保德信金融集團 (PRU) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by. We do appreciate your patience today and good morning, good afternoon, or good evening around the world and welcome to Prudential's second-quarter 2005 earnings conference call.

At this point, we do have all of your phone lines muted or in a listen-only mode. However, after the executive team's presentation today, there will be opportunities for your questions, and those instructions will be given at that time. (OPERATOR INSTRUCTIONS). As a reminder, today's call is being recorded for replay purposes and that information will be announced at the conclusion of this second-quarter call.

So with that being said, let's get right to today's agenda. Here with our opening remarks is head of Investor Relations, Mr. Eric Durant. Please go ahead, sir.

Thank you, Brent. I will add my own good morning and thank you for joining us.

Presenting today are Art Ryan and Mark Grier. Also joining for your questions are Rich Carbone, Peter Sayre and Dennis Sullivan.

In order to help you to understand Prudential Financial, we will make some forward-looking statements in the following presentation. It is possible that actual results may differ materially from the predictions we make today. Additional information regarding factors that could cause such a difference appears in the section titled forward-looking statements of our earnings press release for the second quarter of 2005, which can be found on our Web site 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 -- (technical difficulty) -- 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 (indiscernible) to contract holders and recorded changes in contractholder liabilities resulting from changes and related asset values. The comparable GAAP presentation and the reconciliation between the two in the second quarter are set out in our earnings press release on our Web site. Additional historical information relating to the Company's financial performance is also located on our Web site.

That done, here's Art Ryan.

Thank you, Eric, and good morning.

I will provide a brief overview of the quarter and then Mark will go into detail on each of the businesses.

Our results this quarter were strong. We had a 15% increase in earnings per share, based on adjusted operating income, and each of our divisions contributed to our earnings growth. In particular, I would highlight strong sales results in annuities and international insurance, as well as continued good performance of our recent acquisitions. We are on track to achieve our goal in 2005 and beyond. While we are not yet declaring victory on our goal to achieve a return on equity of 12% for this year, our return on equity for the first half did exceed that threshold.

Our increased financial returns reflect underlying improvement in the capabilities and performance of our businesses, along with capital management.

Within the broad retirement and savings market, we are strengthening our position. The retirement businesses we acquired last year from CIGNA is performing well. Novation is now 95% complete and integration continues on schedule. Retention of business continues to exceed expectations.

Earnings from the acquired business are also on schedule and in line with the original expectation we shared with you in late 2003.

Our annuities business very recently introduced a new generation product, the lifetime Five living benefit guarantee. We are encouraged by the very favorable early market acceptance of Lifetime Five, which has driven a sharp increase in our variable annuity sales and market share this quarter. In addition, the annuity business has taken measures to expand its distribution, especially in the Waya (ph) House channel where we added two major platforms in the second quarter.

Our domestic protection businesses, Individual Life and Group Insurance, are also performing well. We believe that each is fully competitive within its markets but at the same time, each focuses on profitable growth and maintenance of appropriate returns. In the second quarter, for example, results in Individual Life benefited from a reduction in our cost structure.

Our asset management business continued to enjoy particularly strong results. 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.

Finally, our international business continues to excel. The Aoba block of business, which we acquired last November, has enhanced the already strong earnings performance of our Life Planner business.

Now, I will turn to capital management. We still have dry powder. We calculate that our excess capital, including untapped borrowing capacity, continues to exceed $3 billion and our business generates significant free equity as well as excellent cash flow. This means that we are able to pursue opportunities to improve Prudential's business and financial performance, but we are committed to doing so in a highly disciplined fashion.

As for acquisitions, we are interested only in those that make business as well as financial sense.

We also used share repurchases to manage our capital. In the first half of 2005, we repurchased $843 million of common stock. As of June 30, roughly 1.25 billion remained under our current authorization for 2005. While we will review activity under this authorization with the Board regularly, we believe that repurchases of roughly $625 million per quarter is a realistic base case for Prudential at this time.

Finally, I will address our earnings guidance for the full year. We now believe that Prudential will achieve common stock earnings per share in the range of $4.50 to $4.60 for the year 2005, based on adjusted operating income. This represents an increase from our earlier guidance of $4.20 to $4.40. Our current guidance considers results for the first half, including the effect of items that may be non-recurring. In addition, our guidance assumes appreciation in the S&P 500 Index of 2% per quarter for the balance of the year.

Now, I will turn it over to Mark.

Thanks, Art. Hello, everyone. Thanks for joining us today.

