保德信金融集團 (PRU) 2005 Q4 法說會逐字稿

Good morning. Welcome to the Prudential fourth-quarter and year-end fiscal year 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 Prudential executive team presentation today, there will be opportunities for your questions. (OPERATOR INSTRUCTIONS). As a reminder, ladies and gentlemen, today's conference is being recorded. With that being said, let's get right to the fourth-quarter agenda. Here with our opening remarks is Prudential's head of Investor Relations, Mr. Eric Durant. Happy new year, Mr. Durant, and please go ahead.

Thank you, Brad, and happy new year to you too and thank all of you for joining us for our fourth-quarter 2005 call. Our speakers today are our usual duo of Art Ryan and Mark Grier and the supporting cast is again Rich Carbone, Peter Sayre and Dennis Sullivan, who will join Art and Mark for the Q&A.

In order to help you to understand Prudential Financial, we will make some forward-looking statements in the following presentation. It is possible that actual results may differ materially from the predictions we make today. Additional information regarding factors that could cause such a difference appears in the section titled forward-looking statements of our earnings press release for the fourth 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 representing profit or loss of certain of our businesses, which primarily originate investments for sale or syndication to unrelated investors and 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 accrue to contract holders and recorded changes in contract holder liabilities resulting from changes in related asset values. The comparable GAAP presentation and the reconciliation between the two for the fourth quarter are set out in our earnings press release on our website. Additional historical information relating to the Company's financial performance is also located on our website. Art.

Thank you, Eric. Good morning and welcome to everyone. Mark will be giving you a review of the fourth-quarter earnings so I will focus on the full year and the future. Our earnings per share for the year increased by 33% based on after-tax adjusted operating income. Just as importantly, we achieved our long stated goal of a 12% return on equity. For all of 2005, our return on equity was 12.4% compared to 10.2% in 2004 and 7.5% in 2003, all based on adjusted operating income.

These results reflect and validate actions we have taken in our first four years as a public company to strengthen our core businesses. Two acquisitions have enhanced our position in the broad savings and retirement market. American Skandia, which we acquired in May of 2003, has fulfilled our financial expectations from the beginning and it has significantly enhanced our competitive position in the annuities business.

You may recall that systems integration of this business was completed during the fourth quarter of 2004 so 2005 was in a sense a new beginning for our annuities business. And the business recorded strong sales, driven by expanded product offerings and enhanced distribution. The results, as I stated, were excellent.

Integration of the retirement business we acquired from CIGNA in 2004 is on schedule for completion in the first quarter of 2006. Importantly, our retention of business continues to exceed expectations. Now that we can see the light at the end of the tunnel on the integration, we have begun to invest in expansion of our full-service retirement capabilities.

Our domestic protection businesses, Individual Life and Group Insurance, each contributed to our earnings performance last year. Individual Life has made great strides in operating and improving the efficiency and quality of our career agency network while increasing sales to third-party channels.

In Group Insurance, our ability to grow life block while maintaining effective risk selection is evident in improving results. Asset Management had a banner year. Its earnings increased by more than 70%. This result reflected particularly favorable conditions in commercial real estate, appreciation in asset values and excellent flows.

Turning to Financial Advisory, the loss for this segment should not obscure the attractive returns we are earning on our investment in Wachovia Securities. Before transition costs and costs for retained obligations, including market timing, our 38% stake in Wachovia Securities produced a return on our investment of about 13% last year. With the integration of the retail brokerage business now complete, transition costs have gone away. And I can assure you that we look forward to reaching a settlement with authorities that would put market timing behind us as well.

Finally, our international division had an exceptional year. Gibraltar and Prudential's Life Planner businesses achieved 25% and 57% growth in adjusted operating income for the year. In addition, our International Investments business benefited from a full year's contribution from the former Hyundai Securities, which we acquired in 2004.

As you know, capital management has been central to our efforts to achieve our return on equity goals and it remains an important component of our plans. We were able to acquire American Skandia, CIGNA Retirement and Hyundai by reinvesting capital that was underemployed. In addition, we have used share repurchases to manage our capital. Last year, we repurchased $2.1 billion of common stock and a Board authorization to purchase up to $2.5 billion is in effect for 2006. We believe that repurchases of roughly $625 million per quarter is a realistic base case for Prudential at this time. That is where we are.

So what should you expect over the next couple of years, particularly 2006 and 2007? For 2006, we continue to believe that Prudential Financial will achieve common stock earnings per share in the range of $5.40 to $5.60 for the year 2006 based on adjusted operating income and assuming market appreciation in the S&P 500 of about 8% for the year. The midpoint of this guidance equates to a return on equity of roughly 13%.

Beyond 2006, the key for us is continued strong execution along with a business mix that I believe gives us the opportunity to outperform most of our competitors. We believe that Prudential has a superior mix of businesses; in particular, our businesses' combined growth with high return opportunities. We are also unusually well diversified between domestic and international, between insurance and investment businesses, between captive and third-party distribution channels. This diversity is reflected in the balance among the risks we manage and profit from, including exposure to mortality, interest rate and equity market risk.

