保德信金融集團 (PRU) 2006 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Prudential first-quarter 2006 earnings call. For the conference, all the participant lines will be in a listen-only mode. However, that will be an opportunity for your questions and instructions will be given at that time. (OPERATOR INSTRUCTIONS). As a reminder, today's call is being recorded. I would now like to turn the call over to Mr. Eric Durant, Head of Investor Relations. Please go ahead.

Thank you, John and thank all of you for joining our call. This may be hard to believe, but this is Prudential's 18th conference call to review and discuss quarterly earnings since our demutualization in December 2001.

Our lineup is the same as it has been for all of our calls. Art Ryan and Mark Grier will be presenting today and after that, we will have at your questions. With Rich Carbone and Peter Sayre joining Art and Mark in response to whatever is on your mind.

In order to help you to understand Prudential Financial, we will make some forward-looking statements in the following presentation. It is possible that actual results may differ materially from the predictions we make today. Additional information regarding factors that could cause such a difference appears in the section titled Forward-Looking Statements of our earnings press release for the first quarter of 2006, which can be found on our website at www.investor.Prudential.com.

In addition, in managing our business, 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. Wow, this is a mouthful.

Adjusted operating income also excludes reported changes in asset value 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 first quarter are set out in our earnings press release on our website. Additional historical information relating to the Company's financial performance is also located on our website. With that, here is Art Ryan.

Good morning and welcome. I will be brief to allow time for Mark's detailed review of the quarter and also for your questions. In sum, Prudential is off to a good start for the year. Our earnings per share for the first quarter increased by 15% based on after-tax adjusted operating income.

Our annualized return on equity in the quarter, again based on after-tax adjusted operating income, was 13.6%. Bear in mind that adjusted operating income includes the effect of items that we consider unusual. This quarter, AOI includes an expense to increase our reserve for estimated settlement costs of market timing issues, as well as a small number of partially offsetting favorable items that Mark will cover.

Clearly, Prudential's underlying earnings power in the first quarter, if sustained, would result in earnings per share for full year 2006 above our guidance of $5.40 to $5.60. Our businesses are performing well and market conditions have been better than expected, both for equities and for commercial real estate investments.

On the other hand, the year is young. At this early date, our guidance for Prudential's 2006 common stock earnings per share remains $5.40 to $5.60 based on adjusted operating income and assuming appreciation in the S&P 500 of 2% per quarter for the balance of the year. We revisit guidance quarterly and are more inclined to change our numbers as the year unfolds.

The midpoint of guidance equates to a return on common equity of roughly 13% for 2006 versus an actual 2005 full-year return on equity of 12.4%. Our stated goal has been to improve ROE from last year's 12% to roughly 14% in 2007 assuming normal market conditions.

While we are not prepared to declare victory based on a single quarter's annualized results, I am confident that we will reach or exceed our 14% goal on or ahead of schedule.

Let me now touch on a few other topics. First, market timing. We are in active negotiations with state and federal authorities to achieve a global resolution of these issues. We expect to achieve a settlement without material additions to our reserve for estimated settlement costs. Because negotiations are in process, I am really not able to comment further at this time nor will I be able to address any questions that you may have on this subject.

Second is acquisitions. Integration of the retirement business we acquired from CIGNA in 2004 is complete. Investment in expansion of our full-service retirement capabilities, which began in the fourth quarter of last year, continued in the first quarter. This business infrastructure expansion should in time lead to increases in planned and retail rollover sales.

Our acquisition of Allstate Corporation's variable annuity business, which we announced in March, is expected to close by midyear. This acquisition will increase the scale of our annuities business. We are adding roughly $15 billion in variable annuity assets and will provide exclusive access to Allstate's proprietary channel, as well as complementary distribution in the broker and bank channels.

We expect to hire substantially all of Allstate's roughly 50 wholesalers covering the proprietary and brokered channels. Our initial investment in this business is estimated to be approximately $560 million. We expect to earn an unlevered double-digit return on this investment during the first year and beyond.

The third area I will cover is excess capital. We continue to estimate that excess capital exceeds $3 billion. This estimate includes untapped borrowing capacity, but excludes our capacity to issue preferred stock. While the Allstate acquisition will utilize excess capital, all else the same, our businesses generate more capital than they need to support their growth. We still have dry powder to pursue acquisition and to repurchase shares.

A Board authorization to purchase up to $2.5 billion this calendar year is in effect and we believe that repurchases of roughly $625 million per quarter remains a realistic base case for Prudential at this time. Now I will turn it over to Mark.

Thanks, Art. Good morning, everyone or good afternoon, everyone or good evening, everyone. I will start with an overview of first-quarter results for the financial services businesses. We reported common stock earnings per share for the financial services businesses of $1.36 for the first quarter based on after-tax adjusted operating income, which includes expenses this quarter for retained obligations from PSI that amounted to about $0.25 per share mainly related to market timing.