I will start with an overview of second-quarter results for the Financial Services Businesses. We reported common stock EPS for the Financial Services Businesses of $1.13 for the second quarter compared to $0.98 per share for the year-ago quarter. These results are based on after-tax adjusted operating income and amount to a 15% increase in earnings per share.

Starting this quarter, the comparability of results is not affected by our acquisition of CIGNA's retirement business, which closed on April 1 last year. This was a strong quarter for us, with each division contributing to the EPS increase and core results of our businesses continuing well in line with our expectations for the full year.

In the quarter, we benefited from several items that are of a non-recurring nature or may be unsustainable. On the other hand, our expenses this quarter for retained obligations from PSI were unusually high. The increase in this volatile item essentially offset the impact of the favorable items.

Before I get into the business discussions, I'd like to go through these items as well as the expense for retained obligations. In the retirement business, mortgage prepayment income and reserve refinements and updates contributed a total of $0.04 per share. Income from a single transaction in our asset management business contributed another $0.03 per share. In Gibraltar Life, a benefit to investment income from market opportunities, together with a reserve true-up, contributed $0.02 per share. An additional $0.03 per share came from mortality more favorable than our average expectation in Individual Life and a true-up of reserves in the annuity business.

Going the other way, we recorded $136 million of expenses this quarter in the Financial Advisory segment for obligations and costs we retained when we combined our retail securities business with Wachovia. This amount includes an accrual for estimated settlement costs related to market timing issues under discussion with state and federal authorities.

Transition costs are not a major item this quarter, amounting to $0.02 per share in total for the combination of our retail securities brokerage business with Wachovia and the integration of CIGNA's retirement business. We expect integration costs for the remainder of the year to amount to an additional $0.02 per share.

Now, I will review our business results for the quarter. I will start with the Insurance division. Adjusted operating income from our Individual Life Insurance business was $119 million for the current quarter, up $21 million from a year ago. More than half of this increase came from lower expenses, reflecting actions we initiated late last year to reduce headcount and occupancy costs in our Prudential agent distribution system. The rest of the increase came mainly from increased fees and general account spread income, reflecting growth in account balances.

Both the current quarter and year-ago quarter benefited from mortality better than our average expectation. We recalibrate these expectations annually, looking back over five years of experience.

Sales, excluding COLI, amounted to $101 million in the current quarter, up 7% from a year ago. Most of the increase came from Universal life, reflecting the market's continuing emphasis on that line and the traction of our products. This sales increase was driven by our growth of third-party distribution, which registered an increase of nearly 40% over year-ago sales and accounted for nearly half of our current-quarter production.

At the same time, we've continued to emphasize cost-effectiveness in our Prudential agent channel and we hired only 200 agents during the first half of the year under selective criteria. With attrition of lower producers, our agent count stood at 3,340 at the end of the second quarter, down from 4,000 a year earlier.

Our annuity business reported adjusted operating income of $101 million in the second quarter, compared to $94 million a year ago. Current-quarter results included a $6 million benefit from the reserve true-up I mentioned earlier. Current-quarter results benefited from growth in asset-based fees tracking market appreciation and from increased spreads on general account products that reflect abatement of the downward pressure on our investment portfolio returns and reflect crediting rate reductions earlier this year. However, these benefits were largely offset on the expense line.

With a substantial increase in variable annuity sales driven by the new product features we introduced in March, current-quarter results absorbed a portion of the upfront distribution costs that we charge to expense immediately. In addition, now that the integration of American Scandia is behind us, we are investing in the annuity business for organic growth with a major focus on increasing access to the wirehouse channel, where we have had a limited presence and see a major opportunity. We added one major Wirehouse in April and another in late June.

Our gross variable annuity sales for the quarter were $1.8 billion, up 16% from a year ago, on the strength of a major new product feature we introduced in March, our Lifetime Five guaranteed withdrawal benefit, which combines a lifetime income guarantee with the flexibility and control of principle offered by GMWB products. With the favorable initial response to Lifetime Five by our distributors and customers, we have regained market share against the backdrop of lower retail market activity. We believe we have established a foothold of first-to-market advantage with this new product, which satisfies today's customer needs and can be easily explained by financial advisors.

Risk Management considerations were integral to our development of the new annuity features. Prior to the introduction of Lifetime Five, we had established a comprehensive hedging framework to address the range of risks associated with guaranteed minimum withdrawal benefits, including equity market level risk, volatility risk, and interest rate risk. We have tailored the program to the features of Lifetime Five, considering both the guarantees and Risk Management built into the product design, including the required use of an asset allocation model which limits equity market exposure in the product.