Among our markets, we believe we have two substantial growth opportunities. First, there's no question that the international marketplace is offering faster growth opportunities today than the U.S. market. Our international operations are well-positioned to produce double-digit growth in earnings and to maintain outstanding returns on capital as they grow. Within the United States, we are well-positioned in the faster growing retirement and savings market through our annuities, retirement and Asset Management businesses.

Our Individual Life and Group Insurance businesses, although unlikely to grow as rapidly, are competitive and sound. In terms of distribution, we continue to evolve toward a multichannel strategy. In the United States, where we had a relatively late start in developing third-party capabilities, we have made important strides and are headed towards an appropriate mix of captive and third party.

And when I talk about multichannel strategy, I'm not simply talking about third party in the United States. If you look outside the United States, we see our Life Planner business has been successful in pursuing a distribution model that is virtually unique in each of its markets.

On the other hand, we are also enjoying good success in Japan with Gibraltar, where we have welded some of the features that have made our Life Planner distribution channel successful to the chassis of a traditional Japanese life distribution model. To cite a third example, our International Investments business in Korea, the former Hyundai, emphasizes proprietary distribution through a network of about 90 branches.

To sum up, we expect to achieve a 13% return on equity this year. In 2007, we look to continued improvement in ROE to the higher end of our stated 12% to 14% range for the '06 through '07 period. We also target double-digit average annual growth in adjusted operating income and earnings per share and reasonably consistent results due to the diversity within our portfolio of businesses.

Thinking beyond 2007, we expect to continue to produce double-digit EPS growth and our ROE accretion story will not be over. Continued growth in our high return businesses, improving scale economics and effective capital management will all drive our results to best in class levels, consistent with our emphasis on premium valuation for our shareholders. Now I'll turn it over to Mark.

Thank you, Art. Good morning, everyone. I will start with an overview of fourth-quarter results for the financial services businesses. We reported common stock EPS for the financial services businesses of $1.06 for the fourth quarter based on after-tax adjusted operating income. This includes expenses for this quarter for retained obligations from PFI that amounted to about $0.40 per share, mainly related to market timing.

In the year ago quarter, we reported common stock EPS of $0.96. Before I get into the business discussions, I would like to go through a short list of unusual items that affected our results this quarter, including the market timing charge. In the annuity business, we had a net favorable unlocking of DAC and other amortization items and reduced our reserve for guaranteed minimum benefits, which together contributed about $0.04 per share.

In our International Insurance business, income from a single joint venture contributed about $0.06 per share. On the other hand, our Life Planner and Gibraltar Life operations absorbed expenses for this quarter for technology and service improvements, as well as an advertising campaign. We estimate that this quarter's expense level compared to an average we would expect for the current level of business was a negative of about $0.05 per share, leaving a net positive of $0.01 per share in International Insurance.

Corporate and other results benefited from a reversal of expenses recorded in earlier periods amounting to $0.04 per share and mortgage prepayment income in the retirement business contributed another $0.01 per share.

Summing up, the net contribution of these items to our current quarter results was about $0.10 per share. Going the other way, current quarter adjusted operating income of our financial advisory segment includes pretax expenses of $267 million for retained obligations. These expenses are mainly driven by an increase in our accrual for estimated settlement costs related to market timing issues, which are now under active negotiation with state and federal authorities. Typically, a portion but not all of these costs would be tax-deductible and we have considered that in our tax provision.

The net effect is a reduction of our after-tax adjusted operating income amounting to about $0.40 per share for the overall retained cost. Transition costs are not a major item this quarter amounting to $0.01 per share for the integration of CIGNA's retirement business. We expect to wrap up this integration during the first quarter of this year without significant additional transition costs.

Now I'll review our business results for the quarter. The headlines are lower expenses in the insurance division's protection businesses, growth of asset-based fees in our annuity business, investment in the expansion of the full-service retirement business as we near completion of the CIGNA retirement integration, increased earnings from the Asset Management business driven by growth and assets under management and continued strong international results driven by business growth and actions we have taken to enhance investment income margins in the International Insurance operations.

I will start with the insurance division. Adjusted operating income from our Individual Life insurance business was $142 million for the current quarter, up $38 million from a year ago. The increase came essentially from lower expenses. Current quarter results benefited from actions we initiated to reduce headcount and occupancy costs in our Prudential agent distribution system. While results for the year-ago quarter absorbed the cost of this program.

Sales, excluding COLI, amounted to $116 million in the current quarter, up $10 million from a year ago. Variable life sales were up $8 million driven by two large case sales in the quarter and the remainder of the increase came from growth of our term insurance sales. We are continuing to emphasize cost-effectiveness in our Prudential agent channel while growing third-party distribution. With attrition mainly of lower producers, the Prudential agent count has declined from about 3700 a year ago to just under 3000 at the end of 2005 while annual per agent productivity of the remaining agents has increased nearly 10% from a year ago.

Current quarter sales by Prudential agents declined $8 million from a year ago reflecting the reduced headcount. On the other hand, sales through the third-party distribution channel increased $18 million over the year-ago quarter and contributed about half of overall non-COLI sales for the year 2005. This compares to a contribution of just over one quarter of sales for 2002, our first full year as a public company.

