保德信金融集團 (PRU) 2008 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the fourth-quarter 2008 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given to you at that time. (Operator Instructions).

As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Mr. Eric Durant. Please go ahead.

Thank you, Cynthia. And thanks to all of you for joining us this morning. We always welcome the opportunity to tell you our story, to hear your questions, and we hope to provide responses that are helpful to you.

Our presenters today are John Strangfeld, Rich Carbone and Mark Grier. And for the Q&A, they will be joined by Ed Baird, Bernard Winograd and Peter Sayre. John?

Thank you, Eric. And good morning, everyone. We appreciate you joining us, and we appreciate your interest in Prudential.

First, a general comment about the quarter relative to what we said on Investor Day. The fourth-quarter results are largely what we anticipated and presented to you in December. I say largely for two reasons. First, we identified then, but did not quantify, the goodwill JV write-offs. Outside of the goodwill JV write-offs, our results were actually modestly better than we indicated in December. Second, our year-end liquidity ended a bit stronger than we had shown. We will talk about this more a little later.

Now, regarding the fourth-quarter earnings, anticipated or not, we are not satisfied with these results. Yes, the market conditions were horrendous for any business sensitive to the public markets. What we see is unsatisfactory and frankly frustrating is that the extreme market impact on some of our business completely overshadowed the fact that most of our businesses had pretty darn good fundamentals. In fact, businesses representing nearly half of our normalized earnings actually produced record results.

Our response to this challenging environment is not to simply ride this out, but to actively manage through it. Of course, there is a lot of a judgment involved in this process, because on the one hand, we do not perceive everything that is going on as a trend that will go on forever. As such, we don't want to manage the short term in a manner that does not -- we want to manage the short term in a manner that does not compromise the long term.

On the other hand, where we have thought appropriate, we have reduced the risk profile of certain products and activities in what we believe are very material ways that will reduce volatility in the future, even in the event of another extreme environment. The most notable example of this is our annuities product redesign, which we described at Investor Day and is fully reflected in all new annuity product sales.

In these times, we also recognize investor concerns with capital and liquidity, and Rich will walk you through the details in a few minutes. The headline is that we believe we have resources to maintain RBC and solvency margins for our insurance companies at double-A levels, even under stressed equity market scenarios similar to those presented at our Investor Day. We have ample liquidity to meet our commitments, as well.

Now let me take a moment on the long-term view. We continue to see Prudential as having a balanced set of businesses and a balanced set of risks. This balance was especially evident last year, as our international insurance operations achieved record earnings. Among domestic businesses, Group Insurance also recorded its best-ever result, and Retirement held up well, while more market-sensitive businesses sustained sharp declines, or in the case of annuities, a loss.

But it is not just the mix. It is also the quality of these businesses. Our businesses are good businesses. They help people manage risk, and that is more relevant today than ever. They serve attractive markets, and we are competitive in those markets, as our solid sales and flows last quarter and last year would reflect.

Bottom line, we are weathering the storm, and we are doing it by tacking our way through it, not simply battening down the hatches. We remain confident that we can manage through this and emerge in better shape than most and stronger for it. That is our expectation and our aspiration is to gain ground.

However, in the near term, we face continuing challenges in this extraordinary environment, as everyone else does. And considering current financial market conditions, we continue to expect Prudential's 2009 common stock earnings per share will fall within the range of $5.25 to $5.65, based on adjusted operating income. Our guidance assumes appreciation of 2% a quarter in the S&P 500, commencing with its close as of December 31, 2008.

Now, Rich and Mark will walk you through the details, and then we welcome your questions.

Before Rich begins -- this is Eric Durant. I know Rich Carbone, and I am not Rich Carbone. But I forgot to give you a commercial before John's talk, and I'll do that now.

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 2008, 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 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.

So here is the real Rich Carbone.

Thanks, Eric. And good morning, everyone. I'm going to begin with our fourth-quarter adjusted operating income. I'm going to talk about net income. I will discuss capital and liquidity. I will go into some of the goodwill write-offs and the impairments of JVs in some detail. And all of the references that I am about to make are of course related to the Financial Services Businesses.