The Group Insurance segment reported adjusted operating income of $46 million in the current quarter, unchanged from a year ago. Our disability claims experience, which was unfavorable in the first quarter of this year, moved back into the range of our historical experience with more favorable claims resolutions this quarter. Group Insurance sales amounted to $76 million in the second quarter, up more than 50% from a year ago. They increase came mainly from two large disability cases and reflect premiums we received in return for assuming existing case liabilities.

Turning now to the Investment division, the Retirement segment reported adjusted operating income of $142 million for the second quarter, up $50 million from a year ago. The business we acquired from CIGNA contributed $52 million to current-quarter segment results, up $16 million from a year ago, which was our first quarter of operations after the acquisition. Current-quarter results benefited from increased spreads on general account business, where balances have grown and some low-margin business has rolled off and from growth in asset-based fees.

The integration of the business remains on track. The Novation process, representing a legal transfer of client contracts from CIGNA paper to Prudential, is substantially complete. At this point, we have two-thirds of the overall transition behind us with wrap-up still expected by the first quarter of 2006.

The segment's original Retirement business reported adjusted operating income of $90 million for the second quarter, up $34 million from a year ago. This increase reflects $19 million of mortgage prepayment income and $16 million of reserve releases which were included in current-quarter results. Stripping out these items, results were essentially unchanged from a year ago, as growth in fees and lower expenses were largely offset by less favorable case experience.

The segment, including the CIGNA business, had gross sales of $4 billion for the second quarter, bringing first-half sales to just over $9 billion. Net sales were a modest negative of about 200 million for the quarter with lapses on the business we acquired from CIGNA continuing to be well within our expectations.

The asset management segment had adjusted operating income of $105 million in the current quarter, up $45 million from a year ago. This increase includes $23 million of income from a single sale in our principle investing business, where we acquired investments to be sold or syndicated to institutional investors or placed in funds we manage. The rest of the increase, $22 million, included the benefits to current-quarter results from increased transaction and incentive fees and higher fees from administration of managed accounts, which more than offset lower income this quarter from our commercial mortgage operation.

The Financial Advisory segment had a loss of $97 million this quarter. Our 38% share of the results of Wachovia Securities, before transition costs, resulted in pretax income of $47 million, compared to 36 million a year ago, with reduced retail brokerage activity partly offsetting the benefit from expense saves in the comparison.

As I mentioned earlier, the segment's results absorbed expenses of 136 million in the quarter from obligations and costs we retained in connection with the contributed businesses, including the accrual for market timing that I mentioned earlier. In addition, current-quarter results absorbed $9 million of remaining transition cost.

In July, Wachovia announced that the integration is now complete.

After absorbing a total of $145 million in these retained and transition costs, the retail securities brokerage operations reported a loss of 98 million for the quarter. In the year-ago quarter, the segment reported an $80 million loss after absorbing $115 million of retained and transition costs.

Turning now to the International Insurance and Investments division, the International Insurance segment reported adjusted operating income of $327 million for the current quarter, compared to $244 million a year ago. The segment's results included adjusted operating income of $144 million from Gibraltar Life in the current quarter, up 29 million from a year ago. The current quarter benefited from a $9 million true-up of reserves. In addition, we took advantage of market opportunities to increase Gibraltar's U.S. dollars investments, contributing about $8 million to investment income margins in the current quarter. We will manage this part of our investment strategy based on relative strength of the dollar in relation to the yen going forward. The year-ago quarter included a $9 million benefit from extinguishment of liabilities established in connection with the restructuring of Gibraltar in 2001. Stripping out these items, adjusted operating income is up $21 million over the year-ago quarter, mainly due to improved investment income margins and more favorable mortality, together with a $7 million benefit in the comparison from translation of yen earnings at a more favorable rate.

Sales from Gibraltar Life, based on annualized premiums in constant dollars, were $94 million in the current quarter, up from $82 million a year ago. The increase was driven by greater sales of single-premium life insurance products and by a recently introduced U.S. dollar-denominated fixed annuity product which contributed $10 million to current-quarter sales. These products have targeted returns consistent with Gibraltar's overall product portfolio. They are attractive to a substantial portion of Gibraltar's customer base and meet a need for reinvestment of funds rolling out of maturing contracts, which tends to be concentrated in the second quarter.

