保德信金融集團 (PRU) 2006 Q4 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by. We do appreciate your patience today while the conference assembles. Good morning, good afternoon to our global audience. Welcome to Prudential announcing their fourth-quarter 2006 earnings conference call. At this point we do have all of your phone lines muted or in a listen-only mode; however after management's prepared remarks, there will be opportunities for your questions. (OPERATOR INSTRUCTIONS). As a reminder today's call is being recorded for replay purposes.

With that being said, let's get right to this fourth-quarter agenda. Here with our opening remarks is Prudential's Head of Investor Relations, Mr. Eric Durant. Please go ahead, sir.

Thank all of you for joining us for our call. In a moment I will be entertaining you with a reading of our forward-looking statement and after that, Art Ryan and Mark Grier will indeed be making their prepared remarks. After that we will be happy to address your questions. Joining Art and Mark for the Q&A are Rich Carbone, CFO, and Peter Sayre, Controller.

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 and non-GAAP measures of our earnings press release for the fourth quarter of 2006, 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 investments 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 on foreign currency earnings, current period yield adjustments, and product guarantees 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. Mark will be giving you a review of fourth-quarter earnings, so I will focus on the full year and the future.

Our earnings per share for the year increased by 27% based on after-tax adjusted operating income. For all of 2006, our return on equity was 14.6%, compared to 12.3% in 2005, again based on adjusted operating income. Our stated goal had been to improve return on equity from last year's 12% to roughly 14% in 2007 so we arrived a year ahead of schedule. These results reflect and validate actions we have taken in our first five years as a public company to strengthen our core businesses.

Acquisitions have helped us to build a leading position in the domestic savings and retirement market. Our latest, Allstate's variable annuity business, which closed on June 1, has strengthened our annuities business. We added more than $16 billion of variable annuity assets. We gained exclusive access to Allstate's proprietary channel and we added complementary distribution in the broker and bank channels. We are already achieving an unlevered double-digit return on this investment. While in its early days, our sales results have been very encouraging thus far.

Our retirement business is back on the offensive. Integration of the old CIGNA Retirement business is now behind us and we are now focused on growing our full-service retirement business. We do not expect instant gratification, but this change in focus as well as investments we have made to enhance our capabilities should lead to steady improvement in results.

Our domestic protection businesses, individual life and group insurance, are performing well. Each focuses on maintenance of appropriate returns. Growth is desirable, but growth is a secondary consideration. It must be profitable growth. These are important businesses to us, but we actively manage the capital that we commit to them. Required equity in individual life and group insurance amounted to roughly 16% of total equity of the financial services businesses at year end.

Asset management had another banner year. Its earnings increased by 28%. This result reflected particularly favorable conditions in commercial real estate markets, appreciation in asset values, and excellent flows. Our financial advisory segment produced a profit for the year due to the attractive returns we are earning on our investment in Wachovia Securities. Before costs for retained obligations, our 38% stake in Wachovia Securities produced a return on our investment of about 17% last year.

Finally our international division overcame extremely difficult comparisons to record an 11% increase in adjusted operating income for the year.

Over the last five years, capital management has been instrumental to our efforts to achieve our financial goals and it remains an important component of our plans. We have been able to acquire businesses, American Skandia, CIGNA Retirement, Hyundai, AOBA, Allstate's variable annuity business, by redeploying capital that was under deployed. We still have dry powder but our approach remains disciplined and opportunistic. We are interested in transactions that make strategic sense as well as penciling out.

We have also used share repurchases to manage our capital. Last year we repurchased $2.5 billion of common stock and the Board authorization to purchase up to $3 billion is in effect for 2007. We believe that repurchases of roughly $750 million per quarter is a realistic base case for Prudential at this time.

That is a brief summary of the year. So what should you expect from us in 2007 and beyond? As for 2007, we are raising our guidance for Prudential's common stock earnings per share to a range of $6.80 to $7.00 based on adjusted operating income. This guidance assumes appreciation in the S&P 500 of 8% for the year.

Beyond 2007, the key for us is strong execution along with a portfolio of businesses that I believe gives us the opportunity to achieve differentiated financial returns. We do believe that Prudential has a superior mix of businesses. We are 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.

In addition to balance, we believe we have two substantial growth opportunities. First, the international marketplace offers 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 fast-growing retirement and savings market through our annuities, retirement, and asset management businesses. Our individual and group insurance businesses, although unlikely to grow as rapidly, are competitive and sound.