Now, as you've seen from yesterday's release, we reported a loss of $2.04 per common share for the fourth quarter, based on adjusted operating income. This includes a charge of about $1.32 per share for impairments of goodwill and investments in operating joint ventures. Excluding the impact of these impairments, we would have reported a loss of about $0.72 per share. This compares favorably to the guidance we provided at our Investor Day in December, when we were expecting a loss of between $1.10 and $1.30 per share.

Now to be fair, that was an assumption of an S&P of 800 at year-end. But also to be fair, it was before impairments of goodwill and investments in operating joint ventures.

Adjusted operating income for the fourth quarter of 2007 was $1.74 per share. The operating results of our businesses are once again substantially impacted by various discrete items, which are in most cases closely tied to unfavorable financial market conditions. As I just mentioned, our guidance range at Investor Day assumed that the S&P Index would close at 800 on December 31. The actual close of the S&P at year-end was 903, still down 22% for the quarter, but less punitive to DAC amortization and other market-driven measures in our assumptions.

On the other hand, as we pointed out on Investor Day, and I just mentioned, our guidance did not include any impact to the impairments of goodwill or investments in operating JVs, since it was premature to estimate this impact before conditions as of December 31 were known. At year-end, we had about $1 billion of goodwill subject to impairment testing and another 600 of investments in joint ventures in our international investments business which needed to be evaluated.

Now next, I am going to take you through the goodwill evaluation process and how in a way we arrived at these write-offs. Testing for goodwill impairment is a two-step process performed annually, generally at the segment level. First, we compare the estimated fair value of the entire business based on current market conditions and estimated future cash flows to our carrying value. If the carrying value exceeds this fair value estimate, we then go through a process similar to purchase accounting to measure the goodwill that we would record if we purchased the entire business today. If our recorded goodwill is higher than that, we have to write all the difference. For operating joint ventures, we also estimate a fair value based on current market conditions and compare this carrying value -- to which we compare this carrying value -- excuse me.

If we find that the carrying value is higher than this fair value and determine that the decline is other than temporary, again we have to write off the difference. Current market conditions were a significant driver in our impairment analysis. In addition to the negative impact of projected cash flows, we are required to consider earnings multiples that would apply in today's market, as well as current market-based discount rates on future cash flows, which are higher than the discounted rates we would apply in more normal markets.

The impairments of goodwill and joint venture investments amounted to $653 million on a pretax basis. This charge reflects the write-off of the entire balances of goodwill for three areas -- the variable annuity business we acquired from Allstate, our international investments business and our real estate and relocation business, as well as a portion of our operating and joint venture investment in our international investments business. We included all of this in our fourth-quarter adjusted operating income. I would note that these impairments have no impact on our statutory capital position.

Now I will go through the remaining discrete items that affected adjusted operating income results for the fourth quarter. In our individual annuity business, we increased amortization of deferred policy acquisition and other costs, producing a charge of about $0.89 per share. And we increased our reserves for guaranteed minimum death and income benefits, resulting in a charge of $0.73 per share. The substantial market decline in account values for the fourth quarter, leading to expected future lower fees and higher expected benefits, in addition to the unfavorable experience in the quarter, was responsible for these charges.

We know longer apply a corridor for market performance in the annuity business -- or I should say we will no longer apply a corridor for market performance in our annuity businesses. So our updates of amortization and reserves take into account the entire market-related decline in account values for the quarter, as we reproject future fees and benefit costs similar to an annual unlocking.

In addition, while we use a reversion-to-the-mean approach to this projection that assumes some recovery in account values over a four-year look-forward period, the benefit to our calculations is limited, because we apply a cap in the overall gross returns on the account values. Also in the annuity business, hedging breakage, reflecting the highly volatile financial markets of the fourth quarter, resulted in a net charge after DAC of about $0.23 per share.