Our Life Planner business, the international insurance operations other than Gibraltar Life, contributed $183 million of adjusted operating income in the current quarter, up $54 million from a year ago. The increase came mainly from continued business growth with insurance revenues for the quarter, excluding the estimated contribution of the Aoba Life business we acquired last year, up approximately 20% from a year ago on a constant-exchange rate basis. Current-quarter results also benefited from the Aoba business, which was fully integrated with our Prudential of Japan operation during the first quarter, and the business benefited from more favorable mortality and investment income margin. In addition, our Life Planner results benefited by $5 million in the comparison from more favorable foreign currency translation.

Sales from our Life Planner operations, based on annualized premiums in constant dollars, were $239 million in the current quarter, up 65% from a year ago. The increase was driven by U.S. dollar-denominated products we recently introduced in Japan and Korea that combine a protection element similar to our whole Life policies with the retirement income feature. The strong appeal of these products for the customers of our Life Planners resulted in an initial sales bulge continuing from the first quarter. In addition, current-quarter sales benefited from customer purchases in anticipation of a premium rate increase that was implemented late in the quarter.

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 second quarter with about 5,500 Life Planners, up 8% from a year ago.

Due to change in our recruiting cycle from quarterly to bimonthly, the second quarter had less than a Pro Rata share of the year's Life Planner hiring but a full quarter of normal attrition. As a result, the Life Planner count is essentially unchanged in the second quarter from the first quarter.

The International Investment segment reported adjusted operating income of $20 million for the quarter, compared to $25 million a year ago, reflecting a lower contribution from money-market funds and a modest decline from our Asset Management business in Korea.

Turning now to Corporate and Other, Corporate and Other operations reported adjusted operating income of $60 million for the second quarter, compared to $64 million a year ago. Corporate and Other operations include our real estate and relocation business, which contributed about half of the adjusted operating income for both the current quarter and the year-ago quarter.

Now, I'd like to comment on net income. Net income for the Financial Services Businesses was $754 million for the second quarter, compared to $519 million a year ago. Realized investment gains before taxes were 249 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 hedging instruments, primarily related to our foreign operations.

Impairments and credit related losses were insignificant in the quarter, amounting to just $8 million. Our gross unrealized losses on fixed maturities stood at $334 million at the end of the quarter, almost entirely on investment-grade securities and essentially interest rate-related. Non investment-grade fixed securities comprised less than 6% of the Financial Services Businesses' fixed maturity portfolio at the end of the quarter.

Briefly, on our 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 $129 million for the current quarter compared to $30 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 a higher level of realized investment gain.

Turning back now to the Financial Services Businesses and summing up, the Insurance division's protection businesses contributed to our earnings growth in this quarter with a benefit from reduction of the cost structure in individual life. Our strong annuity sales reflect the early success of our recently introduced product features, and we are investing in the organic growth potential of the annuity business.

Our domestic investment businesses are benefiting from the contribution of the retirement business we acquired from CIGNA with the integration on track and business retention well within our expectations. Asset Management results contributed to the quarter's earnings growth with strong transaction and incentive fees in the current quarter. Our international businesses reported a significant earnings increase for the quarter with continuing growth of our Life Planner insurance business, more favorable mortality and investment margins and the contribution of our recent Aoba Life acquisition.

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

Indeed. Thank you very much, Mr. Ryan, and our host panel. (OPERATOR INSTRUCTIONS). Jason Zucker with Fox-Pitt Kelton.

I wanted to start with the litigation-related charges and the couple of questions I wanted to ask around it is whether or not your guidance for 2005 has an expectation for some amount of litigation charges. In addition, in the release, you talked about an accrual for some of the market timing-related issues. I was wondering whether you had taken that before and whether or not that type of thing is also going to continue in that particular line.

Then just related to that line, I was also hoping that you could just share with us whether or not the Wachovia joint venture is tracking expectations, if we think about excluding transition costs and excluding litigation costs.

You know, this is Art Ryan. Thank you for the questions.

First, yes, our guidance does include all litigation costs. We've always included those costs in adjusted operating income but have tried to highlight them, if I can use that phrase, so that you understand what the real costs are, but they are included in our guidance.

The JV is tracking very well to our expectations. In fact, the cost saves are a little bit better. But that's been offset by a very weak retail brokerage market. But in general, we are very satisfied with the results and we believe, going forward, will be an excellent return on the capital that we have invested in the joint venture.

Mark is going to talk about the accrual itself.

Good morning.