In terms of distribution, we continued to evolve to 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.

Outside of the United States, we are also pursuing a multichannel strategy. Our Life Planner businesses have a distribution model that is virtually unique in their markets. We are also enjoying good success in Japan with Gibraltar, where we have welded some of the features that have made our Life Planner operations successful to the chassis of traditional Japanese distribution models. To cite a third example, Gibraltar has recently developed a bank channel through which it has initially distributed U.S. dollar-denominated fixed annuities.

To sum up, we expect to produce double-digit EPS growth beyond '07 and we believe our return on equity accretion story still has legs. Our goal for the next three years, which we first shared with you in December, is to expand return on equity within the 15% to 17% range, assuming normal market conditions. 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 a premium valuation for our shareholders.

Now I will turn it over to Mark.

Thank you, Art. Good morning, everyone, or good afternoon, depending on where you are. I'll start with an overview of fourth-quarter results for the financial services businesses. We reported common stock earnings per share for the financial services businesses of $1.67 for the fourth quarter compared to $1.06 for the year-ago quarter. These results are based on after-tax adjusted operating income and in each case includes certain market-sensitive or non-recurring items that I would like to mention.

For the current quarter, in our asset management business, incentive fees from two institutional real estate funds contributed $0.06 per share. Mark-to-market income on securities in corporate and other results contributed another $0.03 per share. And going the other way, our group insurance business absorbed costs from a regulatory settlement we announced in December amounting to a charge of $0.02 per share. Summing up, these items contributed a net of about $0.07 per share to current quarter results.

In the year ago quarter, retained costs in our financial advisory segment amounted to about $0.40 per share, driven almost entirely by an increase in our reserve for settlement costs related to market timing issues. On the other hand, we benefited about $0.10 per share from unlockings and other one-off items. The net effect of these favorable items and the retained costs was a reduction of adjusted operating income for the year-ago quarter of about $0.30 per share. Stripping out these items from both the current quarter and the year-ago quarter, our EPS increase would be 18%.

Now I'll review our business results for the quarter starting with the insurance division. Adjusted operating income from our individual life insurance business was $132 million for the current quarter, compared to $142 million a year ago. Current quarter mortality experience was about in line of our average expectations but less favorable than a year ago. The mortality swing more than offset an improvement in spreads on our general account business reflecting increased asset balances and higher yield on investments.

Sales excluding COLI, amounted to $143 million in the current quarter, up $27 million from a year ago. A concentration of large cases in the fourth quarter, especially in the third-party channel, contributed to the $19 million increase in universal life sales. Earlier in the year, we established a relationship with a third-party distributor specializing in a selected market where our capacity to write larger cases, those with $1 million or more of premium (technical difficulty) competitive advantage. These cases tend to have a lumpy sales pattern. I should note that we continue to maintain our vigilance to screen out stranger owned life insurance business.

Term insurance sales were up $15 million or 45% over the year-ago quarter. The increase reflects our cultivation of direct response third-party agents who specialize in this business as well as a repricing in the second quarter that has kept our products competitive. A $7 million decrease in variable life sales partly offset the universal and term sales growth in the quarter.

The Prudential agent count stood at just under 2600 at year end, down about 400 from a year ago. The decrease reflects attrition mainly of lower producers coupled with selective hiring. This attrition tends to be concentrated in the fourth quarter since agents are held to minimum production requirements on a calendar year basis.

Our annuity business reported adjusted operating income of $154 million in the fourth quarter compared to $143 million a year ago. Results for the year-ago quarter included a $30 million benefit from a net favorable unlocking of DAC and other amortization items and a reduction of our reserves for guaranteed minimum benefits. Stripping out these items from the comparison, results were up $41 million including a $22 million contribution from the variable annuity business we acquired from Allstate in June.

The remainder of the increase came mainly from higher asset-based fees driven by market appreciation together with strong net sales of variable annuities over the past year. Excluding the impact of the Allstate business, which reported negative net sales consistent with our expectations as we phase in our products and develop the new distribution channels, our net sales of variable annuities for the year were $2.2 billion, up 57% from 2005. For the quarter, our gross variable annuity sales were $2.6 billion including $520 million from the new distribution that came to us with the acquisition of the Allstate business.

The introduction of our variable annuity products and the new distribution channels is on track and we are encouraged by their early success. Allstate's proprietary channel where we launched our products in August contributed more than $250 million to our fourth-quarter sales. This contrasts to variable annuity sales by this group of about $350 million for the entire year of 2005.