Our annuity business reported adjusted operating income of $143 million in the fourth quarter compared to $139 million a year ago. Current quarter results included a $30 million benefit from the unlocking and reduction of reserves for guaranteed minimum benefits that I mentioned earlier. This benefit came from more favorable experience, including mortality, persistency and investment results than our earlier expectations. The year-ago quarter also included a favorable unlocking, which amounted to $44 million. Stripping out these items, current quarter results were up $18 million from a year ago as market appreciation, together with $1.4 billion of net sales of variable annuities over the past year, drove higher asset-based fees.

Our gross variable annuity sales for the quarter were nearly $2 billion, up 52% from a year ago, on the continued strength of our Lifetime Five living benefit, which we introduced last March. We continue to enjoy a leading position in the independent financial planner distribution channel and are encouraged by our early progress in the wirehouse channel. We believe this channel offers us a substantial opportunity for growth since it accounts for about one quarter of industry variable annuity sales.

Sales in the wirehouse channel reached $176 million in the fourth quarter, double the contribution of a year ago as we've started to register production from two major new wirehouses added in April and June. We expect the recent enhancement of our sales force management with the creation of two new national sales positions we announced in January to contribute to continuing growth of our independent financial planner and wirehouse distribution.

The Group Insurance business is also performing well. This segment reported adjusted operating income of $80 million in the current quarter, up $26 million from a year ago. The increase came mainly from lower expenses as results in the year-ago quarter included costs related to legal and regulatory matters. Current quarter results also benefited from a greater net contribution from investment income. Group Insurance sales amounted to $51 million for the fourth quarter bringing total sales for the year to $524 million. Most of our Group Insurance sales are registered in the first quarter based on the effective date of the business sold.

Turning to the investment division. The retirement segment reported adjusted operating income of $91 million for the fourth quarter compared to $96 million a year ago. Now that the integration of the retirement business we acquired from CIGNA is nearing completion, we are viewing the segment as a single business with a strong competitive position in the full-service retirement market complemented by institutional investment products such as GICs and structured settlements.

As we move beyond the transition period, our focus will be on growing the full-service retirement business. To that end, we have begun to invest in sales force expansion, technology improvements and upgrades of client facing facilities. Higher expenses more than offset a lower level of transition costs, which amounted to $8 million in the current quarter versus $21 million a year ago. Gross sales of full-service retirement business were just over $3 billion for the fourth quarter bringing the year's sales to $13 billion. Full-service sales have remained at an average of about $3 billion per quarter since we acquired the CIGNA business with business integration our first priority.

I would also note that this business has a longer development period than retail businesses like annuities meaning that it can take as long as 12 to 24 months to record a sale starting from the beginning of a bid process. Withdrawals can be lumpy from one quarter to another and full-service withdrawals for the current quarter included about $300 million of participant outflows that resulted from two plan determinations by their employers. Plan lapses in the business we acquired from CIGNA continue to be well within our expectations. But consistent with our assumptions for the integration period, net sales for the year fell short of positive territory.

We approach sales of institutional investment products opportunistically considering the attractiveness of spreads and returns. Gross sales of these products were about $800 million for the quarter and just over $4 billion for the year.

The Asset Management segment had adjusted operating income of $109 million in the current quarter, up $19 million from a year ago. The increase tracks our growth in asset-based fees, which have benefited from a $30 billion increase in assets under management over the past year. Positive net flows and market appreciation both contributed to the increase in assets under management.

The Financial Advisory segment had a loss of $204 million this quarter, including our $267 million expense for retained obligations primarily related to our accrual for market timing that I mentioned earlier. Our 38% share of the results of the Wachovia joint venture resulted in pretax income of $61 million before these expenses. Now that the integration of the retail brokerage business is complete, transition costs are no longer a factor in quarterly results. This quarter's $61 million of pretax income compares to $54 million a year ago before transition costs with the increase reflecting increased fee income and the achievement of a lower expense structure in the joint venture.

In the year-ago quarter, the segment reported a $75 million loss after absorbing $137 million of retained and transition costs. With the transition costs associated with combining PSI and Wachovia Securities behind us, resolving the legal issues is the remaining challenge to the completion of our strategic solution to the underperforming retail brokerage business that we promised to find when we went public four years ago. While we are of course disappointed in the impact of these legal issues on the Company, overall, our exit from the brokerage business is a positive for us. The hidden value that is attributable to the success of the Wachovia Securities business more than offsets the negative and our deal structure allows us to realize this value if or when we believe it appropriate.

Turning now to the International Insurance and Investments division. The International Insurance segment reported adjusted operating income of $340 million for the current quarter compared to $219 million a year ago. The segment's results included adjusted operating income of $111 million from Gibraltar Life in the current quarter, up $18 million from a year ago. Gibraltar is continuing to benefit from improved investment income margins reflecting strategies we implemented in 2005 to lengthen maturities and increase U.S. dollar investments. In addition, results benefited by $6 million from translation of yen earnings at a more favorable exchange rate.

