保德信金融集團 (PRU) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the first-quarter 2007 earnings conference call. At this time, all lines are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Eric Durant.

Thank you, Alex, and thank all of you for joining us this morning. We tried to get a celebrity guest to read the forward-looking statement this morning, but you're stuck with me.

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 first quarter of 2007, which can be found on our website at www.investor.prudential.com.

In addition, in managing our businesses we use a non-GAAP measure we call adjusted operating income to measure the performance of our Financial Services Businesses. Adjusted operating income excludes net investment gains and losses as adjusted, and related charges and adjustments, as well as results from divested businesses. Adjusted operating income also excludes reported 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 a 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.

Our first speaker today is Art Ryan. Art?

Thank you, Eric. Good morning and welcome to everyone. Prudential is off to a very good start for this year. Our annualized return on equity for the quarter was 16.4% based on adjusted operating income. In a few moments, we will walk you through certain market-sensitive or unusual items that contributed to this result. But stripping out the benefits of these items, return on equity would be about 15.5%. On the same basis, earnings per share would be $1.75 compared to a reported result of $1.85.

Clearly Prudential's underlying earnings power in the first quarter, if sustained, would result in earnings per share for full-year 2007 above our guidance of $6.80 to $7.00 a share. Our business momentum is broadly based, and market conditions have been favorable for equities and commercial real estate so far this year.

On the other hand, the year is young. So at this early date we are maintaining our guidance for Prudential's 2007 common stock earnings per share at $6.80 to $7.00, 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 we are more inclined to change our numbers as the year unfolds.

We are continuing to use share repurchases to manage our capital. In the first quarter we repurchased $749 million of common stock under our current Board authorization to repurchase $3 billion this calendar year.

Excess capital remains an opportunity and a challenge for Prudential. We estimate that excess capital, which includes untapped capacity to issue capital debt and hybrid securities, as well as equity on the books, is in the range of $6 billion to $7 billion. This is a static measure. Share repurchases, common dividends, and acquisitions reduce this total. But a significant portion of our earnings -- we estimate about 60% of after-tax adjusted operating income --increases our excess capital.

Acquisitions have been instrumental to our efforts to achieve our goals, and we continue to pursue opportunities to improve Prudential's business and financial performance. We would like to make acquisitions that fit our business model and pencil out; but acquisitions are neither a financial nor a strategic imperative for us. As we view it, today's markets favor sellers over buyers; and exceptions to the rule tend to be relatively small properties. While recognizing that opportunities may become more plentiful for us, we do not intend to hoard excess capital in the expectation that they will.

As I said at our last investor day, as a base case we expect annual share repurchases of $3 billion through at least 2009.

Now I will update you on some changes in Prudential's senior management. Since our February conference call, Vivian Banta, head of our Insurance division, and Rodger Lawson, head of International, have left Prudential. John Strangfeld has succeeded Vivian as head of the Insurance division and will continue to lead the Investment division as well. Mark Grier has assumed responsibility for the International division and has relinquished responsibility for the enterprise Financial Management.

John, Mark, and myself still constitute the office of the Chairman for Prudential. Mark's former direct reports, including Rich Carbone, Prudential's Chief Financial Officer, now report to me.

Prudential's divisional structure is unchanged and our businesses are under the same management as before. Vivian and Rodger both did an outstanding job for Prudential and left their businesses in excellent shape. While John and Mark will make their presence felt, I expect no significant changes in Prudential's overall direction.

Now I will ask Rich Carbone, John Strangfeld, and Mark Grier to review the quarter for you. After that we look forward to hearing your questions. Now let me turn it over to Rich.

First, I will start with an overview of the first-quarter results for the Financial Services Business. As you have seen from yesterday's release, we reported common stock earnings per share for the Financial Services Business of $1.85 for the first quarter compared to $1.36 for the quarter a year ago. These results are based on after-tax adjusted operating income and in each case include certain market-sensitive or non-recurring items that I would like to mention.