We've described legacy legal expenses in the past as made up essentially of two parts. One is a part related to the market timing issue and the other is a part related to what I've called broker client arbitration suitability-type questions and other disputes between brokers and clients. We've not broken it down beyond that, but as we have historically recognized these expenses, there have been both of those parts reflected.

I don't suppose you'll go one step farther and tell us what your guidance is for the litigation costs.

Right, Jason. (LAUGHTER). No, we don't give guidance for that level of detail.

Okay, I didn't think so. Thank you.

Nigel Dally.

With variable annuities, I think there's still a couple of large states, including New York and New Jersey, which you are yet to introduce your Lifetime Five (indiscernible). Correct me if I'm wrong but I think some distributors will only sell the product if it's available nationally. Does that imply that there's still some channels, such as Wirehouse (indiscernible) where you get to introduce these products? Then I have a follow-up -- (technical difficulty).

You are right; we still do not have final approval in New York and New Jersey, as an example.

Actually, we do now in New Jersey as of August.

As of August, we received approval in New Jersey.

It is true that some national firms will not sell it unless you have all states but on the other hand, I think our issue is more an opportunity that deals with our historical absence in those channels. I think, as Mark commented, we were able to get on two of the wirehouse platforms most recently, and I think that's where the opportunity comes, as opposed to simply reflecting on the fact that national firms at times will not do it unless you're in all 50 states. This is an opportunity for us in the sense that we have not been strong on those platforms and we expect to be in the future.

That's helpful. A follow-up on the international business -- you mentioned some change in your recruiting, which is basically a sequential decline in the number of Life Planners. Can you provide a little more detail as to what the changes you are doing there? Are these changes to ramp up the level of future recruiting? If so, if there's any change in your (indiscernible) for new recruit growth?

No, the change was just more to reflect the time allocation of our agency and sales managers in those countries. We had switched to a quarterly recruiting pattern, and it simply wasn't as effective as our prior activities, which tended to be bimonthly. So, the reason you'll see it on a quarterly -- the kind of fluctuation that you mentioned is -- so for example in the first quarter, there were two recruiting cycles, while in the second quarter, there was only one recruiting cycle -- by going every other month.

We are still confident that we will have double-digit growth in our Life Planners and continue to have strong sales, so our pattern for recruiting has changed; our criteria for recruiting has not, and we're still quite confident that we will continue to grow our Life Planners as well as grow our Life Advisors in the Gibraltar channel as well.

Saul Martinez representing Bear Stearns.

A couple of questions on capital and capital management -- first, some of your competitors have issued perpetual preferreds with the recent change in Moody's methodology. Given your capital flexibility, is this something that you are considering as a way to reduce your cost of capital? If so, if you could talk about where you are in that process?

Then secondly, a more specific question, -- if you can give us an update on what your estimated RBC was at the end of the quarter.

On the second one, we don't disclose our quarterly RBC unless anything is filed that has it in the public domain.

On hybrids, you can view that as an opportunity for us. When we've talked about unused debt capacity, we have not factored that in and obviously, right now, we are still focused on deploying the capital we have, but you should think about it exactly the way you said; it will be a sensible part of our capital structure at some point and represent an opportunity.

Terrific. Thanks a lot.

Sanford Bernstein, Suneet Kamath.

Two questions, one follow-up on capital -- Art, you had mentioned that 625 million quarterly run-rate of buybacks is a reasonable expectation at the present time. I'm just wondering if you could provide some context around how long you think that level of buyback is sustainable.

Then a second numbers question on capital -- if I look at the equity attributed to the international business, even sequentially, it looks like it picked up about 7% or so. I'm just wondering about the flexibility that you have there in terms of being able to take some of that capital out and redeploy it elsewhere.

What we've said about the pace of buybacks, which we will reiterate, is that we believe that 625 is the base case until we say something different. So our expectation is we would be able to maintain that.

On international equity, the general lay of the land for us has been that we have been able, as a result of using a variety of techniques, to deploy capital that's been available in our international businesses. Sometimes it's a little bit lumpy, but our record over time has been pretty good here and I would say that we expect to continue to be able to use that capital, either keeping it in place for things like some of the acquisitions that we've made, or using other techniques to deploy it elsewhere within the Company.

Colin Devine representing Smith Barney.

I have three questions for you. First, on your new variable annuity products, perhaps you could just comment briefly on what is so appealing of your product and why you are so bullish on its outlook for success.

Secondly, with respect to the Life Planner business, perhaps you could just give us a little bit more of an update on what's happening, particularly in Korea. Obviously you made a lot of changes there last year. Sort of how are those playing out?