In the year-ago quarter, we reported common stock earnings per share of $1.18. I view our business results this quarter as very strong, giving us a good start on the year as a whole.

Before I get into the business discussion, I would like to go through a short list of unusual or possibly unsustainable items that affected our results this quarter, as well as the market timing charge. Our Financial Advisory segment received stock as part of the commencement of public trading of New York Stock Exchange shares, essentially a demutualization of our membership. And we recorded income for the value of the shares. This income, together with mark to market income on similar exchange-related shares in our International Investments segment, contributed a total of $0.08 per share.

Mortality in Individual Life was more favorable than our average expectations contributing another $0.02 per share. And in the Asset Management business, while we had no major single event in the quarter that I would call unusual, we continued to benefit from a strong commercial real estate market and market sensitive revenue was very robust.

Going the other way, current quarter results of our Financial Advisory segment include pre-tax expenses of $176 million for retained obligations, mainly representing an increase in our reserve for estimated settlement costs related to market timing issues. Both the current quarter expenses and the similar expenses we recorded in the fourth quarter stem from our active negotiations with state and federal authorities as we are pursuing a global resolution for all of the market timing-related issues.

Now I will review our business results for the quarter. I'll start with the insurance division. Adjusted operating income from our Individual Life insurance business was $133 million for the current quarter, up $16 million from a year ago. Mortality experience improved in comparison to a year ago and was better than our average expectation, which we reset at the beginning of this year looking back over five years of experience.

Increased fees reflecting growth in account values also benefited current quarter results. In addition, spreads on our general account business improved as yields on the shorter duration part of our investment portfolio increased. This largely offset the benefit to year-ago results from collection of $10 million of investment income on a bond that had been in default.

Sales, excluding COLI, amounted to $92 million in the current quarter compared to $99 million a year ago. Sales in the Prudential agent channel were down $15 million reflecting a decline in agent count, as well as the impact of one large case sale last year. The agent count declined to 2850 at the end of the first quarter from about 3500 a year earlier due to attrition mainly of lower producers as we continue to focus on cost-effectiveness in this channel.

At the same time, we are continuing to grow third-party production, which accounted for more than half of our sales this quarter. Sales from third-party distribution were up $8 million or 21% marking the fifth consecutive quarter that we registered a year-over-year double-digit increase.

Our annuity business reported adjusted operating income of $118 million in the first quarter compared to $100 million a year ago, which included a $9 million benefit from collection of investment income on a bond that had been in default. Stripping that year-ago item out of the comparison, results were up $27 million as market appreciation, together with $1.9 billion of net sales of variable annuities over the past year, drove higher asset-based fees.

Our growth variable annuity sales for the quarter were more than $2 billion, up almost 50% from a year ago when we introduced our Lifetime Five living benefit. Our product lineup with a full suite of living benefits continues to perform well in each of our distribution channels. We see a major opportunity in the income for life market and recently added Spousal Lifetime Five to the portfolio offering lifetime income to a married couple with no reduction in annual income at the death of the first spouse.

Our product strength is supporting our efforts to expand distribution and we are continuing to see good progress in development of the wirehouse channel where sales were nearly $200 million in the quarter, more than double the contribution a year ago. Our acquisition of Allstate's variable annuity business, expected to close by the end of the second quarter, will significantly bolster our distribution and we believe our products will be an excellent fit for the distribution access that comes to us with the acquisition, including several major wirehouse relationships and Allstate's proprietary channel.

The Group Insurance business is also performing well. This segment reported adjusted operating income of $47 million in the current quarter, up $9 million from a year ago. The increase came from improved disability claims experience, which was unfavorable a year ago. The improvement is largely a result of more favorable claims resolutions, an area where we have taken steps to improve our capabilities and about which we have spoken in the past.

Most of our Group Insurance sales are registered in the first quarter based on effective dates of the business sold and sales amounted to $280 million for the current quarter. This compares to $350 million a year ago when we recorded sales of about $100 million from a single large group life case.

Turning now to the investment division, the Retirement segment reported adjusted operating income of $137 million for the current quarter compared to $155 million a year ago. Results for the year-ago quarter benefited from reserve releases based on client census data for a block of group annuity business and also from the collection of investment income on a bond that has been in default for a total of $17 million. Stripping out these items from the comparison, results were essentially unchanged from a year ago.

With the integration of the Retirement business we acquired from CIGNA completed on schedule during the first quarter and now behind us, our focus will be on growing the full-service Retirement business where we see an attractive long-term opportunity. To that end, we are investing in sales force expansion and client servicing capabilities.