For the first quarter 2007, in our Asset Management business, income from market value changes in a proprietary fixed-income fund contributed $0.03 per share. Results for our retail brokerage joint venture with Wachovia, included in our Financial Advisory segment, benefited from strong equity syndication activity during the quarter. We estimate that this contributed $0.03 per share. Our International Investments business benefited from strong sales of mutual funds with front-end charges, as well as income from an equity-related investment, for a total contribution of about $0.02 per share. And there was a positive mark-to-market on securities related to exchange seats also in the International Investments segment; and that contributed another $0.02 per share. In total these items totaled about $0.10 per share to the current quarter.

Additionally, individual life mortality was less favorable than our expected range. We did not include this among the special items for the quarter, recognizing that claims fluctuate from one quarter to another.

Our annualized return on equity, as Art mentioned, based on after-tax adjusted operating income for the first quarter was 16.7%. Excluding the contribution of the items I mentioned, our ROE would be about 15.5%.

In the year-ago quarter, retained costs in our Financial Advisory segment amounted to about $0.25 per share, driven almost entirely by an increase in our reserve for settlement costs related to market timing. On the other hand, we benefited about $0.08 per share in the same quarter from income on shares related to exchange memberships in two of our businesses. The net effect of these items was a reduction of adjusted operating income for the year-ago quarter of about $0.17. Stripping out these items from both the current quarter and the year-ago quarter, our EPS grew at 14%.

The earnings per share growth reflects increases in adjusted operating income in each of our three operating divisions, driven mainly by growth which John and Mark will speak to in a moment.

Corporate and other operations reported adjusted operating income of $12 million for the quarter, down 14 from a year ago with lower contributions from investment income net of interest expense.

Now thinking about our results going forward, I would like to point out that corporate and other results for the quarter and the year-ago quarter each benefited from the investment of proceeds from our $2 billion convertible issued in November of 2005, which we have called for redemption this May. Earnings on the convertible proceeds contributed about $0.02 per share in each of those quarters.

Now John Strangfeld and Mark Grier will review our business results for the quarter. John will begin with the domestic businesses.

Thank you, Rich. I will start with the Insurance division. Adjusted operating income from our Individual Life insurance business was $101 million for the current quarter, compared to $133 million a year ago. The decline is a result of an unfavorable swing in mortality. Our mortality experience when viewed over time has been very consistent with our expectations; but with over $400 billion of Individual Life insurance business in force, claims are subject to fluctuations from one quarter to another. We have looked carefully at this quarter's claims and have found nothing to indicate that the mortality fluctuation is anything other than a random event.

Sales excluding COLI amounted to $141 million in the current quarter, up $49 million from a year ago. The sales increase was broadly based, with contributions from variable life, universal life, and term insurance. We offer variable life products with investment options that are especially attractive to high net worth clients. Several large case sales in the current quarter through a third-party distributor specializing in this market drove a $27 million increase in variable life sales.

Our sales increases of $18 million for term insurance and $4 million for universal life compared to a year ago were mainly driven by our continued development of distribution relationships, including our cultivation of direct response third-party agents who specialize in term insurance.

Overall third-party sales were more than double the level of a year ago and accounted for 70% of our total first-quarter non-COLI Individual Life sales.

The Prudential agent count stood at about 2,500 at the end of the first quarter, down about 350 from a year ago. Sales by Prudential agents declined by 7% from a year ago, less than the 12% decline in headcount. The decrease in count mainly reflects (technical difficulty) our attrition (technical difficulty) as we continue to focus on cost-effectiveness in this channel.

Our annuity business reported adjusted operating income of $166 million in the first quarter, up $48 million from a year ago, including a $23 million contribution from the variable annuity business we acquired from Allstate in June of last year. The remainder of the increase came mainly from higher asset-based fees, driven by market appreciation, together with strong net sales of variable annuities.

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 over the past year were $2.3 billion.