Our wirehouse channel sales were over $350 million sales for the quarter double the level of a year ago. We are starting to benefit from the late September rollout of our products at Morgan Stanley, where we are now among the top players. In our largest channel, independent financial planners, we registered an 18% increase in variable annuity sales from a year ago.

The group insurance business reported adjusted operating income of $63 million in the current quarter, compared to $80 million a year ago. Current quarter results included expenses of $14 million relating to a regulatory settlement we announced in December. Stripping that out results were down slightly from a year ago as less favorable group mortality in comparison to a strong fourth quarter last year essentially offset improved group disability claims experience.

Group insurance sales amounted to $54 million in the fourth quarter, bringing total sales for the year to just over $500 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 $121 million for the current quarter, up $30 million from a year ago. Investment results were more favorable in the current quarter than a year ago as joint venture income and growth of balances more than offset lower income from mortgage prepayments. In addition, results for the year-ago quarter absorbed $8 million of transition costs due to the integration of the retirement business we acquired from CINGA. That integration was completed in the early part of 2006.

Gross deposits and sales of full-service retirement business were $3.7 billion for the fourth quarter bringing the total for the year to $16.2 billion, a 24% increase over 2005. Retirement case sales and withdrawals tend to be lumpy from one quarter to another, especially with our emphasis in the mid to large case market. Net flows for the year 2006 in full-service requirement were modestly positive and in line with our expectations for the year in which our business integration was completed.

Going forward, we believe that our new retirement income product called IncomeFlex will appeal to defined contribution plan sponsors and contribute to our sales prospects. In addition, with the business integration now behind us, we began to fully participate in the bid process during the past year. As we've pointed out in the past, it can take as long as 12 to 24 months to record a sale from the start of a bid process.

Gross additions for institutional investment products were $1.4 billion in the fourth quarter, up from $785 million a year ago mainly due to higher sales of funding agreement products. The asset management segment had adjusted operating income of $187 million in the current quarter, up $78 million from a year ago. This includes $44 million of income in the current quarter from incentive fees related to two institutional real estate investment funds.

The rest of the increase or $34 million came from a greater contribution from our proprietary investing business and from growth in asset management fees, which have benefited from a $36 billion or 10% increase in assets under management over the past year driven by positive net flows and market appreciation.

The financial advisory segment had adjusted operating income of $47 million this quarter compared to a loss of $204 million a year ago. Current quarter results absorbed expenses of $39 million for retained obligations. As we've pointed out in the past, the retained costs include a variety of items relating to events prior to the formation of the Wachovia joint venture in 2003 and will vary from one quarter to another until they ultimately disappear. There were no changes to the market timing settlement we announced in August.

The loss in the year-ago quarter included $267 million of expenses from retained obligations almost entirely related to our reserve for market timing that I mentioned earlier. Stripping out the expenses for retained obligations, the financial advisory segment's operations contributed pretax income of $86 million to current quarter results, compared to $63 million a year ago. The increase reflects a greater contribution from our retail brokerage joint venture with Wachovia, which benefited from growth in fee income.

Turning now to the international insurance and investments division, the international insurance segment reported adjusted operating income of $364 million for the current quarter, compared to $340 million a year ago. The segment's results include adjusted operating income of $132 million from Gibraltar Life in the current quarter, up $21 million from a year ago.

In the year-ago quarter, Gibraltar invested in technology and service improvements as well as in advertising campaign resulting in a level of expenses that we estimated to be about $15 million higher than what we would expect on average for its business volume. The improvement in results reflected a return to a more normal level of expenses in the current quarter. In addition, Gibraltar's results for the current quarter benefited by $6 million from translation of yen earnings at a more favorable rate.

Sales from Gibraltar Life based on annualized premiums in constant dollars were $86 million in the current quarter, compared to $81 million a year ago. The increase reflects a $10 million contribution in the current quarter from sales of our U.S. dollar-denominated fixed annuity product in the bank channel where we commenced distribution in mid 2006. A downtick in sales by Gibraltar's Life advisers was a partial offset. The decline came entirely from lower sales of the U.S. dollar-denominated fixed annuity by life advisers. We commenced life adviser sales of this product in late 2005 and sales in the year-ago quarter benefited from initial customer demand following the product introduction.

Gibraltar had just under 6000 life advisers at the end of the year, up about 500 from a year earlier. Over the past two years, we have accelerated life adviser recruiting at Gibraltar to take advantage of opportunities in its market, especially the Teachers Association. While the newer life advisers are receiving the same training and are subject to the same variable compensation arrangements as the established field force, we would not expect them to initially register the same level of productivity in terms of new annualized premiums as seasoned life advisers.