Partly offsetting these benefits was the higher than usual level of expenses in the current quarter that I mentioned earlier. For Gibraltar, we estimate that fourth-quarter expenses compared to an average we would expect for its current business volume had a negative effect of about $15 million. Sales from Gibraltar Life based on annualized premiums in constant dollars were $77 million in the current quarter, up from $65 million a year ago. The increase was driven by recently introduced U.S. dollar denominated fixed annuity and whole life products, which together contributed about $25 million to current quarter sales, more than offsetting a decline in sales of older yen denominated products.

Gibraltar had more than 5400 life advisers at the end of 2005, up nearly 500 from a year earlier. During the second half of the year, we increased the pace of recruiting in comparison to earlier quarters. We believe the expansion of our sales force will help us take better advantage of the opportunities in Gibraltar's market, especially the Teachers Association.

Our Life Planner business, the International Insurance operations other than Gibraltar Life, contributed $229 million of adjusted operating income in the current quarter, up $103 million from a year ago. Current quarter results include $44 million of investment income from a single joint venture that I mentioned earlier. This benefit was partly offset by a higher than usual level of expenses in the current quarter similar in nature to those incurred at Gibraltar with an estimated impact of about $20 million for the Life Planner business.

In addition, our Life Planner results benefited by $7 million from more favorable foreign currency translation while results for the year-ago quarter included an $11 million charge to true up investment income. Stripping out these items, adjusted operating income for the Life Planner business increased $61 million from a year ago mainly from two drivers. Business growth, particularly in Japan and Korea, together with the contribution of the Aoba business, which we acquired at the end of 2004 and enhanced investment income margins, which reflect portfolio strategies similar to those we implemented at Gibraltar.

Sales from our Life Planner operations based on annualized premiums in constant dollars were $197 million in the current quarter, essentially unchanged from a year ago. As we have noted in the past, sales are subject to fluctuations from quarter-to-quarter due to product introductions, rate changes and other factors. But when viewed over time, our Life Planner sales have broadly tracked our growth in the Life Planner count.

In the current quarter, sales in Japan dropped as we expected due to recent premium rate increases on our popular U.S. dollar denominated products. Earlier in the year, strong sales reflected customer purchases in anticipation of these rate increases, as well as our introduction of U.S. dollar denominated retirement income products. For the year as a whole, sales in Japan were up 29% on a constant dollar basis reflecting 8% growth in the Life Planner count and the initial sales bulge from the new product introduction.

Life Planner sales outside of Japan on a constant dollar basis increased by 17% for the quarter and 18% for the year. The International Investment segment reported adjusted operating income of $38 million for the quarter, up from $34 million a year ago.

Now getting into corporate and other. Corporate and other operations reported adjusted operating income of $75 million for the fourth quarter compared to $26 million a year ago. Current quarter results included the $30 million benefit from reversal of expenses that I mentioned earlier. This true-up relates to intercompany expenses we removed from the DAC we capitalized and maps to the line item for amortization of deferred policy acquisition costs in our income statement.

In the year-ago quarter, we recorded a $26 million charge for supplemental benefits to policyholders under previous contractual settlements related to sales practices in the 1980s and early '90s in the corporate and other segment.

Now I'll comment on net income. Net income for the financial services businesses was $377 million for the quarter compared to $317 million a year ago. Pretax realized investment gains and losses, including related charges and adjustments, were essentially awash in the quarter with impairments and credit related losses of $53 million offset by sundry gains mainly on equities in Japan.

Our gross unrealized losses on fixed maturities stood at $617 million at the end of the year with the vast majority 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 year. Fourth-quarter net income also included a $45 million pretax loss from divested businesses mainly relating to Canadian Individual Life business dating back to well before our demutualization, which we had been reporting within corporate and other results and are now preparing to sell.

And briefly our Closed Block Business, the results of the Closed Block Business are associated with the Class B stock. The Closed Block Business reported a net loss of $13 million for the current quarter and had net income of $261 million a year ago. We measure results for the Closed Block Business only based on GAAP rather than adjusted operating income. The decrease from last year reflects reserves established this quarter under GAAP related to the pattern of income in comparison to Closed Block expectations set at demutualization and a lower level of realized investment gains.

To wrap up, I would like to turn back to the financial services businesses and sum up where we came out for the full year 2005. Our after-tax adjusted operating income reached $4.83 per common share, registering a 34% increase over 2004 and translating to an after-tax ROE of 12.4%. We would view non-recurring and unusual items, including the benefits from DAC unlocking, significant onetime transactions in our asset management business, prepayment income and reserve refinements, as well as the unusually high retained PFI expenses we recorded to increase our accrual for market timing to be just about equal to each other for the year.

The main drivers of our business results for the year are improved results from our domestic protection businesses, including the benefit of a lower cost structure in Individual Life, growth of our individual annuity business following the completion of the American Skandia integration resulting in higher asset-based fees, a full year's contribution from the retirement business we acquired from CIGNA and continued growth of our international businesses, including the contribution of the Aoba Life business we acquired together with our actions to enhance investment income.

I am just making over the finish line here. Thank you for your interest in Prudential and we will look forward to your questions.

Indeed. And thank you very much Mr. Ryan, Mr. Carbone and our host panel for your time and for that overview of the fourth quarter today. And ladies and gentlemen, as you just heard, at this point, we turn towards your questions and comments. (OPERATOR INSTRUCTIONS). Saul Martinez, Bear Stearns.