For the first quarter our gross variable annuity sales were $2.8 billion, including about $450 million from the new distribution that came to us with the acquisition of the Allstate business. Excluding the new distribution, gross sales were up 9% from a year ago. This sales increase is driven by our largest channel, independent financial planners, where we began the introduction of our new Highest Daily, or HD, Lifetime Five feature last November. We're now in the process of completing the rollout of this feature in the wirehouse channel.

Sales in the wirehouse channel, including the relationships that came to us with the Allstate business, are up $124 million from a year ago, but below the level of the fourth quarter. During the first quarter, we completed the transitioning at Morgan Stanley from the former Allstate product to Prudential products; and not surprisingly, sales were held back somewhat as the producers adapted to the new products.

Our popular living benefit features are continuing to drive momentum in the annuity sales, with a take rate of almost 80% in the first quarter. Over $400 million of our current quarter gross sales include the HD Lifetime Five feature, reflecting its initial success in the channels and markets where it is now available.

During the first quarter, we surpassed the $10 billion milestone for Lifetime Five account values on the books. Including the original version introduced in early 2005, the spousal product introduced early last year, and the new HD product. These features take advantage of our risk management capabilities to offer an excellent value proposition in a variable annuity market with a growing focus on retirement solutions. I should note that HD Lifetime Five is awaiting approval in New York and a few other states.

The group insurance business reported adjusted operating income of $51 million in the current quarter, up $4 million from a year ago. The increase came mainly from more favorable life claims experience in the current quarter. Less favorable experience on group disability business in the quarter was a partial offset.

Group insurance sales amounted to $195 million in the first quarter compared to $280 million a year ago. Our focus is on growing this business by adding cases that offer appropriate returns; and we are disciplined in bidding on new business. As a result, our sales levels reflect the availability of attractive opportunities. We found fewer such opportunities, particularly in the large case market, which is our major emphasis, during the most recent bid cycle and in recent years.

That being said, we are also focused on retaining the attractive business we cultivate; and our retention has been excellent, with group life persistency at around 95% for all of 2006 and into the first quarter, driving continued earned premium growth.

Turning to the Investments division, the retirement segment reported adjusted operating income of $148 million for the current quarter, up $11 million from a year ago. Investment results were more favorable in the current quarter than a year ago, benefiting from growth of balances for institutional investment products and a higher portfolio yield.

In addition, current-quarter results benefited from growth in fees on our full-service retirement business, where account values have increased $7.7 billion or 8% from a year ago. Net flows for our full-service retirement business were in the positive column for the first quarter, amounting to $570 million. This compares to modest negative flows a year ago and exceeds our net additions for the full year of 2006.

Gross deposits and withdrawals for full-service retirement tend to be lumpy from one quarter to another, especially with our emphasis on mid to large case market. Gross deposits and sales of full-service retirement business were $4 billion for the first quarter compared to $5.4 billion a year ago, which included a $1.6 billion for a single large case.

Withdrawals and other outflows in the current quarter were $3.4 billion, down from $5.5 billion a year ago, which included $2.1 billion from three large cases reflecting merger and acquisition activity and plant consolidations.

We have begun to introduce our new retirement income product, IncomeFlex, in a controlled initial rollout. Several of our institutional clients have signed on. Our strategy is to use these early pilot clients to help us refine the product in our approach in helping clients understand its value. This product addresses the focus of growing numbers of DC plan participants on meeting retirement income needs. We believe IncomeFlex will gain significant market acceptance over time.

The Asset Management segment had adjusted operating income of $184 million in the current quarter, up $15 million from a year ago. The increase came mainly from growth in asset management fees, which have benefited from a $42 billion or 11% increase in assets under management over the past year, driven by market appreciation and positive net flows.

Results from the segment's proprietary investment business were essentially unchanged from a year ago, as lower income from real estate activities was largely offset by the $20 million of income from market value changes in a fixed-income fund that Rich mentioned previously.