Higher expenses in the current quarter more than offset higher fees from growth in full-service retirement account values, which are up $8 billion from a year ago. Gross sales of full-service retirement business were $5.4 billion for the first quarter, which included $1.6 billion for a single large case. This business has a longer development period than retail businesses such as 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. As a result, it would probably not be realistic to expect to see a dramatic change in the average level of quarterly sales immediately after our completion of the business integration.

Withdrawals in this business can be lumpy from one quarter to another and full-service withdrawals for the current quarter included $2.1 billion from three large cases partly driven by merger and acquisition activity and planned consolidations. Net sales in the business were just about flat.

The Asset Management segment had adjusted operating income of $169 million in the current quarter, up $35 million from a year ago. The increase came mainly from increased incentive fees primarily related to our management of commercial real estate investments for third parties and growth in asset-based fees, which have benefited from a $33 billion or 10% increase in assets under management over the past year. Positive net flows and market appreciation both contributed to the increase in assets under management.

Results from our proprietary investing business also continuing to benefit from the strong commercial real estate market were essentially unchanged from a year ago when we recorded income of $35 million from a single sale.

The Financial Advisory segment had a loss of $66 million this quarter compared to adjusted operating income of $15 million a year ago. Current quarter results include two items I mentioned earlier; our $176 million expense for retained obligations primarily related to our reserve for market timing and $42 million of income mainly from receipt of shares related to New York Stock Exchange memberships.

Results for the year-ago quarter included $38 million of retained and transition costs. Stripping out these items, the Financial Advisory segment's operations contributed pretax income of $68 million to current quarter results compared to $53 million a year ago. This reflects a greater contribution from our retail brokerage joint venture with Wachovia, which benefited from growth in fee income.

Our earnings from the joint venture this quarter equate to a 16% annualized after-tax return on our investment.

Turning to the International Insurance and Investments division, the International Insurance segment reported adjusted operating income of $338 million for the current quarter compared to $285 million a year ago. The segment's results included adjusted operating income of $110 million from Gibraltar Life in the current quarter compared to $106 million a year ago. Gibraltar's comparison benefited from improved investment income margins reflecting strategies we implemented last year to lengthen maturities and increase U.S. dollar investments.

In addition, results benefited by $5 million from translation of yen earnings at a more favorable rate. Partly offsetting these benefits was a less favorable level of policy benefits and expenses. Sales in Gibraltar Life based on annualized premiums in constant dollars were $76 million in the current quarter, up from $68 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 product.

Gibraltar had more than 5700 Life Advisors at the end of the first quarter, up about 800 from a year earlier. During the second half of last year, we increased the pace of recruiting to 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 $228 million of adjusted operating income in the current quarter, up $49 million from a year ago. The increase came mainly from business growth, particularly in Japan and Korea, coupled with a more favorable level of policy benefits and expenses. The increase also came from enhanced investment margins, which reflect portfolio strategies similar to those we implemented at Gibraltar.

In addition, our Life Planner results benefited from $13 million from more favorable foreign currency translation. We had our third-best sales quarter ever and we are comparing to another of the three best quarters a year ago. And sales from our Life Planner operations based on annualized premiums in constant dollars were $219 million in the current quarter compared to $232 million a year earlier.

The year-ago quarter benefited from an initial sales bulge in Japan from our U.S. dollar denominated retirement income and whole life policies, which has been recently introduced in the Life Planner market and proved very popular. Sales of these products declined as we expected following the initial impact of the product introductions, as well as premium rate increases we implemented later last year.

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. Our Life Planner count in Japan was just under 2900 at the end of the first quarter, an increase of about 200 or 7% from a year earlier. Life Planners in other countries, which mainly reflects our Korean operation, also stood at about 2900, essentially unchanged from a year ago reflecting heightened competition for sales representatives in Korea coupled with our maintenance of very selective recruiting standards consistent with the Life Planner model.

The International Investments segment reported adjusted operating income of $44 million for the current quarter, up from $25 million a year ago. Current quarter results include the mark to market income on shares and securities exchanges held in this segment, which I mentioned earlier. This amounted to $15 million.

Turning now to corporate and other. Corporate and other operations reported adjusted operating income of $26 million for the first quarter compared to $17 million a year ago. The increase came mainly from investment income net of interest expense and reflects the spread we're earning from investing the proceeds of our $2 billion convertible debt issue last November.

Now let me comment on net income. Net income for the financial services businesses was $675 million for the first quarter compared to $766 million a year ago. Pretax realized investment gains, including related charges and adjustments, were $51 million in the current quarter. The net gains reflected sales of equities in Japan, which along with other realized gains and losses more than offset the $15 million of credit-related losses and impairments.

Our gross unrealized losses on fixed maturities in our general account stood at $1.1 billion at the end of the first quarter with the vast majority on investment-grade securities and essentially interest rate-related. Non-investment grade fixed maturities comprised about 6% of the financial services businesses' fixed maturity portfolio at the end of the first quarter.