A couple of questions on the market timing issues. Based on your commentary, Art, in your prepared remarks, is it fair to say that there finally is now potentially a light at the end of the tunnel with regards to a final settlement on the market timing issues?

I certainly hope so.

That is a succinct answer. In the past, you've also indicated that you're working with regulators on the mark -- that you were working with the regulators on these issues, but in this quarter, you discussed the negotiations and you took the big accrual. What has changed about the dynamic of your negotiations? Is it just that you're at a more advanced stage at this time?

I think that's a good way to summarize it, but I would say directly it is not a change in facts that has caused this change. It is a change in our estimate of what it is going to cost to resolve the issue. These are dynamic negotiations, as you are well aware of, and the cost of settlement, in our opinion, has gone up. The underlying facts have not changed.

Okay. Great. And just a couple quick questions on your capital position. Can you give us an update on your excess capital? Has it changed from the previous estimate of about $3.5 billion?

It's down about 500 million to $3 billion as a result of the buybacks and the dividend.

And do you have an estimate of your RBC at year-end?

We don't give that out.

Okay. Fair enough. Thanks a lot.

Nigel Dally, Morgan Stanley.

A couple of questions on Prudential in Japan. First, growth in Life Planner accounts of 8% running marginally below your target of 10% as it has for most quarters this year. Does this suggest recruiting is becoming more difficult or are there any other factors at play?

Second, sales obviously did very well in the first half of the year on the next product introductions; given the importance of product introductions can you discuss what you have in the pipeline for 2006?

And lastly, one of your competitors Sony Life seems to be doing well in offering a standalone medical sickness policy to their clients, hoping you can discuss would you be interested in that product in the future.

Nigel, I didn't get the last question.

(inaudible) the successful offering, a standalone medical products, medical product.

No in terms of the last one no, we're not looking to offer standalone medical products. I think that tends to be more of other American competitors who compete in the third segment as they call it in Japan. Our products are life insurance that do have certain riders that incorporate medical capabilities but we do not look to offer a standalone medical product.

In terms of the recruiting the recruiting was as you stated slightly below our target for this particular year. We are going to go back to monthly recruiting. We had changed the way in which we were doing some of the recruiting this year and I don't think there is any serious issues, it's just a matter of the timing and the way in which we had moved. We thought we would save some money by doing it a little bit differently I think we're better off going back to the way it has always worked for us in the past. So hopefully next year we will see numbers that approach our target even more closely in Japan as they have an all the other markets.

Product introduction is kind of interesting in Japan. A lot of it does tend to occur early in the year; you have got to remember they are on a different fiscal calendar, most of the Japanese companies in terms of the last quarter being our first quarter. We frequently see stronger growth in the early part of the year than in the later part of the year. But an awful lot of it has to do with the dynamics of the product itself; the dollar based product obviously is driven heavily by the expectation of what Japanese consumers believe will happen to the dollar yen rates since they take that particular risk. So I think it is fair to say that we deal in a very, very dynamic product market in Japan. It is a very aggressive market and one that we have been quite successful. And I think all we're really saying is that year over year results are probably more indicative of what happens in that market than quarter-over-quarter results.

I think we don't see the same dynamic historically in the United States with the changes in the various annuity businesses, not only ourselves but others, I think we're seeing some of the same characteristics there in terms of product introduction. So without trying to change the way we report obviously every quarter I think year-over-year is more indicative of our strength and growth opportunities than quarter-over-quarter.

Suneet Kamath, Sanford Bernstein.

I just wanted to drill down on the retirement segment. If I look at the normalized earnings excluding unusual items it looks like in each of the quarters of 2005 the earnings have been coming down ending in the fourth quarter of around $82 million. So I guess I kind of want to know what is going on there, how much of that is the increased spending that you're doing that you did in the fourth quarter? How much of that is yield curve related? And then when do you think we're going to start to see the earnings accelerate actually start to grow in that segment?

As I pointed out in my discussion we have started to replace some of the transition costs in this business with investment spending. We discussed in the third quarter and it would still be true today some of the pressure on spreads that we're realizing in that business, and I guess one of the broad themes, which I tried to highlight is that there is a long leadtime in growth in this business because the sales cycle unlike annuities can be as long as a year or two. So we realistically believe that we are very much on track. We are extremely pleased with the CIGNA acquisition but this business is going to emerge over time as opposed to as quickly as we saw the new product introductions have an impact in the annuities business. So I think the three broad trends are the investments in the business as transition costs and integration are behind us, the pressure on spreads, which we've already talked about and the time that it is going to take to establish momentum in sales.

Maybe just two quick follow-ups. First on the investment spending, should we assume that the fourth-quarter run rate is what we are going to see as we get into 2006 and then second, on the full-service withdrawals, I understand that a big piece of it, something like 60%, were participant withdrawals. I remember back at the investor day, you guys talked about having the annuity business and the retirement business as a competitive advantage. I am just wondering what sort of linkages have you established between those two to try to retain as much of the assets as possible and maybe roll them into some of your annuity products?