The Financial Advisory segment had adjusted operating income of $96 million this quarter compared to a loss of $66 million a year ago. Current-quarter results absorbed expenses of $14 million for retained obligations. The loss in the year-ago quarter included $176 million of expenses from retained obligations almost entirely related to our reserve for market timing. On the other hand, segment results a year ago benefited from $42 million of income mainly from the receipt of shares related to our New York Stock Exchange memberships.

Stripping out the expenses for the retained obligations and the income last year from trading exchange shares, the Financial Advisory segment's operations contributed pretax income of $110 million in current-quarter results compared to $68 million a year ago. The $42 million increase tracks greater contribution from our retail brokerage joint venture with Wachovia, which benefited from growth in commissions, fees, and other revenues, partly due to the strong equity syndication activity in the quarter that Rich previously noted. Now I will turn it over to Mark for the International businesses.

Thank you, John, and thank you all for listening in. The International Insurance segment reported adjusted operating income of $413 million for the current quarter compared to $338 million a year ago.

The segment's results included adjusted operating income of $143 million from Gibraltar Life in the current quarter, up $33 million from a year ago. The increase in Gibraltar Life came mainly from improved investment income margins reflecting a continuation of our portfolio strategies to lengthen maturities and increase US dollar investing, as well as growth in Gibraltar's US dollar fixed-income annuity business, where account values reached $2 billion at the end of the first quarter, up from about $650 million a year ago. In addition, Gibraltar benefited from more favorable levels of mortality and expenses in the current quarter.

Foreign currency translation was not a major driver of Gibraltar's earnings growth, as we are translating yen earnings at JPY102 per dollar this year compared to JPY103 per dollar last year. Sales from Gibraltar Life based on annualized premiums in constant dollars were $84 million in the current quarter compared to $80 million a year ago. The increase reflects the $7 million contribution to the current quarter from sales of our US dollar-denominated fixed annuity product in the bank channel, where we commenced distribution in mid 2006.

A downtick in sales by Gibraltar's Life Advisors, reflecting lower sales of US dollar fixed annuities, was a partial offset. We commenced Life Advisors sales of this product late in 2005. Sales in the year-ago quarter benefited from initial customer demand following the product introduction. The $7 million decline in these annuity sales more than offset an increase in sales of life insurance and other protection products in Gibraltar of $4 million or 7%.

Gibraltar had just under 6,000 Life Advisors at the end of the first quarter, up about 200 from a year earlier and essentially unchanged from year-end. Over the past two years we've grown the sales force at Gibraltar by more than 1,000 Life Advisors to take advantage of opportunities in its market, especially the teachers association. At the same time we continue to focus on the quality of the field force, which drives both productivity and persistency of business sold.

We hold our Life Advisors to minimum production standards based on semiannual evaluation periods. During the first quarter, we experienced some attrition of lower producers as a result of the most recent evaluation period. We applied what we've learned over the past two years about critical success factors to reinforce our selection standards in hiring.

Our Life Planner business, the International Insurance operations other than Gibraltar Life, contributed $270 million of adjusted operating income in the current quarter, up $42 million from a year ago. The increase came mainly from continued business growth. Current-quarter results also benefited from improved investment income margins, reflecting a continuation of our portfolio strategies to lengthen maturities and increase US dollar investing, similar to what we've done in Gibraltar Life.

In addition, our Life Planner results benefited by $9 million from more favorable foreign currency translations mainly related to our Korean operation. Sales from our Life Planner operations based on annualized premiums in constant dollars were $235 million in the current quarter compared to $228 million a year ago.

Sales in Japan are $169 million for the current quarter, up $16 million from a year ago or 10%. The increase reflects greater sales of our US dollar-denominated retirement income product, including purchases in advance of a repricing of the income feature that we implemented in April, as well as growth in our Life Planner count.

For our operations outside of Japan, which mainly reflect our Korean Life Planner business, sales were $66 million in the current quarter compared to $75 million a year ago. The Life Planner count in Korea stood at just under 1,600 at the end of the first quarter, a decline of about 100 from a year ago, but an increase of almost 50 from year-end 2006.