Our Life Planner business, the international insurance operations other than Gibraltar Life, contributed $232 million of adjusted operating income in the current quarter, compared to $229 million a year ago. Results for the year-ago quarter included $44 million of income from a single joint venture as well as a higher than usual level of expenses similar in nature to those I mentioned for Gibraltar with an estimated impact of about $20 million.

Stripping these items out of the comparison, adjusted operating income for the Life Planner business was up $27 million from a year ago. The increase came mainly from continued business growth, particularly in Japan and Korea, with less favorable mortality experience in the current quarter, a partial offset. In addition, our Life Planner results benefited by $13 million from more favorable foreign currency translation.

Sales from our Life Planner operations based on annualized premiums in constant dollars were $200 million in the current quarter compared to $202 million a year ago. Sales in Japan are $128 million for the current quarter, up $9 million from a year ago or 8%. This increase is roughly in line with the increases in Life Planner count.

For our operations outside of Japan, which mainly reflects our Korean Life Planner business, sales were $72 million in the current quarter compared to $83 million a year ago. The Life Planner count in Korea stood at just over 1500 at year end, a decline of about 8% from a year ago as we continue to see aggressive competition with some companies pursuing growth at the expense of profitability in our view.

We are committed to the fundamentals of our Life Planner model in Korea and believe that some of the aggressive actions of competitors including agent compensation structures will prove to be economically unsustainable over time.

The international investment segment reported adjusted operating income of $34 million for the current quarter compared to $37 million a year ago.

Now with respect to corporate and other results, corporate and other operations reported adjusted operating income of $8 million for the fourth quarter compared to $76 million a year ago which included a $30 million benefit from a true up of expenses for earlier periods. A lower contribution from investment income net of interest expense in the current quarter more than offset $19 million of current quarter income from securities that we marked to market.

In addition, our real estate and relocation business, which we include in corporate and other results, contributed $20 million less in the current quarter than a year ago, reflecting a less favorable residential real estate market.

Now I will comment on net income. Net income for the Financial Services businesses was $893 million for the fourth quarter compared to $377 million a year ago. Current quarter results included pretax realized investment gains including related charges and adjustments of $130 million. These realized gains came mainly from fixed maturity investments primarily in our international operations and fluctuations in the value of hedging instruments covering our foreign currency risk.

Credit related losses and impairments were just $17 million in the current quarter. Our gross unrealized losses on fixed maturities in our general account stood at $652 million at the end of the year with the vast majority on investment grade securities and essentially interest rate related. Noninvestment grade fixed maturities comprise about 6.5% of the Financial Services business's fixed maturity portfolio at the end of the fourth quarter.

And briefly on the closed block business, the results of the closed block business are associated with our Class B stock. The closed block business reported net income of $144 million for the current quarter, compared to a net loss of $13 million a year ago. Pretax realized investment gains were $299 million in the current quarter and $126 million a year ago. We measure results for the closed block business only based on GAAP rather than adjusted operating income.

To wrap up, I would like to turn back to the financial services businesses and sum up where we came out for the year 2006. Our after-tax adjusted operating income reached $6.15 per common share, registering a 27% increase over 2005 and translating to an after-tax ROE of 14.6%.

Unusual and non-recurring items including DAC unlockings, significant onetime transactions, and income for mark-to-market securities, reserve refinements, and the expenses associated with regulatory settlements amounted to a net contribution of about $0.20 per share to our results for the year. Absent the net benefit of these items, our ROE would still be just over 14%.

The main drivers of our business results for the year are growth of our individual annuity business including the initial contribution of the variable annuity business we required from Allstate; strong performance from our investment division, which benefited from earnings growth in our asset management and retirement businesses and enjoyed higher income from our investment in the Wachovia joint venture; and greater earnings from our international businesses, which are benefiting from continued growth in our Life Planner insurance operations.

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

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

One question really and it's just got to do with guidance. I was hoping you could discuss what has changed since the two months that you issued the guidance in December? And I guess just typically management has usually made changes in guidance usually about midyear '07 -- sorry, midyear the following after your investor day, sorry about that.

So let me sum that back up, so please just tell me I guess what has changed in the last couple of months and maybe the slight change in your strategy about updating us with guidance.