Briefly on our closed block business, the results for the closed block business are associated with our Class B stock. The closed block business reported net income of $58 million for the current quarter compared to $163 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 a lower level of realized investment gains.

Turning back to the financial services businesses and summing up. The insurance division is benefiting from continued growth of our annuity business and good performance in our domestic protection business with current quarter results bolstered by favorable mortality in Individual Life.

In the investment division, our Asset Management business registered strong results reflecting growth of asset-based and performance fees with a continued benefit of a favorable commercial real estate market.

In Prudential Retirement, with the business integration now behind us, we are investing in the expansion of our full-service retirement capabilities.

Our International businesses reported a significant earnings increase for the quarter with business growth in our Life Planner insurance operation complemented by increased investment income margins reflecting our implementation of certain portfolio strategies.

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

(OPERATOR INSTRUCTIONS). Jason Zucker, Fox-Pitt.

The question is now that we are through the litigation charges, could you tell us what you had assumed for 2006 that is behind the $5.40 to $5.60?

You mean with respect to litigation charges?

Yes. Can you tell us what your underlying assumption was for those expenses for the year?

The way we account for this, which is proper, is that the assumption is booked.

Okay.

So whatever was in last year was where we stood at the time we issued that guidance.

So just to clarify for myself then, you mean if I look at last year's expenses, that is what you were expecting in 2006 or the $5.40 to $5.60 doesn't include any additional expenses?

The $5.40 to $55.60 doesn't include additional expenses. Again, had we expected an additional number, we would have booked it.

Okay. Great. And then just turning to some of the specifics, with respect to Allstate, do you have other opportunities to sell into their agency force, any other products? Then internationally, I was hoping you could just comment as to how much you might have spent getting into China and Mexico.

In terms of Allstate, our agreement with them is the sale of variable annuities and only variable annuities. The reason of course being that was the only product that Allstate was selling. They have retained their other products, which include property and casualty, life insurance and fixed annuities. So it really includes -- it is only an agreement on variable annuities.

In terms of China and India, India has been de minims -- did you say -- Oh and Mexico, I'm sorry.

Yes.

I am going to have to give you rough estimates. I don't have the exact numbers, but in the case of China, we have a joint venture with Everbright, of which the capital contribution was roughly $15 million to $20 million. We also said that we are part of a consortium with the Carlisle group in terms of the acquisition of China Pacific Life and that investment is -- it is very modest. In terms of -- that has not been disclosed. That is the reason why I am not giving you the exact number.

In the case of Mexico, our total investment is probably under $50 million at this point in time. We have a new startup operation in life. We have an investment in the pension business and we have a mutual fund business. But what I would like to do is really go back and validate each of those numbers and I'll come back to you on it. But obviously my intent in answering them is they are not substantial relative to our international investments to date.

Saul Martinez, Bear Stearns.

Two questions. Obviously, year-over-year sales comparisons at POJ were skewed by the introduction of dollar denominated products last year. Can you give us a sense for whether there are any new product introductions planned at POJ that you can talk about and then secondly, on your capital strategy, in the past, you have discussed getting to a goal of 70% common equity, 10% to 20% debt and 10% hybrids. Can you give us any sense for how quickly you can move to this optimal capital structure?

This is Rich. Well, the debt structure, that 20% debt to capital, we're going to try to approach that by year end. The hybrids will probably take a little longer, but eventually we will reach that 70/20/10 and that is a rating agency look or view of the capital structure.

In terms of the POJ sales, you are right. Last year, there was a tremendous response to the dollar denominated products both in the first and second quarter. We still had strong sales in the first quarter. You've got to remember in the first half of last year at Prudential of Japan, over the first half of 2004, sales were up over 50%. So over a two-year period, they have done extremely well.

In terms of new products, we are obviously always looking to introduce new products. I don't think we have any at the moment that we expect to have the comparable effect of the dollar-based product, but we still expect to have good sales on those dollar-based products for the retirement income component and obviously, as Mark said, the key for us is in terms of Life Planner growth because that really is a driver of our product sales and then periodically will have very nice spikes as a result of the unique product offering. But I don't think I can predict that every year.

Then just to follow up on the Life Planner growth. Obviously, you made some cautious comments on Korea and I think Life Planner declined. The number of Life Planners there actually declined a little bit year-over-year. Do you think things will pick up there in terms of Life Planner growth?

Yes, interestingly, our business is good. Our sales are actually up even with, as you correctly point out, the decline in Life Planners. The majority of the Life Planner loss has been recruitment by other companies. We clearly expect that to stop or slow down in the near future, but it is not something I can predict. I am not too concerned that there is a fundamental problem in our business, but competition picks up every now and then and we have to respond accordingly.