Then lastly, Mark, if we could talk about the sales practice costs this quarter. As you laid out, there's two parts to this. It's very difficult for me to believe that as we close in on $0.5 billion here since you started the JV, that much more than even 50 of that to be this normal sort of broker/client arbitration disputes (ph), which means we're looking at about 450 million put aside for has always been represented, as I understood it, fixed brokers, market timing on behalf of the client. That just seems a staggering amount. So my question is, is there something else that has come to light in the last quarter on some sort of improper actions that have led to the magnitude of this step-up in the charge?

Do you want me to take the last one first? Why don't I take the last one first? Your accumulation of costs since the formulation of the joint venture reflects a bunch of stuff. I'm not going to go through any specific details there, but there's more in there than just the market timing piece, as you characterized it. So I would be careful about the conclusion that you're drawing. We believe we're on track to move toward a settlement here, and we are continuing to do the best we can.

Okay, Mark, I don't think you answer the question, though, specifically. What has changed? Did something change in the last quarter, in terms of something else coming to light about improper actions (indiscernible)? Yes or no?

No. The answer is no, an unqualified no.

(inaudible).

I think, in terms of the variable annuity product, what is most attractive to it is the feedback we get back from financial advisors who are selling it and it's the simplicity of explaining a guarantee. As you well know, variable annuity products have become much closer to a true retirement product than simply a deferred savings account. At the same time, there's been a level of complexity that's been introduced into the product, and I don't mean just Prudential's product but the market in general, that has caused some concern. This product is pretty simple; it gives a lifetime guarantee, people understand it, and there is, I think, a reasonable demand from folks who are worried about living too long as opposed to dying too early to have something they understand and that incorporates this lifetime guarantee. I think that has a lot to do with the early sales results and why we are comfortable with it.

On the other hand, it suggests that one always has a permanent advantage in the product characteristics is also not true. This is a highly competitive market; there are very, very good players in this market, but we believe, in this particular case, we've had great success in first-to-market and hopefully we can continue that success but recognize that products change frequently and we have to invest and grow in that product as well.

Let me take your question on Korea. Korea, last year, had AOI of about $140 million, as you probably know. It's doing great. Its AOI in the second quarter of this year was $42 million; that compares to $32 million a year ago. Its annualized new business premium on a constant-exchange rate basis in the second quarter was up by 21%. Life Planners there, which were stagnant last year, were up 8% year-over-year as of June.

If you recall, last year, we had talked about some significant expansions in Korea and we're beginning to see the benefits from that expansion.

(OPERATOR INSTRUCTIONS). Peter Monaco (ph) with Tudor Investments.

Two questions, if I may? Thanks for your time, by the way.

The first relates to the Wachovia JV and the legacy expenses. Maybe this is a silly way to look at it, but isn't it fair to say that however much it costs to wrap this up, at the end of the day, it truly is a legacy item in the sense that you always have the put at your disposal, if you ever chose to use it? That's the first question.

The answer is you are absolutely correct. I mean, the legacy costs contained a lot of items. We've talked about arbitration; we've talked about market timing; we've talked about restructuring. There's a great deal of volatility.

In answer to the earlier question, we said there is nothing new but something that we will continue to manage, but your comment is correct; it is legacy. It will go away at some point in time. It is impossible for me to predict when.

On the other hand, we do have the option that you've talked about, but an option we're not likely to exercise because we're quite satisfied, as I said to an earlier question, in terms of the returns that we're generating based on the capital we have invested in the JV.

Fair enough. Secondly, to be sure that the pace, magnitude and duration of buyback will always be impacted by the performance of the businesses and related execution and whether or not you come across any opportunistic acquisition, but given what you' said about existing excess capital, including debt capacity, given what Mark added about bias toward incorporating preferred at some point, and then considering, for the sake of argument, the next three years of excess capital generation, which you typically have not disputed, approximates half or so of earnings. The sum total of all three of those figures, 3 plus maybe 2 billion of preferred capacity or approaching 2 billion and then 3 years of free capital generation at 1 billion or somewhat above that sums to 7.5 or so, very rough numbers. The implication is that you have the capacity to sustain this pace of buyback for at least three years. Is that a fair enough way to look at it?

If I take all of your assumptions -- and I have to obviously restate these are assumptions that you have made -- your calculations are quite accurate.

Thanks very much.

We will continue to either face the challenge or enjoy the opportunity, depending on how you look at it, of deploying our capital, regardless of the fine points. That will be part of us going forward.