In our Asset Management Business, results from fixed income and equity investments within our proprietary investing activities resulted in losses equal to $0.27 per share. Our Individual Life Insurance business also recorded an increase in the net amortization of DAC and related costs of $0.19 per share as the result of the market decline in the fourth quarter. The mechanics are similar to the annuity business, meaning that the current quarter charge is determined like an annual DAC unlocking.

There were a few one-time positives. Our retirement businesses did benefit from a reserved refinement on our traditional group annuity business, based on an actuarial study of the beneficiary population that drives the length of time that we expect to pay benefits. This contributed about [$0.06] on the positive.

In our international insurance business, the sale of a former branch office at Gibraltar Life contributed another $0.02 per share, and we repurchased about $850 million of convertible debt issued in 2007, which has a put date of June 2009 at a discount, resulting in income of about $0.07 per share. That is that $3 billion total convert that is due in June. Again, we repaid $850 million in December.

In total, the goodwill and joint venture impairments and the other discrete items that I mentioned had a net unfavorable impact of about $3.50 on our earnings per share for the fourth quarter. Now, bear in mind that these declines in account values during the fourth quarter in several of our domestic businesses will continue to affect our results going forward, and the full-year effect of that will be felt in 2009. So adding back all of these items I mentioned to our reported results for the quarter to arrive at a near-term run rate may not be a useful or accurate exercise in these markets. Mark will discuss our business results in much greater detail in a moment.

Now, moving onto our GAAP results, we reported a net loss of $1.6 billion, or $3.85 per share, for the quarter. This compares to net income of $792 million, or $1.75 per share, a year ago.

Our current GAAP pretax results include net realized investment losses of $511 million. This compares to realized losses of $91 million a year ago. Net realized losses of $511 million for the quarter have three main components. There are $1.2 billion of impairments on fixed income and equity investments and losses from sales of credit-impaired investments; $304 million representing the mark-to-market declines for our externally-managed European fixed-income investments; and gains on derivatives used in our hedging and duration management programs amounted to roughly $900 million in the quarter, and these partially offset the above losses.

The $1.2 billion of impairments and credit-related losses on sales included $570 million for fixed maturities, $601 million for the equities, and $21 million from other investments. The $570 million for fixed maturities reflected $506 million of impairments, including $400 million that were credit-related, and $64 million for sales of credit-impaired securities. $214 million of these losses were on subprime paper, with the remainder primarily on corporate holdings in services, manufacturing and finance sectors. The credit-related impairments and losses on sales totaling about $460 million compared to a range of $300 million to $400 million that we had estimated for credit losses on our Investor Day back in December.

The $601 million of equity impairments came mainly from declines in values reaching 12 months in duration and relate primarily to Japanese equities and domestic mutual fund holdings that are invested in high-yield bonds. For equities, we record our other-than-temporary impairments when there is a decline in value of 50% or more for six months or for any decline in value that persists for 12 months. We also impair equities for declines in value if we don't intend to hold them until recovery.

The $601 million of equity impairments compares to a range of $300 million to $400 million that we had estimated at Investor Day, and reflects the continued decline in credit spreads for the bonds underlying the domestic mutual funds, as well as the decline in Japanese equity securities.

The $304 million negative mark-to-market in our externally managed European and fixed income investments is essentially a result of credit spread widening, similar to what had taken place in the United States. We hold about $1 billion of these investments through a structure that requires us to record market value changes through the income statement, rather than through unrealized investment gains and losses, as we would for direct holdings of bonds. About 90% of the underlying securities are investment-grade.

The roughly $900 million of realized gains recorded as a result of increases in market value of derivative positions during the quarter came from a decrease in the base interest rate that drives the value of the derivative positions we hold as part of our management of interest rate risk for our international and domestic portfolios.

Our GAAP results for the quarter also included $230 million of pretax losses from divested businesses, mainly driven by a loss from our share of the Wachovia retail brokerage joint venture, as it reflected absorption of costs related to an earlier settlement with regulators concerning auction rate securities, as well as transition costs for the integration of AG Edwards.