We recently implemented some fine-tuning of our compensation structure in Korea including features to encourage sales of life insurance to new customers. While it is early in the process, the initial results were positive in terms of improved Life Planner retention, which contributed to the net increase in Life Planners during the first quarter.

The International Investment segment reported adjusted operating income of $62 million for the current quarter, up $18 million from a year ago. As Rich mentioned, current-quarter results benefited from strong sales of mutual funds with front-end charges and income from an equity-related investment. These items were largely responsible for the increase in adjusted operating income.

Results also included mark-to-market income from shares related to exchange memberships amounting to $11 million in the current quarter and $15 million a year ago. The lower mark-to-market income was essentially offset by more favorable results from the segment's trading operations. Now I will turn it back to Rich.

I will comment on net income and then the Closed Block Business. First, net income for the Financial Services business was $1.025 billion for the first quarter compared to $675 million a year-ago quarter. Current-quarter results include pretax realized investment gains of $140 million net of related charges and investments. These realized gains came mainly from sales of equity securities in our Japanese insurance operation.

Credit-related losses and impairments were $29 million in the quarter. Our gross unrealized losses on fixed-income securities in our general account stood at $551 million at the end of the first quarter. The vast majority related to investment-grade securities and interest rates.

Non-investment-grade fixed maturities comprised about 6.5% of the Financial Services business total fixed-income portfolio at the end of the first quarter, essentially unchanged from a year-ago quarter.

Briefly, our Closed Block. The results of the Closed Block are associated with our Class B stock. The Closed Block business reported net income of $95 million for the current quarter compared to $58 million a year ago. Pretax realized investment gains in the Closed Block were $207 million in the current quarter and $60 million a year ago. We measure results of the Closed Block business only on a GAAP basis.

Turning back to Financial Services business, the Investment division is benefiting from continued growth of our annuity business, including the combination of the variable annuity business we acquired from Allstate.

In the Investment division each of our businesses contributed to the quarter's increase in earnings. Our asset management business registered strong results, reflecting growth in asset management fees; while Prudential Retirement is benefiting from improved investment returns and growth in fees on full-service retirement balances.

Lastly our International business reported a significant earnings increase for the quarter, with the business growth in our Life Planner operations complemented by increased investment income in both Japanese insurance businesses as well as an uptick in our results from our International Investment businesses.

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

(OPERATOR INSTRUCTIONS) Suneet Kamath, Sanford Bernstein.

Just a couple quick ones. First on individual life, you said the mortality was high; and you did not wall it off as a special item. Any sense in terms of order of magnitude, just as we model out the next couple quarters?

Then I guess for Rich, it looks like that convertible deal, about $0.02, was a good deal for you. Any limitations on doing another one to sort of replace that income at some point in the future?

In terms of the first question, if you look at our mortality, it was below a year ago and below our expectations for any given quarter. The range was roughly $20 million to $30 million.

It was $31 million worse than the single point expected. That is an average of a range of expected outcomes. It was also worse than the lower end of a band that we look at by single digit millions. So depending upon how you want to look at it, Suneet, there is your answer.

Rich?

On the second question, Suneet, we look at that in an opportunistic way depending upon the size of the spread that we can garner and the amount of premium that we have to associate with the stock; i.e. the stock price versus the conversion price. So as we go through the year and those spreads widen, we will still consider putting on another one of those trades.

Okay, but no rating agency imposed restrictions or anything like that?

None that I am aware of. As you said, one is rolling off.

Nigel Dally, Morgan Stanley.

First one is Prudential of Japan. Sales run ahead of agent count, which I expect is unsustainable over time. Currently can you discuss what is leading to the lackluster agent growth? How quickly do you believe you can ramp that up?

Second on Korea. Nice to see the sequential pickup in agents. Was this purely a reflection of the new commission structure? Or are we also seeing some easing of competitive conditions?

Then last on annuities, does the lack of approval for Lifetime Five HD in various states prohibit you from introducing the product to certain wirehouse firms? I thought that some companies required the product to be approved in all states before offering the product.