Thank you, Jason. You are correct. Historically I have not changed guidance other than where we have had a period of time to assess what has gone on. I think the difference here is that our December investor day presentation was basically driven off of results through October of 2006. I felt that as I looked at November and December, we saw a substantial improvement in the number of the business results. Mark referred to one example of where in Allstate's proprietary channel we had $250 million and variable annuity sales versus $350 million for the entire year of 2005.

Second, we saw some substantial improvements in market conditions, especially in real estate transactions. They continued I think over the past few weeks as well. So I would view it as unusual. I would not look forward to the fact of changing it every couple of months, but I felt that the changes were significant enough around the year-end period that warranted us to do a modest adjustment of our outlook for the year in order to align it with where we believe the results were going to come out in 2007.

Great, sorry for the fumbled question but thank you for the answer.

Saul Martinez, Bear Stearns.

Two questions. First in Japan as you are probably well aware, AEGON and Sony Life are entering into a joint venture where Sony Life's Life Planners are selling VAs. Any updates there on how you are thinking as to manufacturing VAs and selling through your Life Planners?

Secondly, a capital question. Realizing that your debt to cap is still at 17%, any updates as to when you might want to tap the hybrid marketplace? I would think if credit spreads widen out, or interest rates generally rise, you may not get as favorable rates there. So just any update as to kind of timing as to when you might want to look at issuing hybrids?

I'm going to let Rich answer the question on the hybrids and then I'll come back to your AEGON/Sony question. Rich?

Jason, we still have room in the cheaper capital source, which is debt, however, hybrids are getting cheaper. So as the year progresses, we may or may not go to hybrids first. But our inclination is to use up all of our debt capacity first.

On the AEGON/Sony, I think it is an interesting joint venture around variable annuities. We historically have allowed variable annuities to be sold by our Life Planners only in a defensive reaction, i.e. a client demand. So you are correct, we have not made it a broad product offering of our Life Planners. I think there are risks associated with it. I think the risks come down more into one, the value of the variable annuity both to the client and to the manufacturer.

You have seen the kinds of returns we get in selling permanent life insurance and we think that offers the best opportunity for us to differentiate ourselves in the market. It is a highly competitive market, the variable annuity market. The introduction of an AEGON/Sony team will probably further increase the competitiveness of it. So at the present time we are very, very comfortable with the success we are having in our Life Planner system, selling the products we sell, and we do not intend to change your strategy as a result of their announcement.

Rich, can you just elaborate a little bit on your comment that you think -- that hybrids are getting cheaper?

Yes, about nine months ago when we started to look at them, they were about 150 basis points over our debt spreads and we still had plenty of debt capacity at the time, so it really made no sense to even think about them. They have compressed down now to where they trade at less than 50 basis points above our debt spread. But again we still have $700 million plus of debt capacity, so we are thinking about which one is the cheapest, which is debt, but there may be an opportunity in the hybrid market that we may take advantage of. That is all I can really tell you.

Great, thanks a lot.

Suneet Kamath, Sanford Bernstein.

Two questions, please. First in terms of Japan, we've been hearing that new mortality tables will be rolled out I guess in the first half of '07. Do you have any sense in terms of what that's going to do for your product pricing there, how significant the premiums are likely to change?

Then on the retirement business, just looking at your supplement, it looks like the stable value account values sort of year-over-year are down about 1.5%, whereas the total account values in the full-service business are up about 10%. Knowing that stable value is sort of one of your key benefits from doing the CIGNA deal, just wondering is this a function of the yield curve, credit spreads, or are plan participants just putting money in equity options just given the strong equity markets?

In the case of Japan, the new mortality tables are not expected to have any material impact in terms of our pricing or our profitability going forward. I will let Mark answer the retirement question.

You sort of answered it yourself. It really does reflect market conditions and the equity markets versus the shape of the yield curve and level of interest rates.

Okay, that was easy. Thanks.

Nigel Dally, Morgan Stanley.

Two quick ones. First in domestic individual life, DAC amortization was down quite significantly, I'm guessing due to the run-up in the equity markets. Is that correct? If so, should we take out some of that benefit in looking at the core run rate of those operations looking forward? Second, just on consolidation if you can provide us an update on the pipeline for potential acquisitions, both domestically and internationally.

Yes, in terms of individual life, you are mostly correct. It is market run-up. It also some persistency to do with it as well. So some of it I think is going to be there for a longer period time around the persistency. But the market run-up was clearly a part of that improvement, so you are correct.