Let me just -- on the first part of that, we don't give guidance by individual business and I'm not going to get into specific details about our spending plans. We have talked about guidance for the total Company. I will let Art comment on the business issue.

I think that -- obviously, we're very pleased with the acquisition and the success of the integration to date. We said we would finish it by the end of '06. But it will require additional investments in terms of the kind of growth opportunities we expect over time. Mark mentioned the leadtime on institutional sales. I think it is early yet in terms of our ability to comment in terms of some of the activities of rollover into other Prudential products given the fact that there hasn't been a lot of that activity. The roll-out that we saw that Mark mentioned were planned terminations, not the normal retirement type of rollover that you would see.

We have really good success in terms of rollover, but certainly we want to improve that and over time, I think it is appropriate for us to give additional guidance and activity, not only in terms of new business and outflows, but also specifics on the kind of rollover as more and more people approach retirement. But it is too early for us to be doing that but I will take that as a good recommendation for us to do in the future.

Colin Devine.

A couple of quick questions. If we can start on the settlement, Art. The numbers here are, what, up to about $768 million now. Take out perhaps a little bit for the routine broker-dealer settlements arbitration. You're looking at roughly half the number AIG just settled for. Maybe you can give us a little more of an explanation as to how this is just related to market timing by a few brokers on behalf of their clients. That's number one.

Number two, with respect to the ROE, stock buybacks and EPS goals, can you reconcile for me how, if you're looking at $2.5 billion in buybacks this year, assuming you are obviously continuing to pay in the dividend, doing the math would suggest that book value is going to remain essentially unchanged and how does that then reconcile to a 13 ROE relative to the guidance if we're working off a $40 book value?

And then also since you opened up '07 -- again, if the buyback pace is going to be maintained, which assuming from the indication from Mark in the past into '07 and yourself, then are we looking at flat earnings for '07 as well?

Then if we could turn to one of the business units in terms of the Life Planners. When I am looking in for the -- excluding the Japan -- looking at Korea and the other countries, planners really were up only about 4% I think for the year. I would have thought with all the sales offices you opened in Korea we would have seen a little bit more there.

Then perhaps lastly on the comp plan and Mark and Eric and I discussed this, perhaps for everybody on the line, you could confirm that looking at the 150% payout for 13.5 ROE this year through '08 from the way you said comp really would only get you I guess a market average, midrange, sort of for the peer group and since I'm an impatient guy and I hate to wait for the proxy, perhaps you could put some color on what that means for your pay packages this year. Thank you.

Let me start with the first question on the market timing [settlement]. I'm not going to directly comment on your arithmetic, but it is inaccurate. I said, as I answered the earlier question, there's not a change in the underlying facts but the cost of resolution and certainly the case that we have is different than other companies' cases. But I don't think anyone would disagree that this is a very, very, very different environment in terms of what the penalties are for mistakes that are made and what is expected in order to resolve them. So I said it early and I'll say it again; it is not a change in facts but a change in our estimate of the cost resolution and it is very high-priced but one that we think is best to get behind us. I will let Mark talk a little bit about the book value question.

Or Rich.

I think, Colin, if you do it in total and you take off buybacks of 2.5, you take out what we might pay the dividend on an estimate, you add back net income and you do it in total, you are going to get, using the midpoint of our guidance, 13%. If you do it at the book value level per share and you do it on an EPS basis, I think what happens there is, because the price to book multiple is greater than one, it kind of screws up the arithmetic but I could do that calculation later and get back to you.

Mark, do you want to cover the other, the comp plan?

Yes, let me make a couple of comments on the comp plan and I have got some headlines here and if you would like further discussions we can probably do it separately. The first point is an important one, which is that asset can be benchmarked. Our compensation will be in the second quartile for achieving the 13.5% average ROE result. We believe this is appropriate. By second quartile by the way I mean closer to the middle of our peers than to the top of our peers. So we have not designed a plan that produces premium compensation for the 13.5% ROE result.

The second point I would make on this is that the upside for management beyond the number of shares determined by the plan is in share appreciation. That is the plan calculates a share outcome but the only way management's outcome can be improved beyond that is for the share price to go up. We also believe that this is appropriate.

The third point is that there is no cap or floor for that matter on the value of the payouts to management. The stock price will determine the value. The structure of the plan only determines the share outcome and again, as that share outcome can be benchmarked, we are in the second quartile with respect to total compensation for producing the 13.5% result. This plan is consistent with our emphasis on ROE accretion and on premium valuation and I think it provides us -- (technical difficulty) -- provides us with appropriate alignment with respect to shareholders and appropriate positioning in the market in the context of compensation versus performance.

Let me take the question on the Life Planner growth outside of Japan, Colin. As your question suggested, the slow rate of growth for the entire category is the result of only 2% growth in Korea reflecting the very challenging competitive conditions in the Korean market that we have talked about for some time. In particular, some of our competitors have been offering agents protection like commissions to sell savings like products, which we don't think is very intelligent; we have declined to do it. And I'm happy to report that we have noticed some recent easing in the competitive conditions as these other companies have been reaping the unintended but adverse consequences of their actions.