This is Mark. I will start off with the two international questions and then we will get to annuities. On Japan, as you commented, sales were up about 10%, which ran higher than the growth in Life Planners. We have actually, if you go back to the beginning of '05, had mix changes quarter-to-quarter and the influence of pricing changes reflecting sequential quarter results.

There was some of that going on. We had a change in the mix of sales in the first quarter. We also had some higher sales reflecting anticipated price changes. But 10% is the ballpark that we expect to see sales growth over time. Again I would not disconnect the linkage between sales growth and Life Planner growth. We also expect those two to track each other pretty closely.

Turning to Life Planner growth then in Japan, as you noted it was 5% for the quarter. We aspire to 10% growth overall in Life Planners. That is the target that we have talked about, and we generally come pretty close to that year over year. We would not change our target or our expectations for the full year based on what we saw in the first quarter.

So on Korea we would attribute the result primarily to the actions that we have taken. As I commented in my remarks, we have changed some of our commission structures. I guess I should point out that we've done it in a manner that is very consistent with what the Life Planner business is all about, encouraging our Life Planners to sell protection life insurance. And we did see an improvement in the Life Planner headcount, which we think is a result of that.

Nigel, with regard to your question on annuities in the wirehouse channel, the absence of individual state approvals has not impaired our ability to develop the relationships with the wirehouses. We're now in the five major wirehouses and we are also -- we will be adding A.G. Edwards in the second half of the year as well.

But I think your observation, Nigel, is correct. There is at least one major securities firm that I am aware of that I think does not allow sales until there has been approval in New York State and maybe other states as well. We do not yet have approval for this product in New York State.

Okay, that's great. Thanks a lot.

Thomas Gallagher, Credit Suisse.

I just had a question on Gibraltar Life. I noticed there was a 13% decline in premiums and fees, yet earnings were very strong, up 30%. Is this being distorted by, I guess, a mix shift from FAS 60 to FAS 97? Because when I look at the policies in force, they were only down marginally.

Then also if you can remind us kind of overall where you would think revenues are going in that business, and whether that continues to support mid to high single digit earnings growth consistently.

I'm going to let -- Eric has got the numbers in front of him, so I'm going to let him give you the numbers and explain the -- or give the answer to your question.

Okay, Tom. If you look on page 25 of the QFS, which you probably already have open in front of you, you are quite right. There is a distortion from a change in mix, with FAS 97 products providing a lot of the growth there, particularly as a result of the sales of the dollar-denominated fixed annuity.

There is also a distortion from our upside sharing dividend, which you might remember is one of the ways that we have rewarded former policyholders of Kyoei for better investment results than were expected at the time that we rehabilitated Kyoei.

So if you back everything out of the yen-denominated revenue, you actually get an apples-to-apples rate of growth of about 5% in revenue at Gibraltar.

That dividend sharing reduces both revenue and benefits, so it is neutral for earnings, but it does affect the revenue side.

Okay, so if we just consider that, then, you are well on track; especially when you consider probably some upward bias to the margin to deliver onto that mid to high single digit growth in that business. Is that (multiple speakers)?

We remain very encouraged by what is happening at Gibraltar. The Life Advisor growth has been pretty robust. As I mentioned in my notes, we're focusing on quality of distribution, which continues to result in improving productivity and strong persistency. And the margin on new products is attractive, so we think everything is very much going the direction we hoped it would.

Okay, thanks.

Colin Devine, Citigroup.

I have a couple questions. First, with the new mortalities tables out in Japan, if you can discuss what if any impact that has had on your pricing; and also if that will have any impact on the reserves you hold on the in-force would be the first question.

Second for John Strangfeld, turning to the disability sales clearly a very strong quarter. I guess the second-best in the Company's history. I just am looking back at my notes. When we saw that back in '04, it's the similar sort of sales, unfortunately Prudential had about the worst benefit ratio in its LTD experience four quarters later. What have you changed since then to make sure that the business that is going on is profitable?