Interestingly since sales are up and Life Planner count is down, you can gather what type of -- which portion of the Life Planners are being recruited. Namely those that are less productive in our system. So our recruiting is going fine and I think we will continue and we will of course do our best to respond to the hiring by other companies over the near term.

Nigel Dally, Morgan Stanley.

Just sticking with the growth in Life Planners. You commented on the reasons for the weakness in Korea, but Japan lost planner growth at 7%, but still below your target of 10%. Looking at the past results, it has been below target for four out of the last five quarters. So I was hoping you can discuss the factors which are holding recruiting down and any initiatives you have in place to move that back up to 10%.

Second, if we can get an update on the outlook for consolidation opportunities, both in the U.S. and internationally. Thanks.

On the POJ, you are absolutely correct. Our target is 10% and you're also correct; we have been below it. There are two principal reasons. One is mechanical as we have moved people into other positions within POJ. That represented somewhere between 1% and 2% in terms of Life Planners, still slightly below our 10% target.

The second thing we have done is, and I've talked about this a few other times, is we have been changing our recruiting cycle in the hopes that we could reduce the amount of time monthly that management spends doing that. We have been doing that really over the last two years and very frankly we're going to go back to monthly recruiting. It works best in terms of recruiting and we believe that the investment we have made in additional management time will pay off and get us closer to the target more frequently. So that is the principal issue around POJ.

Again the business is extremely strong. We are very, very confident in the business and look forward to continued strong growth there.

In terms of consolidation, obviously as I had mentioned given our strong capital position, bolt-on acquisitions to our existing businesses is clearly a high priority for us, as is also the case, I don't control that. We were fortunate obviously in winning the Allstate variable annuity business and we will look for adding to any and all of our existing businesses whether here in the U.S. or outside the U.S.

I am somewhat less optimistic at this point because pricing is higher. You tend to see a higher level of acquisitions on the market when folks are doing less well. Obviously markets have allowed most companies to do reasonably well, but again we proactively scan the market. We look both here in the U.S., Asia and in Latin America particularly for new opportunities and I am hopeful that we will find those opportunities, but again we will continue the pricing discipline that we have had in the past and we will be adding to our existing businesses, not looking to enter any new lines of business.

Suneet Kamath, Sanford Bernstein.

Two questions. First on the buybacks. Some of your peers have been using these accelerated buyback programs. Whereas you guys have stuck with a more gradual quarterly share buyback. I am just wondering if you thought about the accelerated buybacks and if there is any impact from that convertible that you issued last year in terms of the stock price and when that might start to be dilutive.

And then second on the Retirement business, I think Principal has been having a lot of success with this total retirement suite offering that they have because it bundles a lot of the retirement offerings; ESOP, nonqualified plans, etc. I am just wondering if that is something you're considering offering as well. Thanks.

I will take the second one and then I'll let Mark answer the first. You are right. Principal is an outstanding competitor in the retirement business and yes, we do have what we call TRS, total retirement service package. That service is to find benefit, to find contribution on qualified and the like and so as we continue to invest in our distribution capabilities, we expect to be very, very competitive.

In fact, in our most recent sales, it represented about 25% of our sales were total retirement service or the total retirement package that you mentioned. So we will be very competitive with it and we expect to get even more competitive now that we have completed the conversion.

On the capital management question, we have not contemplated accelerating our share repurchases. We believe that we are implementing the plan that we have actually laid out four years ago with respect to managing our capital structure and we expect to stay on the track that we are on.

The convertible issue will not have a dilutive impact unless or until the stock price gets to $91 a share.

Is my understanding correct that it is got to hit $91 and stay there as opposed to just reach $91?

Hit $91 and stay there and if a dilution is probable then we will include it under the treasury stock method in the [VS] calculation.

Andrew Kligerman, UBS Warburg.

A couple of quick questions. One, on what appears to be your final litigation expense, is there a chance down the road that you might actually be able to reverse some of that? It just seems that you're so close to about $1 billion in reserves for that. It seems that every lawyer wants a piece of the rock where you get some of it back. That is question one.

Question two is on disability income, the group disability income. The benefits ratio was a very favorable 87% versus 103% a year ago and even 93% in the prior quarter. I believe we have spoken with management, and they say resolution is improving. Is 87% a good run rate area?

And lastly in your retirement business, I know you said early in the year you would still have negative flows, but this was a big outflow number. I think they were three cases that generated or was the bulk of $5.5 billion in outflows in the retirement business. When do we see that go the other way? Those are the three questions. Thanks.

I'll start with the middle one. On the disability ratio, no, I mean we clearly made the investments and the improvements that I said we would do relative to our claims processing. But that is an unusually low number. I think we, in most cases both on the life and the disability side, we target the low 90s as being a more realistic and a reasonable kind of a run rate. But obviously, I am delighted to have come down from the 103.