Having said all of that, I think it bears mentioning that the AOI in Korea was $172 million for the year, up from $137 million in 2004. That works out to a 26% increase and the sales for the full year were up 14% on an annualized new business premium constant exchange rate basis. So this business is still performing extremely well for us.

Two other comments in line with what Rich answered on the book value. Certainly we do not expect earnings to be flat in 2007. Our commitment for ROE growth, as well as double-digit earnings per share growth, is a multiyear commitment, not a one-your commitment. And second, as it relates to my own compensation, it hasn't been awarded yet. The Board will be meeting in February and that is the time in which compensation for all executives and all senior management are awarded by the Board and obviously it will be disclosed in the proxy statement.

Thanks. One quick follow-up though. On the 14% ROE upper end target for '07, working off what equity, a little over 20 billion, is only going to suggest, what, 5% nominal earnings growth for '07. Is that the conclusion I should be taking?

No.

No.

Assuming the buyback stays constant?

No, that's not -- as I said, I think that obviously depending on where in the higher you would go in that -- but again, my commitment is to continue to grow the ROE and double-digit earnings growth every year.

Jimmy Bhullar, JPMorgan.

I just have a couple of questions. First, are you able to break down that $0.40 by just a charge for market timing and normal litigation just to try to get a feel for how much of this might be legacy issue, excluding litigation, the type of stuff you have had in the past?

In the past, we have not broken that out and we do not break that out.

But I think you have said in the past that you thought that you were nearing the end of high charges for this market timing, obviously. I don't know if you assumed a charge for that for market timing.

What I have said in the past is that over time, the ongoing residual litigation would obviously decrease. It was difficult to predict quarter-to-quarter because of the -- its subject to when the claims are put in but over time, obviously, these claims will disappear. I'm just not able to tell you over what period of time.

In terms of the specific reserve for the market timing, which as I said, was a majority of the accrual we took in the fourth quarter, that is subject to my guess and my estimate as to what it will take to resolve the issue. I don't think I've ever said that I knew what that number was and even today, this is my best estimate as to what it will do and what it will cost.

And then in terms -- but the amount outside -- how much of the $0.40 was, you mentioned majority, but is the majority $0.35 or is it --?

We're not going to say anymore about that.

And then second on your -- in the annuity business in the U.S., I guess sales to wirehouse are going through Merrill Lynch and UBS partly. Have you exhausted how much sales you are or are you fully tapped out because those are new relationships? How much more growth do you think you can get out of Merrill Lynch and UBS?

A lot. They are new relationships for us. We have not obviously been active participants in that growth. I mean clearly the annuity business is, we consider, to be a good growth business and we would expect to get our fair share in each of the channels in which we participate. I don't know what exactly that share will be but to answer your question, no we have not tapped out or topped out in any of those channels.

Finally just on Japan, you have mentioned in the past you are not getting into or you don't intend to get into the VA business in Japan. Any change in that because I think you have introduced a fixed annuity product through Gibraltar. But any change in your thinking on the --?

We offered the fixed annuity product through Gibraltar because of the uniqueness of the Gibraltar franchise, namely the Teachers Association where a fixed annuity product, especially as they retire, is highly appropriate for building in that particular channel. We think the fixed annuity has some opportunities but not necessarily enormous and at the present time, we do not intend to enter the variable annuity business for the reasons we have stated in the past.

Tom Gallagher, Credit Suisse First Boston.

Two questions. First is, Mark, I don't know if I caught this right but I thought I heard you talking about potentially exiting the joint venture with Wachovia. I don't know if that was just a generic statement or if there was any teeth to that in terms of is that something being contemplated over the next couple of years? And then the second question is just on POJ, I know sales were a bit weaker this quarter but overall were very strong for the year. I guess based on product change that has been implemented as of late, is it reasonable to think that '06 might also be kind of a sluggish year there just based on I guess environmental factors plus the product change? Thanks.

Let me take the first one and then I'll ask Art to take the second one. That was a generic statement about the structure of the joint venture deal as opposed to any signal of a specific plan at this point.

In terms of the POJ, no, I don't think we were anticipating sluggish sales. As I said earlier, it is a highly competitive market but one in which we have been extremely successful and we expect to continue to be successful in 2007. No, I don't think sluggish is a word that I would use. I think we would use it not dissimilar to what we have said in the past where we look for double-digit sales growth in terms of our International Insurance operations ex-Gibraltar.

Related to the retirement business in terms of the increase in redemptions there -- Art, I guess you commented that persistency is still better than what you had expected. I presume that was an annual comment not a comment on what you saw this quarter and is there any anticipation based on what you're seeing right now that maybe the higher redemptions may stay there for awhile and then if you can comment on whether you still feel good about the outlook on retention.

I do feel good on it. I don't think the quarter was all that unusual. Remember, there are two aspects one has to remember. This requires an ovation process, which means it has to be accepted by every client in terms of the transfer and therefore, at the time of the deal, we had a forecast through normal attrition what would happen when you go through that process and our results are well in line with our expectations. So I think that would be true both for the quarter, as well as for the entire year.