Second, on the acquisition front, no, I do not think there has been any significant change in the outlook in the market. I still think that obviously there are -- there has been significant improvement for many of our competitors as well as ourselves. And that pricing is still relatively high as it relates to acquisition opportunities. Clearly, we benefited last year in being able to find and compete effectively for the variable annuity of Allstate.

So my sense is we are more likely to see acquisition opportunities as folks decide they cannot compete in one or more markets as those who have scale continue to drive, if you will, the success in those markets. So I think it will be selective, and I do not see a lot of enormous or large opportunities in the near-term.

Great, thank you.

Tom Gallagher, Credit Suisse.

One on Japan, then one on the VA market in the U.S. Just on Japan, I know AFLAC has been talking a lot about a five-year claims audit they are doing in Japan that is due back at the end of March, and now actually is in mid-April. Are you undergoing a similar review of your claims? If so, can you give any indication as to what you expect there? That is on Japan.

Then just on the VA side in the U.S., I know you have launched what I think is a pretty unique product that has a daily high point reset in terms of the five for life product. Can you talk about when that was launched, whether you expect it to be a big new product, and whether you think we are likely to see competitors replicating it? Because the one thing that kind of stands out to me on that is it seems like you'd need a lot of systems bandwidth from a back office standpoint for that one. Those are my two.

In terms of the Japan question, that is an industry sweep. That is not unique to any particular company. The FSA over the past actually 12 months has been doing a number of reviews of the industry, so everyone is subject to that. We do not expect any real issues as it relates to any claims audit or the like. But we will be subject to it just as everyone else is, but in general we are very, very comfortable with our businesses there are where we stand relative to our service performance in the marketplace. And as you saw from our results, we continue to do very, very well in Japan given the position we have in the market.

In terms of the variable annuity, I think you're absolutely right on the highest daily value as it relates to Lifetime Five. We introduced the product at the end of November, if I'm not mistaken. We had over $160 million in sales in December. So yes, we think it will be a strong competitive advantage for us going forward. We hope and believe it will be more difficult to replicate. As we know in our business, the ability to sustain innovation is one of a series of events as opposed to a single happening.

People can replicate over time, but you're absolutely right in terms of the technology and systems capability as well as the risk management skills, I think we will further differentiate a few of the significant players in the VA market from the rest of competition. That is certainly our intent is to demonstrate that we can do it faster and we can do it better. I suspect many of my competitive colleagues will think similarly, so I think it's going to be a great market for the consumer.

Art, just to follow up on that VA, is it fair to say that you have not yet heard or seen of any competitor replica filings with similar products?

That is correct, we have not.

Thank you.

EDS Spehar, Merrill Lynch.

Two questions, first on guidance, you mentioned market conditions. I'm wondering if you can sort of give us a sense for what portion a guidance increase would be related to the equity market? And on the real estate market, you mentioned the conditions -- I'm assuming you're saying good conditions in the commercial side, but isn't that being offset somewhat by some deterioration on the residential real estate side of the business?

Then the second question is thinking about longer term and the retirement segment, what do you think would be an acceptable or targeted level of fund flows in full-service retirement once you are sort of in the growth mode? Is this a 2 to 4% of the assets kind of fund flow business or is it better than that? Thanks.

In terms of the guidance question, I think my assumptions on the equity market have not changed other then we finished the year at a stronger level than I might have anticipated back in the April -- excuse me, in the October timeframe when we did it. So I'm not looking for any unusual improvement in the equity market going forward. I just seem to -- it was reflected in more of what occurred in the latter part of the fourth quarter, which we saw was pretty aggressive.

You are right on the commercial versus the residential. But in the case of our own businesses, the commercial clearly has a greater impact than residential does. Our real exposure in residential is in our real estate and relocation business, where we earned $105 million in 2005 and I believe we earned $75 million last year, so there was some effect over the course of the year, about $20 million of that in the fourth quarter. On the other hand, the fee increases and the overperformance in the commercial real estate market more than offset that in a positive sense.

And as I mentioned to you, even over the past month we have seen extraordinary euphoria in the commercial real estate market. So those are the two reasons that I saw the opportunity and I believed that we would produce results in line with the guidance that we've just announced. So I would not put more to it than that. But I felt it was somewhat different than what you normally see in the swings of the market that all went in a positive direction both in our business as well as in the market toward the latter part of fourth quarter. And that's what drove it.

The fund flow is a little bit harder for me to answer, so let me see if I can get Mark or Eric to talk about it.