Andrew Kligerman with UBS Warburg.

John Kim had -- well, just on the retirement business and the fund flows there, John Kim had cautioned that we would see negative flows this year. Then surprisingly, in the first quarter, we saw somewhat positive flows but he warned that, though the balance of the year, for a variety of reasons, it would stay negative as the acquisition is integrated. '06 should get positive. How positive can we expect to see the flows get, particularly in the defined contribution area? What would be some of the likely drivers?

If you recall, part of the first-quarter result was planned participant contributions as opposed to broader planned sales, and we did see a return to more normality in the second quarter and we were very much on track with respect to our broad view of sales and lapses as we go through the integration.

I'm going to let Eric comment on the projections that we talked about when we made the acquisition to give you a frame of reference on what we've said publicly about this. Do you want to do it?

Sure. Well, we never made specific projections about the sales that we expected in any given period, but let me say this -- we did talk about shock lapse, and the shock lapse should essentially run its course when the integration is complete, which we expect by the end of March of 2006.

On the other hand, right now, our first priority is getting the integration done correctly and keeping our existing customers happy. That's inevitably having some modest adverse effect on our sales efforts. That should also change by the early part of next year. So without giving you any numbers, we certainly would be expecting that we would have more inflows and fewer outflows next year that we have had this year.

Eric, just when you say shock lapses, is there any quantification you could give there on what actually the shock lapse is?

Now, I can't quantify it except to say that it is declining and it's been less than we expected. Actually, if you look at the numbers in the second quarter, we actually had a modest decline in lapses in the second quarter compared with the first.

I got it. Thank you.

Edward Spehar with Merrill Lynch.

Good morning. In terms of, Art, a comment you made about the CIGNA acquisition upfront, I think you said that the retention has exceeded expectations and earnings have been in line. I mean, is it too fine a point or is there anything we should infer about the margins on the business being somewhat less than what you thought?

No. What I was referring to was we had given you some guidance back in 2003 when we did the acquisition, and we are very much on track to achieving that. That's a combination of obviously the integration costs being in line with what we've said and the expected benefits being there. The shock lapse has been somewhat less than we had forecasted but in general, we are talking about a $2-plus billion acquisition that is basically on target for what we said in 2003 and will produce the returns that we talked about back then. That was really what I was reflecting in my comments -- not simply the increase year-over-year, but to relate it back to when we did the acquisition itself.

So no material change in the earnings today versus what you thought? Okay, and then one follow-up, again related to CIGNA -- do you have any updated expense guidance in terms of savings in '06? Has that changed at all from when you announced the deal?

No, it hasn't changed. The number for '06 but not necessarily beginning as of January 1, because the integration isn't expected to be complete until the end of March, is $110 million. That remains our guidance.

Just a couple of more embellished much on the performance of CIGNA -- we make it difficult for you because it's included in two segments; it's included in Asset Management and our Retirement segment. But if you add it up and you divide the after-tax annualized result for the year-to-date by the $2.1 billion purchase price, you already have a 10% ROE on the business against our ultimate target of 12 to 13%. We need to build the book up a little bit back to where it was in, let's say, 2002, to get to that 12 to 13%. That is going to require that we have the increase in sales and the decline in lapses I talked about in response to an earlier question.

The other piece of guidance that we've given you in the past is accretion. We said that, net of a modest opportunity cost on the $2.1 billion purchase price, we expected this acquisition to add $150 million to our bottom line this year. It added $75 million in the first half on that basis, so it's spot-on.

Very helpful. Thank you.

Vanessa Wilson representing Deutsche Bank.

Could you give us a little more color on what you did with the GM ID (ph) reserve and what the refinement related to? Then just flush that out and talk about how you're looking at the SOP 03-1 -- I'm sorry, the Phase III -- I can't even say all of these words any more -- the Phase III annuity reserving that will go into effect at the end of this year, the C3 (ph) Phase II?

(indiscernible).

We implemented the new rules, SOP 3-01 that affected how we account for certain insurance contracts. The GM IB (ph) accounting was a late addition to SOP 03-01 and our GAAP valuation models were not yet programmed to perform the detailed reserve calculation. In the interim, we applied a conservative, albeit a less-detailed approach. Our valuation model now has been updated to do the more detailed computation, and that yielded a $6 million reduction in the reserve. Just to put it in context, we have about 2.7 billion of contracts with that feature.

Does that answer your question, Vanessa?

Yes, that's perfect. The C3 Phase II?

Statutory capital.