Now I would like to turn to our capital and liquidity picture. First, let's look at capital. Risk-based capital for Prudential Insurance. Our 2008 statutory financial statements will not be finalized until the end of February. However, based upon where we are today, we would expect to print an RBC ratio for Prudential Insurance comfortably above 400 and consistent with a AA balance sheet strength, but somewhat below the level of 400 that I had estimated -- I'm sorry -- but somewhat below the level of 450 that I had estimated at our Investor Day in December, based on an S&P close of 900 at year-end.

The primary driver of this shortfall from an RBC of 450 at an assumed S&P of 900 was credit migration in the latter part of the year in excess of what we had anticipated. As we discussed at Investor Day, we utilize internal resources to bolster the capital position of Prudential Insurance, most significantly the Wachovia joint venture investment, which was contributed at a book value of $2 billion.

Our international insurance companies are also expected to have solvency margins at or above a AA standard as of their fiscal year-end, which is March 31, 2009.

As we look ahead to 2009, we have the financial flexibility to manage our capital position of our insurance subsidiaries in an environment of continued financial market dislocations. We have additional internal resources that we can contribute to the insurance companies if necessary through intercompany transactions.

The gain we expect on exercise of our put for the Wachovia JV, which we estimate at roughly $1 billion after-tax -- $1.7 billion after-tax -- and that is the gain, not the gross -- is still off balance sheet. Since our current RBC position takes credit only for the book value of the JV, which is the $2 billion I just mentioned, we are continuing to evaluate alternatives for possible realization prior to January 2010.

We continue to believe it is ill advised to quantify an enterprise measure of excess available capital with the financial market conditions changing so rapidly and frequently, and the market for hybrid securities not functional. However, holding capital at a AA standard would suggest no on balance sheet excess capital at year-end. And as I said at Investor Day, we benchmark this measure at a AA standard or, said another way, a 400 RBC target at Prudential Insurance Company of America and several of our other subs.

It is premature to estimate RBC levels for 2009. The closing S&P level, credit migration, derivative gains and losses, internal capital management action and the timing of the realization of the Wachovia joint venture will all play into this outcome.

Now let's turn to the liquidity. At year-end, we will have $4.4 billion of cash and short-term investments on the parent company balance sheet. When we look at the parent company cash position, we exclude any amount of commercial paper and short-term intercompany borrowings. This was the basis on which I described our projected year-end cash position on Investor Day. So while the parent company balance sheet will show $4.4 billion of cash at year-end, you should think about this net of those two items -- that is net the CP and net of the inter-company borrowings. Which would bring the parent company's cash down to, on an adjusted basis, $2.6 billion cash on hand versus the $2.5 billion estimate I had made in December.

Now to make these numbers apples to apples, you need to keep in mind we did repurchase $800 million of the 2007 converts, puttable in June 2009. So our cash position at December 31 is really $900 million better than the estimate I gave you on Investor Day.

In December, we also repaid $2 billion of the convertible debt issued in 2006, when it was put to us, as expected. And as I mentioned earlier, we repurchased about $850 million of our $3 billion convertible issue in 2007 at a discount. We have adequate resources to pay the remaining $2.1 billion of that issue as it is put to us in June of this year.

Other than the remainder of the $3 billion convertible, which would be the $2.1 billion I just mentioned, and an $816 million bridge loan denominated in the yen that we expect to refinance internally this month, we have no significant debt maturities at the parent company until 2011. We have planned our cash flow for 2009 on our assumption that the dividend capacity from Prudential Insurance, the parent company, would be constrained.

Excluding capital market availability, the parent company has sources of cash from continued repayment of intercompany borrowings supporting subsidiary activities that we can wind down, as well as return of capital associated with those activities.

Now, our commercial paper programs. Both of our commercial paper programs are qualified for and are participating in the federal government's Commercial Paper Funding Facility, or CPFF. As of year-end, commercial paper outstanding amounted to $1.2 billion for the parent company, including $600 million under CPFF and $4.4 billion for Prudential funding, including $450 million under CPFF.