I would think outside the box a little on this question. I think there is a business as usual environment that reflects sort of basic asset accumulation, but from our perspective on one level we see opportunities to gain market share. So one question for us will be how much share can we gain -- how quickly?

The second, and it is the real outside the box question, is where can this market go with products like IncomeFlex? What can we do to attract funds that like the packaging of investment attributes, risk management attributes and retirement income attributes, similar to what we've seen with Lifetime Five and more recently the highest daily Lifetime Five.

So if you're thinking business as usual base case, your single digit answer is probably right, but we see opportunities here that go beyond that. We see marketshare opportunities and we see new product opportunities that we think can make this outcome quite a lot more attractive. I cannot quantify those because I don't know the answers to the questions I just asked, but we feel like we're on a track here that has great potential.

So, Mark, just to follow up -- with market share gains, with some success in the guaranteed products, it sounds like you would think you could do better than the high end of that.

Well, I'm not going to quantify that answer. My point is I'm not sure. These are things that we've got to learn as we go through it.

Okay, thank you.

Jimmy Bhullar, JPMorgan.

I just have a couple of questions both a Japan. First, I think you mentioned in your comments you accelerated life adviser recruiting and if I remember right I think the life adviser count at Gibraltar was down in the fourth quarter. If you could just comment on that whether that is true or not.

Second on [grew] of Japan, obviously historically your sales have [tracked] -- growth in the Life Planner count last year that was not the case I think. I think comps were difficult last year. What do you expect for sales growth in 2007 and how is the improvement in sales growth going to come? Is it going to be easier comps, new products -- if you can just comment on it?

In terms of the life adviser, you are right on the fourth and third quarter comparisons, but I think the full year is the important one, 5500 to just under 6000. The principal reason in the fourth quarter is again the recruiting cycle, which I've answered a number of times. We had one recruiting cycle in '06. We had two in '05, so that is why it is always difficult on the quarter-to-quarter comparisons depending on how those dates fall. But the year-over-year result of close to 10% was extraordinary. We're very, very, very pleased with that on the life adviser side.

So there was nothing unusual in the fourth quarter in terms of a slight downticks. It was more the recruiting cycle issue.

In terms of potential of Japan, you are right, '05 to '06, as both Mark and I stated, we had somewhat difficult comparisons, but that is a nice problem to have when you know that you've introduced really good product, as we did on the dollar-denominated products about two years ago and had great success with it. We still look to see Life Planner growth at 9% to 10%, which given the size of our base now becomes a pretty aggressive target. Therefore sales would continue in line with Life Planner growth as it has the past.

So we still are holding to our high-end targets of 9% to 10%. Again, more challenging not because of absence of -- not because of any concerns on our business model, just that we are getting bigger and it makes it harder especially given the selectivity in our recruiting and the high productivity of our Life Planners and the like. But we still are confident and so we are staying with the 9% to 10% number and correlatable increases in sales as well.

I would add importantly that the earnings on the other hand are driven more by the other sources of income, namely the mortality and the expense and the like, and so sales are always important, but what is equally as important is our ability to sustain the growth in earnings so that we can continue to invest in the growth and the new products.

New products are very, very much a part of the mindset of our people at Prudential of Japan. In fact, it is part of what I think we've been able to do in the last 18 months in the United States when we talked about Lifetime Five, highest daily average of Lifetime Five, IncomeFlex and other things. We are committed to providing superior products to produce superior returns.

So my colleagues in Japan will continue to look for new opportunities whether it is writers in the health market, whether it is improvements in terms of our whole life product offerings and the like to maintain competitive advantage in that marketplace. That is why it is very, very important as you have pointed out that quarter-to-quarter, while important, is not as important as year-to-year or multiyear trends. And I think if you look at our numbers in Japan, they look very good over most long periods of time.

Thank you.

Joan Zief, Goldman Sachs.

I have two questions. My first question is could you just go over some of your expense initiatives that you are planning for 2007 that helps with the incremental earnings growth?

My second question is if we were to reconfigure what the earnings contributions were in 2006 and you had to think about incremental growth that came from the equity market performance alone, just the fact that the market was up so strong and you have this asset under management and the commercial real estate market being so strong, how much of the earnings do you think really is being contributed by just these market forces versus your organic growth?

And I guess the corollary to that is if we end up seeing the commercial real estate market soften this year and the equity markets are flat, will we need to be going back to your old guidance?