Then lastly on the Individual Life side, again very strong sales. Do you have any concerns that some of the IOLI stuff is slipping through, or what actions are you taking to screen that out?

Mark, why don't you start on the mortality tables in Japan?

I will start with your Japan pricing question. I'm going to answer it with a couple of different parts to the answer. As you know, case-by-case, prices move in different ways depending on a whole bunch of specific underwriting characteristics. But broadly whole life prices have gone down by about 2% to 3% and term life prices have gone down by 5% to 10%.

There is an offset going the other way in retirement-oriented products where there is longevity risk. Because those prices are the mirror image of the mortality risk that we price into whole and term life, and retirement product increases are 10% and above.

In the abstract, those numbers are not particularly helpful, so let me give you a frame of reference. At current prices we're booking new business at more attractive returns than the average in our books. Returns are less attractive than they were yesterday, but they are more attractive than they were five years ago. So as we think about this, again, we're currently booking products at prices that are more attractive than the average in the books; although, again, somewhat less attractive than they may have been most recently.

I am not aware of a reserving issue around the in-force book. We may have to get back to you on that question. I don't expect anything, by the way.

Just to be clear on the return comment, looking at the 20%-plus ROEs you have consistently put up out of POJ and Gibraltar, are you saying that the new business you're selling today with the new mortality tables, you're earning a better ROE than that?

Over time, yes. Remember that the driver of our returns is what I have called the hyper-productivity model. We produce these attractive returns off of extraordinary productivity and persistency. So the answer is yes.

The statement I made is right about new business being more attractive than average. I will turn it over to John for the other two questions.

This is John. On your other question about the disability, the performance in that business does not reflect any change in our strategy on either pricing or risk-taking.

Then secondly, what is different now versus the earlier era that you mentioned, the principal difference I would point to is the management on the individual business.

On the IOLI sales, we do everything possible to insure that we do not have and have not had IOLI sales. As you know, I have been fairly adamant in my talks about this particular product as not being very good for the industry in general; and certainly do not believe it is good for us. So we do not see any impact on IOLI sales because we do not believe we're doing any. And we do everything possible to assure that we do not do any.

Thank you. Art, just one follow-up since you mentioned the change in the office of the Chairman. Is there any update you want to provide then on the search for the new Chairman?

Well, we still have one, so --

I do believe you said you were retiring at the end of the year; unless there has been a change to that.

No, no. Right now the game plan is still the same. The Board expects to make a decision hopefully before the end of the year in terms of what the succession plan would be. They are still on track. And no, the changes have not changed any of my plans.

Okay, thanks.

Jimmy Bhullar, JPMorgan.

I have a couple of questions on the variable annuity business. The sales decline at Morgan Stanley, could you quantify that?

Secondly on just a related topic in the [VA] business, the new wirehouse distribution relationships that you have added the past few years, UBS and Merrill Lynch specifically, are you running at full production levels through those channels? Or do you think you have a potential pickup in sales as you penetrate the channels further?

This is John Strangfeld. Let me take the first one first. First, vis-a-vis Morgan Stanley, total sales are down in that channel for the first quarter; but PRU sales are actually up. What we had in that case is in the fourth quarter we had some PRU product; we had some Allstate product. We were undergoing the transition from the one to the other.

Now in the first quarter of the year, it is entirely PRU product. What we have is an adaptation of that channel to the new product.

The second part of the question had to do with --

Do you have any numbers on what the Allstate-Pru combined was?

We don't, Jimmy. We do not have those numbers for you.

The second was whether we're producing at a mature level at our new (multiple speakers).

We do not think we are at our full level of potential in our new channels or in the wirehouses for a couple reasons, partly product, partly distribution.

In the case of product, the new products such as Lifetime Five and HD that we referred to earlier are really in the early stages of rollout and acceptance within those channels. So we see product-related opportunities.

Then secondly with distribution still in the relatively early stages, we've recently doubled our wholesaling force to cover this channel. So we think there is upside from that as well.