In terms of the outflows in retirement, you are correct, in terms of three significant cases. One was due to a merger and a second was due to a consolidation. So those are not normal happenings, but as Mark pointed out, they are lumpy. We certainly will expect over time to see significant improvements, but again as Mark said, we have just finished a conversion. We continue to invest in the business. These tend to have a reasonably long lead time for sales, and so this is unlike the success we had in the annuity business where we were able to complete the conversion, develop new products, and saw substantial sales increases within about six months of the conversion.

This will probably be somewhat longer than that, but this is a long-term business. We are going to be successful at it. But it is going to take a little bit of time. I think 12 to 18 months is a more realistic time frame than what we would see in some of the other businesses. Again, given what we did in annuities, I'm very confident we'll do it here as well.

So 12 to 18 months from now, Art? That's the time?

Well, from the end of the year when we completed the conversion.

Okay. And then on the litigation, do you think there is a chance we could see it improve or go the other way?

Andrew, its Mark. I am not going to comment on the answer to that question, but I would repeat a caution that we have expressed for which is be careful about interpreting a line item that may include other things.

Okay. Thanks a lot.

Colin Devine with Citigroup.

A couple of questions. I saw where you spend a little bit more on Korea perhaps if Rodger is around. It seems you put a considerable amount of effort in that country last year, expanding the sales offices and such. Is it fair to say that Korea has been a disappointment for you this year?

Second, could you talk a bit more about the competitive environment in Japan on the medical products and what you're seeing there? And then lastly for Mark or for Art, on the PSI settlement, you are now up towards $1 billion. With all due respect, Mark, the final charge -- you know each time you booked it, you said that is as fat as we think it's going to be by definition and it's been done and now here we are at $1 billion. It's just very difficult to accept that this is only 8 brokers (indiscernible) positive thing to be as large as it is. Are there some other issues going on at Prudential that is going to come out in a press release or a settlement that is going to spook the market?

Let me start with Korea. You are correct in terms of the expansion. I think I certainly wouldn't use your phrase relative to disappointment. Earnings are up, sales are up. But you are right; there is a lot of competitive pressure around our Life Planners. So there is no disappointment at all. Stuff happens. We are very good. People try to recruit from us and at times, they are successful. Fortunately, not all of the time. We will respond to competitors taking our Life Planners, but let's not overdue it. Earnings are up and sales are up and we're very, very confident in our Korea operation. Mark, do you want to talk about the other -- I think you answered it as well, but go ahead on the --.

Yes. If you are asking whether or not we are reserving or recognizing expenses for something that no one has heard of yet, the answer is no. And I would also repeat the caution that I just gave in terms of Andrew's question, which is be careful how you interpret a line item that may have other things in it, but beyond that, I don't want to go any further on this issue except to reiterate there is not anything new in here in terms of something that we are recognizing expenses for that you're not aware of.

I guess the point, Mark, is what you just said is there may be other items in here and I can't recall Prudential providing any clarification on that beyond the 8 brokers or whatever it is up in Massachusetts and that is the point. What other items are in here that are causing this to get as big as it is?

Just to clarify the picture, on that line item, we recognize expenses for retained liabilities that are associated with broker arbitrations and complaints and settlements that are part of what -- you haven't liked my description, but that I've previously called the more routine parts of legal expenses improved securities.

The other item that is reflected in that line is the recognition of a reserve for the settlement of our market timing issues. So those are the two things that are in there and we have been pretty clear about the fact that both of those are in there as. As I just mentioned in response to a different question, if we had expected that we would be where we are today on the number, we would have booked it at the time we expected it, but as we have also said in this press release, we believe that, in terms of the market timing event, our reserve is adequate.

And as I have said earlier, Colin, we did not say in any of the prior periods that these were the final numbers. What we have said this time was that we believe that there will be no material additions to the reserve. So we will leave it at that. In terms of the medical products, let me ask -- do you got some numbers over there, Eric? Eric, go ahead.

Yes. Third sector products have generally accounted for somewhere between 10% and 20% of our new business annualized premiums in Japan in recent periods. These sales really are ancillary to our protection-based life insurance products, which is the main focus of our Life Planners and Life Advisors.

These are principally riders that would be on protection life insurance as opposed to discrete product sales in the so-called third market that we are not a participant in that business.

Peter Monaco, Tudor Investments.

Thanks for your time. I joined a bit late, so I apologize if you addressed some or all of the above in your remarks or Q&A today. First, an obvious question to which I hope to get an obvious answer. In the post-Spitzer era and considering the regulatory and prosecutorial ire that results when companies jump the gun, if I could put it that way, on the report or hint of a regulatory outcome, isn't it fair to say that you all wouldn't have complacently opened the release the way you did if you weren't as sure as you could possibly be that this is in fact about to be ramped up? That is market timing and that anything beyond that is the kind of lingering legacy arbitration related Wachovia JV type stuff.