It is very, very difficult at times to break it down into the exact components in terms of what is driving the improvements, but let me try anyway. In each year I have used an 8% expected growth in the equity markets as part and parcel to our guidance. In a number of years obviously that number has been -- the actuals have been higher. In a number of years it has been lower, but it alone does not cause us to simply say that one number is going to drive the performance.

Certainly in the case of commercial real estate we have highlighted that which we think is extraordinary that occurred in 2006 and therefore have not included it in our guidance as we look at 2007. On the other hand, I've used the phrase normal market conditions, which says that you would see continued good performance, but not necessarily at the same level. But it gets very, very difficult to simply take one variable and then say that alone will cause us to change our guidance.

So I have added in an 8% appreciation in the equity markets, little or no change in the interest rate market per se, continued good performance in the real estate market, but not necessarily at the levels of 2006, and all of those assumptions are built into what I believe is the guidance that is appropriate, the one we announced when we just upped our guidance if you will from what we did back in December.

But I need to emphasize that the majority of our improvement in terms of our performance is driven by business results, both those that occur in the businesses, or growth and variable annuities, the retirement, the asset management, and the international, as well as our capital management strategies. So when I talk about double-digit growth in earnings per share, I'm saying across all of our markets and businesses I'm quite confident absent some extraordinary events that that is the planning guidance that you ought to use relative to Prudential's performance.

It gets much harder for me to articulate around what a 9% growth in equity markets does versus a 7% growth in equity markets. I'm simply not that smart, but across the range of the numbers I have just used, that is how I arrive at guidance, but I'm also heavily driven by the importance of our business results.

When we talked about initiatives, I was not sure whether you were talking about expense initiatives or business initiatives.

Expense, expense initiatives.

Expense initiatives, we are not looking for any substantial growth in our expense base, if that is the question that you are asking, nor am I expecting any substantial reduction. As you know, early on after we became a public company we took out close to $1 billion in expenses, so we expect to manage expenses very tightly. I manage our businesses around their margins and competitive margins as it relates to corporate level expenses -- we rarely allow them to increase.

So in terms of our investments, however, on expenses, we will be continuing to invest in the annuity side of it. I mentioned to a question earlier our commitment to be in the lead in the market in terms of product competitiveness. The IncomeFlex product that we announced in our retirement business at the end of the year will continue to warrant investments. So broadly speaking it is in the product development arena would be number one in terms of our expense investments. Number two will be continued investments in distribution.

As you've heard us talk about in the past -- believe we have been fully represented in all of the for example broker-dealer channels because of some of our own history in owning a securities company. We will continue to invest in wholesalers in terms of growing that market. We will maintain hopefully our leadership in the independent market, so it is going to be in the product and distribution areas here in the United States around annuities and the broad retirement and savings market that we will see expense initiatives.

So where is the offset to keep your expense level flat if you are investing more in product development and more in distribution? What are you investing less in that allows that?

Well, principally what we do is we manage again the business around margins, so where I have investments in one area, we tend to look for improvements, be it in the expenses allocated to other parts of a particular business. There is no single area in 2007 that we have changed.

For example, we have been managing to returns in our life business in the U.S. for awhile, therefore there has not been a lot of expense growth, in fact quite the opposite. There's been decline in expenses in those areas. That would change somewhat based on what I have said as we've introduced new product in individual life.

We have managed our group business around margins. So most of the new investments are financed by productivity improvements. We are not any different than any other business. We do not expect productivity to remain flat. We expect it to grow. Whether we can grow it to offset every nickel and dime is sometimes hard to predict, but if you look at our expense trends over the years, you do not see a lot of growth in our expenses. So part of it is early on it was due to substantial reductions in expenses. Now it is managing on a margin basis business by business.

Great, thank you.

With that, Mr. Ryan, taking a look at the clock, I'll turn the call back to you for any closing remarks.

Thank you very, very much. Thanks, everyone, for joining the phone call. I appreciate your interest in Prudential and look forward talking to you in a few months again. Thank you very much.

Thank you, sir and gentlemen, for your time today. Ladies and gentlemen, Mr. Ryan is making today's conference available for digitized replay. It is for one full week starting at 2:30 PM Eastern standard time February 8 all the way through 11:59 PM February 15. To access AT&T's executive replay service, please dial 800-475-6701. At the voice prompt, enter today's conference ID of 850217. Internationally you may access the replay as well by dialing 320-365-3844; again with the conference ID of 850217.

That does conclude our earnings release for this fourth quarter 2006. Thank you very much for your participation as well as for using AT&T's executive teleconference service. You may now disconnect.