I think the unusual item that Mark mentioned was planned termination. That doesn't necessarily relate to the acquisition that caused that downward trend. So I think what we are trying to signal on retirement is we love the deal, we love the business but this is a tough business to forecast immediate growth quarter-to-quarter. The institutional sales cycle is longer. But this is a very, very promising business over time with us and fits very nicely in terms of the mix of the businesses that we have within the Company as a whole.

And, Tom, our comments on lapse and sales experience, you should think of as sort of deal to date as opposed to any specific quarter. We're talking about the expectations we had when we did the deal. And the fourth quarter taken in that context, as Art said, is consistent with or better than our expectations. In the quarter, we had a couple of large lapses, as well as terminations that we mentioned, but overall, our experience deal to date is very much consistent with what we expected.

Ed Spehar, Merrill Lynch.

One quick question. Looking at the international segment, excluding Gibraltar, the amortization rate has come down for full year '05 versus full year '04 and I am wondering is this Aoba-related or is Aoba not a factor or is there something else going on here in terms of the mix or the underlying profitability of the business? Thanks.

I think that is more accounting noise than anything else. There is no change in our amortization policy. It just may have to do with the mix, as you said, and the products that are going in and out.

It's reflected at current rates of exchange, is it not and that alone would cause the same yen amount of amortization to be reflected in our financial statements as a significantly reduced dollar amount year-over-year.

Yes, I guess the question though is that that's going to affect both the revenue and the expense line and I am assuming that most of the amortization in the segment is driven off of premium and --.

That's right. It's mostly lock. It's mostly [FAS] 60 business?

Right. You had a -- on a dollar basis -- a 24% increase in premium for the year and DAC amortization up 3%. So it seems like that is pretty meaningful and maybe somebody could call me later and we could discuss it I guess.

I think that's fair. We will do that, Ed. I don't have a good answer for you right now.

Ladies and gentlemen, we do appreciate all of your interest you have shown in the Company today. However, taking a quick look at the clock, we have time now for one final question. We go to the line of Joan Zief now with Goldman Sachs.

I have two questions. The first one is when you talked about your guidance in the press release, you specifically mentioned the sensitivity of that range to the equity markets going up 2% a quarter, 8% a year. So my first question is could you just give me a little bit of a feel for the earnings sensitivity tied to the market and then my second question is you are talking about the full-service pension as one of your key long-term growth strategies. It just seems to me to be a pretty crowded market with margins under pressure. What do you see as your competitive advantage in that marketplace? What do you bring to the table?

Let me take the second one first, Joan, on the full-service pension. You're right. It is a competitive market not only in terms of historical insurance companies but obviously money management firms and as well as retail brokerage firms. Each of the competitors brings their own skills and capabilities to the market. We have a couple.

First, in terms of the stable value product, the key to that product obviously is having an insurance license. That gives us a competitive advantage right there over a number of well-known competitors. But second, going beyond that, our ability to be a leader in the private placement market has allowed us to manage that product in a way that produces excellent returns for the investor but also good returns for us as well. And so both of those I think are distinguishing features that we have.

In addition, we now have the scale with the CIGNA acquisition where our technology costs and our cents amortized over the number of participants we have, 3 million if you take both defined contribution and defined benefit, which means that while we don't necessarily have a scale advantage over some very large competitors, we are highly competitive in terms of our ability to manage unit costs and to invest in technology.

Last but not least was our long-term relationships in the institutional market. We have been a player in the institutional market in terms of Asset Management and related products for a long period of time and that gives us I think excellent credibility with many of the clients that would be making these decisions. So I think we are competitive on unit costs and technology. We are certainly competitive on market presence and we have competitive advantage in terms of stable value and private placements.

On the equity sensitivity question, I would just have two things to say. One is to reinforce that 8% equity market appreciation is what is reflected in our guidance and then secondly, equity sensitivity with respect to our income statement is a very complicated issue. The equity markets affect us through a lot of different specific line items on the income statement and what we have said in the past on this is that we manage our equity exposures so that in a pretty bad market, the Company would still earn a double-digit return. I guess that is the gist of it because it can't be parsed into a specific linkage between the markets change tomorrow and earnings. There are corridors; there are lumpy adjustments. There are also some smooth changes but the net is that we think of our equity risk in terms of the impact on the total Company and all the components of our income statement and as I said, we manage so that we believe that in a really bad market we would still produce double-digit returns.

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

Thank you very, very much for joining us today and obviously for the in-depth questions that were provided. Again 2005 was a successful year with earnings up over 30% on an adjusted operating bases and importantly, for many of us, achieving our multiyear goal of a 12% return on equity. Hopefully, we have been able to signal to you that we are certainly not done. We look very, very good in terms of the future and we are quite optimistic about our ability to meet the targets that we have set forward in the marketplace. With that, I thank you very much and have a good day.

Ladies and gentlemen, your host is making today's conference available for digitized replay for one week. It starts at 4:15 PM Eastern standard time February 9 all the way through 11:59 PM February 16. To access AT&T's executive replay service, please dial 800-475-6701. At the voice prompt enter today's conference ID of 813616. Internationally, you may access the replay as well by dialing 320-365-3844 again with the conference ID of 813616. That does conclude our 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.