We're not expecting a significant impact from the changes on that front. We are strong in terms of Risk Management and hedging capabilities, and we don't anticipate that that will be an issue for us.

Lehman Brothers, Eric Berg.

Thanks very much, and I guess it's still appropriate to say good morning. Eric or anyone else on the team, can you tell us, if you can't give us too many numbers, can you tell us whether the old Prudential pension business is cash flow positive? Whether you're getting air flows in your old business?

Yes.

Okay. My second question is a broader one, more of a strategic question. It is -- I believe, almost since the Company was taken public, you have been purposefully bringing down the number of career Prudential agents. In this quarter, we saw third parties figure more prominently than ever in the business, especially in the annuity line.

My question -- what is the future of the Prudential career force? Will their numbers continue to decline? When are we looking at stabilization? How should we think of this career force in the broader context of distribution by Prudential Financial?

Yes, I think that it's very important to look back at the history of Prudential and its career distribution activities. For a very long period of time, the career distribution channel was the equivalent of an agent in each town. It had relatively low productivity and was focused on what I will call the middle market or lower. Buying behavior has changed enormously around the world and in the United States in particular, as people look more and more towards their place of work, the Internet as well as career agents in order to sell or to buy life insurance or annuities.

If you look at the industry as a whole, the average age of a life insurance agent is over 50 years of age. So, the focus has been on productivity as opposed to reducing the agent count. We would love to continue to see growth in agent count, whether it's in the United States, Japan, Korea, or anyplace else we do business, but not at the expense of the financials. That is precisely the strategy and will be the strategy everywhere we go. So, we are committed to a career force, but we are first and foremost committed to producing the kinds of financial returns we think are appropriate and that our shareholders demand.

Very clear. Thank you, Arthur.

Jeff Hopson with A.G. Edwards.

I noticed that, in the asset-management business, the mutual fund sales have picked up fairly dramatically. Anything you can say there in regard to new products, or is this something that could be a trend?

Well, I would characterize that particular result as sort of lumpy. There is a subadvisory relationship in there that added a substantial contribution, as well as a large institutional account.

Tamara Kravec with Banc of America.

Good morning. Two questions, really -- the first is can you tell us the Lifetime Five product, what it was as a percentage of your new sales? Then giving us any further detail on the hedging framework that you talked about, the asset allocation model -- but can you give us any sense of how you think that's working and what's that really comprised of?

In answer to your first question, it was about a third of the sales -- one-third of -- (multiple speakers).

$600 million.

Okay.

The asset allocation model basically restricts equity market exposure. We also restrict the equity options within that so that the account -- I guess the best way to think about it is can't be overexposed to equities relative to the guarantee structure.

Okay. Do you have a team of people internally who put this together, or is this an external model, or --?

No, these are all internal models.

These are all internal, okay. Then my last question is, in terms of Scandia, where do you think that organic growth really settles out? How much are you planning really on investing in the wirehouse channel? Is that really the only place that you're looking at right now?

Well, obviously we want to grow everywhere we can. We've got a significant position as a result of the Scandia acquisition and the independent financial advisors, but we certainly want to continue our strong position there. We highlight the wirehouses. Because the prior ownership, we basically couldn't sell through the wirehouses and we don't have that prohibition now, so that's why it's a tremendous opportunity for us. But we view it as just one of the many channels we want to deal with, whether it's the bank channel, the independent financial advisors, our captive channel, and the wirehouses. So we look at them all as opportunities, but that one in particular because of our historical absence.

The organic growth -- do you think it's a double-digit growth kind of business over time, or --?

Well, I'd have to go with what most people in the market say, that it's probably closer to a high single digit growth. Those are the market numbers that most often and one that I think probably represents (indiscernible), so it's a high single digit growth business, yes.

With that, Mr. Ryan and our host panel, I will turn the call back to you for any closing remarks.

I have no additional comments. I once again want it to thank everyone for participating in the call and we look forward to talking to you again at the end of the third quarter. Have a good day. Thank you.

Very good. Thank you, Mr. Ryan. Ladies and gentlemen, your host is making today's conference available for digitized replay; it's for one week starting at 415 PM Eastern Daylight time August 4 all the way through 1159 PM August 11. To access AT&T's executive replay service, please dial 800-475-6701 and at the voice prompt, enter today's conference ID of 765308. Internationally, please dial 320-365-3844, again with the conference ID of 765308.

That does conclude our earnings call for this quarter. Thank you very much for your participation, as well as for using AT&T's executive teleconference service. You may now disconnect.