Based on CPFF guidelines, the program would accept up to $1.3 billion of parent company paper and $9.8 billion of Prudential funding paper. That is the PICA (inaudible). The Federal Reserve announced earlier this week that the CPFF program has been extended through the end of October 2009.

Now, the membership of Prudential Insurance in the Federal Home Loan Bank of New York, which commenced in June of last year, provides additional liquidity. Under this program, financial insurance can pledge up to 5% of its admitted assets, excluding separate accounts, to collateralized borrowings. As of December 31, our estimated borrowing capacity under this program, considering the statutory limit and holdings of qualified securities at Prudential Insurance, was $6.3 billion. Among the qualifying securities are AAA subprime paper held by Prudential Insurance, which is PICA, the acronym I used a moment ago.

We consider this an attractive form of financing and have $3 billion of outstanding borrowings under this program as of year end. This leaves us with $3.3 billion of untapped borrowing capacity and further liquidity in Prudential Insurance.

Our securities lending program amounted to $7.5 billion for the Financial Services Businesses as of year-end. We have generally limited this program to liquid securities that are requested by counterparties, rather than pushing securities out to the market, and have carefully managed the maturity risk. We estimate that as of year-end, we have an additional $14 billion of lendable securities within the Financial Services business.

Lastly, we have $4.3 billion of committed credit lines that may be accessed by the parent company, Prudential Insurance or Prudential Funding, subject to satisfaction of customary conditions. The agreements expire in late 2011 through 2012.

Now, Mark will comment on the investment portfolio for the Financial Services Business, and he will review in more detail our business results for the quarter.

Thank you, Rich. Good morning, good afternoon, good evening or good night. As we've stated in the past, we've had a cautious view of the US credit markets for several years, and we have managed our portfolio accordingly. As a result, we are coming into this difficult environment with a defensively positioned diversified portfolio in which we have purposely selected our risks and adhere to risk limits in order to avoid undue concentrations.

We continue to believe that today's market values for many classes of investments are, in effect, a negative bubble, with prices disconnected from underlying cash flow prospects. We should all be sensitive to the fact that many financial institutions are reporting valuations on assets that the Treasury and the Federal Reserve have repeatedly said can't be valued. Volatility and uncertainty remain high.

As a long-term investor with primary focus on matching the cash flow characteristics of our liabilities, these cash flow prospects are much more relevant to us than market value changes during the period of ownership. With that said, I will start with our fixed maturity portfolio.

Gross unrealized losses on fixed maturities in our general account stood at $11.3 billion at year-end. About 80% of the total $11.3 billion gross unrealized losses relate to investment grade securities. We have the intent and ability to hold these securities to recovery, and the market-driven declines in value do not have a negative impact on our statutory capital position.

Gross unrealized losses increased by $5.4 billion from September 30, reflecting the accelerated spread-widening that was experienced across virtually all classes of fixed income securities during the fourth quarter. About $3.3 billion of our increase came from corporate securities, across virtually all sectors and most pronounced in manufacturing. Another $1.1 billion of the increase came from commercial mortgage-backed securities, where spread-widening resulted in declines in value for virtually all holdings, regardless of quality. The remaining $1 billion of the increase came from asset-backed securities, including our subprime holdings.

Roughly $1.8 billion of total gross unrealized losses at year-end relates to subprime holdings, an increase of $600 million from the third quarter, as the market for these securities weakened when expected government purchases under the TARP program failed to materialize, and the residential housing market continued to decline.

Total subprime holdings were $5.4 billion at the end of the quarter, comprising less than 3% of our portfolio. Our holdings, based on amortized cost, are down roughly $500 million from the third quarter, reflecting just under $325 million of paydowns and the $214 million of impairments and credit-related losses on sales that Rich mentioned. Virtually all of our subprime holdings were priced as of the end of the quarter using third-party pricing services.

We are continuing to monitor delinquency rates and cash flows for collateral underlying our subprime paper. Our estimate of potential losses of principle from subprime holdings under stress scenarios has not changed substantially during the fourth quarter, and we believe our GAAP results have already absorbed most of the exposure through the other-than-temporary impairments we have recorded for these securities.

