the investment that you see in dollar-based assets there is offset by the equity investment that we have in those businesses. And that's something that we've been working through, depending upon availability of assets, as well as some other things. And we're probably in the first quarter not seeing the full impact of the investment changes overseas, but we're seeing most of it.

Okay. And is that -- Mark, is that largely completed now based on where you're at from a total portfolio standpoint?

I would say largely it's fair, if you're thinking about another significant move there won't be one, but we'll continue to fine-tune both maturities and asset mix characteristics of those portfolios.

Okay. And then just a question on International sales. You had mentioned the bulge in sales was from a retirement-type product, bought by your -- your planner system, can you just comment on whether those are much slower margin than your traditional protection products? And do you think sales will keep moving in that direction or is this likely to be kind of a one-time surge?

The total sales from the new product was about a third of the sales, one-third of the sales. In terms of margin, it's a modestly lower margin product, but the ROE is comparable. We really do not sell extensively the pure endowment product through the Life Planner. We basically sell whole life, but in this case, the market need was looking for a combination of whole life and a retirement writer. Probably not a heck of a lot different than what's going to happen in the United States one of these days in terms of the kind of products that people are looking at.

The interesting thing about our Japan operations is that product development there is not dissimilar to product development in annuities in this country. We frequently see changes in terms of buying behavior and how people use those products there, so I wouldn't describe it as a unique surge, but certainly it got off to a heck of a start. So it's hard for me to describe that as going to continue at necessarily the same levels, but we constantly look for the very best products aligned with our Life Planners and look to continue to grow our sales, as Mark mentioned, in line with the growth in our Life Planners.

And so, Art, is it fair to say same ROE you'd be indifferent to what types of products they're selling all else being equal?

Yes, as long as we can keep the kind of persistency and the kind of returns we historically have targeted. I'm not going to hold them to the nearest 50 basis points since we produced fairly superior returns over there, but no, I'm not going to give up return in order to increase sales.

[OPERATOR INSTRUCTIONS] We'll go to the line now of Jeff Schuman with KBW. Please go ahead.

A couple of questions. First of all, you've seen a nice pickup in fees in Asset Management lately. Is this self-storage transaction big enough that we'll actually see visible fees in Asset Management, or is it more of the upfront transaction fees or ongoing management fees that we'd see?

The broad answer is we'll see both, but we don't discuss specific transactions in that much detail.

Okay. And then secondly, you talked a little bit about the Group Insurance operation and disability claims management. It's a little bit of a hard business for us to assess because of the inherent volatility in both the top and the bottom line. How would you assess the effectiveness of that particular business at this point? I guess in terms of where you stand, sort of relative to competitors and the extent to which you think the business has maybe improved over the last two years?

Yes. I've talked in the past that the group life insurance is a -- is a very good business for us. I think we're No. 2 in the market in terms of overall business behind MetLife. Over time, the buying decision has packaged the two between life and disability, so it's not something that I necessarily introduced into the market, but it's the way in which our clients buy it. So while we believe that we can manage disability to an effective return, I tend not to look at it in the same light as I look at other businesses about where do we position ourselves in the market? What is our overall market share? I mean, I can certainly report those numbers, but I don't have the same mindset with the disability product as I do with virtually every other product that we have.

I think we have had, as I've said earlier, some operational issues, if I can use that word broadly, in terms of resolving the cases. It will be fixed. And so I'm -- I'm fairly confident in going forward, but that's the way I view the -- the disability product in line with the life product. I mean, for example, we're not in the individual disability business nor do I intend to get in the individual business in selling it through our retail channels. There we use someone else's product, so that's how I look at it.

Okay. Thanks a lot.

Thank you. We'll next go to the line of Jeff Hopson with A.G. Edwards. Please go ahead.

Thanks. Two questions. The annuity -- it sounds like on the annuity sales you expect those sales to continue to ramp up. And then on commercial real estate in this type of environment, it seems possible likely that we'll continue to get one-time fees of the type that we saw in the first quarter. Would you comment on that?

In terms of annuity sales, we certainly as -- as Mark had commented earlier, we feel very good about our business right now. We've been through a major conversion. It's finished. We know we've opened distribution in new channels. Skandia we did it through the IFA. We now have opened some wirehouse and the like, so I would think it's fair to say that we are optimistic about annuity sales going forward.

Commercial real estate is always difficult because we are, as you said, a significant manager of third-party money here. Certainly, we -- we look to take advantage of market opportunities on behalf of our clients, but we do have a wide variety of different portfolios, each of which have different objectives, as you might expect in terms of returns. So it is much more difficult for me to predict that the level of transactions that we've seen is -- is sustainable and can be continued, because it's not only the market environment, it's what we've committed to do in that particular portfolio.

Suffice it to say, it's a business that we're very good at. We're comfortable. It does have some volatility, but on the other hand, that gives us some upside against a wide range of businesses which have substantially less volatility.