Peter, we thought very carefully about the language that we used and so the general answer is yes except that it isn't over until it is over.

Well, I said as certain as you can possibly be. I understand that probably falls just a tad short of 100%. Secondly, with respect to Korea, can you remind me of the size of that on a current profits basis?

Yes, it represents roughly 15% of our international insurance business, which of course is probably about 40% of the total earnings of the Company. It is important, but we wouldn't put it in the category of major.

It was $46 million pretax in the quarter.

Right. In light of the fact that it is 50 and a 40 and if I do my math right, just five or six of total. Even if that were to hit the skids a bit given the potential for a hit product introduction elsewhere, given the potential for a success in a market that isn't Korea, it would seem pretty de minimis by way of something to loose sleep over. What is the -- on a scale of 1 to 10, how confident are you that you see decent growth off of that 46 per quarter base or whatever that number was that you gave, Mark?

Well, I certainly have a confidence level that approaches nine on our overall business in Korea. The only reason it is not any higher is that Korea is going through an enormous change inside the country and therefore that is to be expected that you're going to see hiccups here and there.

But as I mentioned earlier, Peter, I am very confident in what we're doing. Sales are up modestly. Earnings are up and the Life Planners is not people dissatisfied with us, but more that a lot of people want more of us and at times, we do get, as they call in Korea, scouted against. We will address that, but I am very confident in our business there. To your point, it does represent a modest component of the overall Company, but I don't want to have anyone misinterpret any negative feelings toward it. I believe it will over time continue to be the strong success it has been to date.

Nine is pretty high on the scale. Could I switch gears and just ask one final on a different and broader topic?

Yes.

It seems without splitting hairs about what the recurring earning power of the Company demonstrated in the quarter was, if one is willing to take the view that we are nearing the end of the road on the legacy litigation and regulatory expenses then eyeballing it, it looks to me like the achieved ROE in the quarter was actually a bit above the 14% that still represents the high end of your targeted range.

Given the still considerable capital deployment opportunities you all have and with the caveat that you can't have the wheels come off anywhere, why shouldn't we believe that over time that with modest growth in operating earnings and with effective capital deployment that that achieved ROE and the EPS that would be associated with same aren't trajecting meaningfully higher?

At the beginning of the phone call, I did try to address that as best as I could, Peter, by saying that if you took the first quarter and annualized it, it would be a 13.6. Obviously if you adjusted it for additional monies to the reserves, it would be in the range you mentioned, but we also talked about some favorable items that added to about $0.10 or $0.11 in the quarter as well.

But notwithstanding that, I mentioned that our target to achieve 14% by the end of 2007, all things being equal, using your various caveats as well, that we will certainly meet and/or exceed that target at a much earlier point in time.

As usual, thanks.

One quick addition. In the call last quarter, Art talked about the 12% to 14% range and one of the points that he made was that as we realize that objective, we don't expect that the ROE accretion story for us will end.

Jimmy Bhullar, JPMorgan.

My questions have actually been answered. Thank you.

Ed Spehar, Merrill Lynch.

A couple questions. When I look at the Asset Management segment, if I assume that some of this real estate-related benefit that you're talking about is in the institutional customer side -- first of all, is that a correct assumption?

Yes.

It looks like you might come up with $30 million or $40 million of additional revenues beyond what the asset growth in that portion of your business would suggest.

Correct.

Can I assume that that is the real estate related stuff you are referring to?

Yes.

Can I also assume that there is some offsetting expense related to those types of performance fees that -- I don't know -- half of them, a third of them?

Yes, you can.

And can I assume that -- you reference the returns in your proprietary investing were essentially unchanged, but then you also said that last quarter included $35 million. Should I interpret that to be an above normal level or do you think that that is a normal -- in looking at the returns you have gotten over a very long period of time, not the last year, but 10 years or whatever in terms of percentage of returns, how does that look?

Well, in any given quarter, these are lumpy. As you can well expect in this type of business that it is not something that you would put under the category of recurring. So lumpy is the right word. And it is above what one might consider normal because of the very, very positive activities that have been going on in the real estate market.

Fortunately, in terms of our various activities, it occurred in the first quarter last year and occurred again in the first quarter this year. That is why we tried to use words other than unusual or onetime, but prefer to use words like lumpy, not necessarily recurring. But it is above normal.

And then one follow-up. On the Allstate acquisition, could you tell us roughly the run rate of sales through their proprietary channel and through the wirehouses at the point that you looked at -- entered this agreement and then what the assumption is roughly about how much of that business you think you would retain going forward.