Okay, then finally any comment on the potential timing of your approval in New York of the new Highest Daily Lifetime Five that you have?

I can't speak to that.

Okay, thank you.

Eric Berg, Lehman Brothers.

I have a follow-up to Colin's question and then one question about fixed annuities. My follow-up question is probably best directed to Mark, and it is this. Am I right to say that this change in the mortality table, it probably is more of an accounting issue than a true economic event? In the sense that obviously this change in the table does not affect when people will die; and the only reason that Prudential's economics would be affected is if you changed the price of your products. And to the extent that some are going up and some are going down -- prices, that is -- it may not be viewed as a big economic event. Am I thinking about this correctly?

It is real in the second sense that you mentioned, which is product prices have been changed to reflect different mortality assumptions. As we have commented on our international investor day and since, there are a lot of moving parts in the insurance product profitability picture. So looking at one piece in isolation, in this case mortality, does not tell the whole story; because for example there may be improving investment margins.

So as I said in my overview, the summary comment is that we're still in very good shape in terms of our ability to earn attractive incremental returns in these products. Part of the reason for that, by the way, is that mortality in isolation does not tell the whole story.

So I guess basically I am agreeing with you. You're right. It reflects moving parts in the products and the way things in total come together to produce returns, as opposed to one particular dimension.

With respect to the -- my second question, final question relates to the fixed annuity products or accumulation products that you're offering in US dollar denominations in Japan. My question is -- what is it about that market that is different, either the Japanese approach to financial services purchases or the state of the fixed income markets that is making these products so successful there, when the fixed annuity business in the US seems very slow? What is different about that market?

I think at 40,000 feet it is a difference between spenders and savers. We have a lot more of the former in the United States and they have a lot more of the latter in Japan.

Second, for us it also reflects the market that we deal with through Gibraltar, namely the teachers association, where at the time of retirement they are getting a lump sum payment and are looking to put that to work to help them through lifetime income.

Then lastly it is rates. That is a simple fact of where we are in Japan nowadays. So I think it is a combination of those reasons. But I would again agree with your point, namely, that it is a more attractive product for us certainly in Japan than it is in the United States.

Thank you, Art.

Joan Zief, Goldman Sachs.

In the US, as you move to penetrate these independent distribution channels, the wirehouses, your independent financial planners, how does PRU really differentiate itself since the industry is really fragmented? There's lots of competitors out there doing the same thing. Is it really in this marketplace just product pricing or product design? Is it commission levels?

Joan, this is Art. I think in any competitive environment like this it is always a combination of factors. But I think if you look at the most recent history, I would say there are a couple of factors that have allowed us to differentiate ourselves.

First is our product innovation. We did come out with Lifetime Five. We've now come out with Highest Daily Lifetime Five. Those are extraordinarily competitive. We were early to market, and we were aggressive in selling it.

Part of that was based on an acquisition of Skandia a number of years ago, which gave us strong positioning in the independent financial channel, which frankly would have taken us many, many years longer had we not made that acquisition. So there is a combination of acquiring someone who was extremely strong in that channel, and keeping it up by bringing new product out and supporting it.

Second, I think that our brand does serve us at the margin quite well. Not only through the distribution channel, but the ultimate buyer, in terms of knowing who we are and what we do.

We certainly have to be competitive. On price, I do not think we have used price as a significant differentiator very often. But it is an area where you want to "be at market."

So I would say it is product innovation, additional acquisitions that have enhanced our position, and the fact that we have invested heavily and continue to invest, which I think are the characteristics of those who are likely to be the winners.

I do not think there is any one winner in these product sales. But I think if you look at annuity sales, while there are a lot of people selling them, it is probably 10 or less that are having the greatest level of success. I think that is a function of investment and capability. I suspect that is what is going to happen over time as well.

Thank you.

There are no other questions. Please continue.

If there are no other questions, so again on behalf of my colleagues, thank you very, very much for your interest in Prudential. We certainly look forward to talking to you at the end of the second quarter as well. Thank you very much.

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