Very good. Thank you.

We'll open the line from Tamara Kravig with Banc of America Securities. Please go ahead.

Thank you. Just to follow up to Colin's question on the extra expenses and the annuity lines just based on expanding into wirehouses, can you quantify that at all or just sort of relate it to what we saw in the first quarter and what you expect for the rest of the year. And then just second question would be to quickly comment on the ROE expectations beyond 2005.

Let me take the second one and then I'll let one of my colleagues answer the expense number. The expectation between and beyond 2005 is really in line with the mix of businesses that we have. Our fastest growing businesses happen to be our highest returning businesses, so for example, International Insurance is not only the fastest growing, it has a very high ROE. Similarly, we would expect Retirement to grow at a faster pace than say, traditional life insurance sales. It also has a higher ROE.

So notwithstanding how we execute, the portfolio mix alone, assuming we perform even at market, which we hope not to do, but even if we do, we would see an upward trend in the 12 to 14% range for our ROE over the next few years, beyond 2005 and going forward. So the key for us, obviously, is to continue to provide the breadth of business performance that we have in our business mix while, obviously, challenging against all of our competitors to do as well as we can within each line of business. But there's no question the trend line over time, because the business mix will cause the ROE to go higher in the 12 to 14% range.

Tamara, this is Eric Durant. I'm going to return service a little bit differently from the way you might have intended. The year-over-year variance in expenses in the annuity business is about $7 million and the first quarter level of expenses is, we think, indicative of what one should expect going forward this year.

Great. Thank you so much.

Thank you. And our final question will come from Joan Zief with Goldman Sachs. Please go ahead.

Thank you. I have two questions and I think that they're related. The first is, you talk about where your -- your fast growing businesses are, the International and the Retirement and annuity business. We know that you're always looking for acquisitions there, but is there -- are you thinking about narrowing the focus of the business at all and potentially thinking about divestitures as well over time? So that's my first question.

My second question also relates though, to your ROE goal. I mean, how fast do you think you can get to that high end of the range over the next few years? And it looks to me that your business is split between Asset Management and underwriting pretty evenly, and I'm just wondering if you're seeing competitive pressures in any of those businesses that might actually slow how fast you can get to the 14% ROE.

Let me -- let me deal with the first one. In terms of acquisitions, now, as I've said, Joan, we would look across the board at all of our existing businesses and not look to "exit or divest" the businesses. Obviously, the question would come about if life insurance is not as fast a growing business as the others, would that be a candidate? And the answer is, not likely, and probably I'd say no. Life insurers, we have it at a level where it provides an excellent return. It provides excellent cash in terms of what we're looking. It does not take on new capital at this particular point in time and we're very good at it.

So I would say that even when you don't have a business that is growing quite as fast as the other, it does have other attributes, and as we all know, the world changes. So, no, I'm pretty comfortable with the mix between the insurance, the investment and the International, and would look to grow across all of those areas assuming the price was right.

Joan, it's Mark. Let me address the second question, and I'm not going to very specifically pinpoint the timing of our ROE improvement beyond what we've got out there for '05 guidance. But let me elaborate a little bit on your earnings mix as opposed to business mix comment. The difference between Asset Management and underwriting. And I would make an even broader statement, which is that we have a very well diversified stream of earnings that comes from spreads, that comes from principal investing, that comes from underwriting profits, and comes from a range of fee-based activities. So we like our broad diversification of sources of earnings, and if you dig particularly into the higher returning businesses, there are a couple of headlines. One in retirement would be the importance of the stable value product and how much that contributes with respect to earnings, and our ability to price that product attractively as part of that overall franchise.

And secondly, on the International side, you've heard us talk a lot about the weight and importance of mortality and expense profits as opposed to investment margin type returns in that business and we also expect that we can maintain those kind of margins in the International arena. So I think the -- the key drivers of profitability and improving ROE, looking at the structure of the business models as opposed to the businesses that we're in, still would reflect a pretty positive outlook relative to the trend that Art talked about in ROE. So we are optimistic that we're in the right places in the right ways. Not to imply by the way, that we don't have a lot of competitive pressure in a lot of things that we do, but the headline drivers, I think, we're pretty comfortable about.

Thank you very much.

Thank you and we will now turn it back over to our hosts for closing remarks.

This is Art Ryan. I want to thank you very, very much for your interest in Prudential and we look forward to talking to you again in a few months. Thank you.

Thank you. Ladies and gentlemen, this conference will be made available for replay after 4:15 p.m. Eastern time today, running through Thursday, May 12th, 2005 at midnight. You may access the AT&T executive playback service by dialing 800-475-6701. International participants 320-365-3844 using the access code 765307. The numbers again are 1-800-475-6701 and International participants 320-365-3844 using the access code 765307.

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