This is Eric. If you look at 2005 sales, which is the best we're going to be able to do, the total was about $1.7 billion. About 20% of that was through their proprietary distribution channel. About 30% was through banks and half was through the broker dealer channel.

Without giving you a numerical assumption, let me put it to you this way. We expect to retain substantially all of their wholesalers except in the bank channel, which they are retaining. So we are quite confident for that reason that we will be successful in maintaining whatever success they have had and in our financial evaluation, the sales numbers that we factored in were not very heroic in coming up with our expectation of a double-digit return.

Would we assume, if we're just going to say they are keeping the bank wholesalers, should we assume 70% of that number?

I don't know what -- they are going to be selling Allstate branded product that has been designed by us.

Okay, right. Sorry.

I don't know why it would be 70% as opposed to --.

Right. Got it. I understand. My mistake. Thank you very much.

Tamara Kravec, Banc of America.

My question is on group life. When looking at the sales patterns there, if you could just talk I guess about the environment there and whether you think the sales will eventually improve. They have been challenging now for about three quarters. That is my first question.

And my second would be, Art, if you could just talk about the interest rate environment has changed in the first quarter and we are getting the sense from a few of the other larger companies that it is obviously more favorable and some are anticipating a little bit higher guidance because of that. But if you could just talk generally but how you're feeling about the interest rate environment and that would be very helpful. Thanks.

The group life -- the sales have been actually quite good. They tend to occur in an overwhelming fashion in the first quarter. The reason being is that we don't really book, if you will, or report the sale until we actually begin or the period when we're going to take the business on. And in an overwhelming majority of cases, these tend to start on the first of the year for obvious reasons because generally a company is moving from one supplier to another and they tend want to do that around the first of the year. So you will always see the overwhelming majority of the sales in the first quarter. That is why you saw the 350 last year and the 280 this year, both of which we consider quite good.

In the 350 last year, there was one sale that was $100 million. That clearly is not a repeatable event and so if you look at "normal sales", it is about 250 in the first quarter last year and 280 in the first quarter this year. So we think sales are moving along quite nicely.

Remember we and one other player are dominant in this particular market and so we tend to hold our margins quite well and therefore are not necessarily looking purely at sales, but in the retention side and we have done quite well there. So that is why you see that pattern in group life.

In terms of interest rates, I would agree that rising rates, especially as they have been rising, are beneficial to us over time. Certainly that does not necessarily apply to pure spread products where the flatter yield curve has more an affect than the actual level of rates, but whether it is here or in our international operations in particular, rising rates will be beneficial to us.

Okay. And any sense of -- I know it is difficult to quantify that in any particular way -- but any sense of incremental quantification?

Not really because again what I had said at the beginning of the call, we rarely look at those particular metrics. (indiscernible) after only one quarter. We need a little more time into the year and obviously if we see continued improvement and dramatic improvement, we would reflect it in our guidance as we have in the past.

Thank you so much.

Jeff Hopson, AG Edwards.

In regard to the annuity business, is it fair to say that we won't see any disruptions from the Allstate integration like we did with the prior and then the mutual fund business, the retail mutual fund business, I have noticed you have gotten some awards, Jennison Dryden. Performance has been very good. Any chance that that could become more of an inflow business for you and/or growth business down the road?

In terms of the annuity business, in this particular case, there actually is not a conversion because Allstate will be retaining all of the operations and will be running it on a contract basis for us until such time we move it onto our platform. So unlike a traditional conversion where one goes down and the other goes up, here they will be retaining the operations, running it for us for a period of time until we put it on our own system. So I think the risks associated with the conversion are less than what one normally sees in traditional conversions of this type.

In terms of Jennison Dryden, the retail mutual fund is not as significant a business for us as some of our other activities in insurance and retirement and annuities. But you are absolutely correct. Our performance in Jennison in particular has been outstanding. What we are doing now is growing out our distribution capability there.

You might recall that having owned 100% of a securities firm, in many cases, we didn't have the access to the other wirehouse channels. Just as we have talked about doing it in annuities, we intend to do it on the retail mutual fund side. So yes, I believe over time we should see continued improved flows in our retail mutual funds adding to our already strong institutional flows that we have in Jennison and elsewhere in our Asset Management business.

And with that being our final question for today's Q&A session, I will turn it back to our host for any closing comments.

If there are no others questions, let me again say thank you on behalf of management for your interest in Prudential and I wish you a very, very good day and we'll see you next quarter. Thank you.

Ladies and gentlemen, this conference is available for replay. It starts today at 4:15 PM Eastern time. Will last until May 11th at midnight. You may access the replay at any time by dialing 1-800-475-6701. International parties please dial 320-365-3844. The access code is 821369. Those numbers again, 1-800-475-6701 or 320-365-3844. The access code, 821369.

That does conclude your conference for today. Thank you for your participation and you may now disconnect.