At December 31, the general account fixed maturity portfolio included $8.5 billion of commercial mortgage-backed securities at amortized cost. Over 94% of these holdings have triple-A credit ratings. For commercial mortgage-backed securities, there are three distinct classes within the AAA category, and Super Senior AAA securities with 30% subordination, representing over 80% of our holdings, stand at the top of the cash flow structure.

These Super Senior AAA securities are further stratified into shorter and longer durations. Our purchases of recent vintage commercial mortgage-backed securities have focused on the shorter duration, Super Senior tranches, and about $4.6 billion, or 54% of our holdings, have cash flow priority which we believe would result in full repayment before the structures reached 30% cumulative net losses.

Our exposure to CDOs is limited. General account holdings at December 31 are about $500 million, mostly our own, with virtually no underlying subprime exposure in the CDO mix. We also have very limited exposure to hybrid securities, which amount to less than one-half of 1% of the general account portfolio.

Based on amortized costs, non-investment grade securities comprised about 7% of the $128 billion fixed maturity portfolio at year-end, essentially unchanged from last quarter.

Gross unrealized gains on the fixed maturity portfolio were $4.7 billion at December 31, up $2.3 billion from a quarter earlier, reflecting interest rate related increases in market value, bringing net unrealized losses to $6.6 billion at year-end.

One last comment on the investment portfolio. We had $22 billion of general account commercial mortgage and other loan holdings as of year-end. While commercial real estate is entering a down cycle, we believe that we are well prepared for it. These are mortgages that we originate and our holdings reflect an emphasis on high underwriting standards.

At December 31, the average loan-to-value ratio, using conservative capitalization rates, for our commercial mortgage holdings is 58%, and the average debt service coverage ratio is 1.9 times. The mortgage portfolio is seasoned and well diversified by geography and property type.

Now I will cover our business results for the quarter. As you've seen in our earnings release, we've modified our domestic business divisions to better reflect the way we think about our business today. Our US Retirement Solutions and Investment Management Division includes our annuity, retirement and asset management businesses. And our US Individual Life and Group Insurance Division include our domestic protection businesses.

I will abbreviate my comments on business drivers in order to leave more time for questions and answers, but if I neglect to cover subjects of interest to you, we'll be happy to address them in the question-and-answer session.

I will start with our US businesses. Our annuity business reported a loss of just over $1 billion for the fourth quarter compared to adjusted operating income of $171 million a year ago. The current-quarter loss is driven by four market-driven discrete items in the quarter that Rich mentioned, with an overall negative impact of $1.1 billion.

Current-quarter results include accelerated amortization of deferred policy acquisition and other costs amounting to $498 million reflecting market performance, essentially a DAC unlocking like we had in the third quarter. Current quarter results also include charges of $409 million to strengthen our reserves for guaranteed minimum death and income benefits. This increase in reserves is based on the same projection of where account values will be over time that we use for DAC, starting with the year-end balances as Rich described.

In setting these reserves, we estimate the extent to which our guarantees will be in the money over time and apply a dynamic lapse assumption that considers the tendency of contract holders to keep their annuities in force when the guarantees are in the money, since we expect more of the guarantees to turn into claims than if these customers lapsed at average rates.

In addition, the adjusted operating income we report also includes breakage between changes in the values of our living benefit guarantees and our hedging instruments. With the continued turbulent financial markets in the fourth quarter, we experienced negative breakage of $130 million after related amortization of DAC. To keep this breakage in perspective, I would note that we are hedging exposure on about $21 billion of account values as of year-end.

Lastly, we wrote off the entire $97 million balance of goodwill from our acquisition of Allstate's variable annuity business. The remainder of the decline in adjusted operating income for the annuity business from a year ago came from lower fees in the current quarter due to the market-driven declines in account values, with spread income from funds rebalanced to the general account of partial offset.

Our gross variable annuity sales for the quarter were $2.1 billion compared to $3 billion a year ago. We feel that our gross sales have held up quite well in relation to the overall market. We are also continuing to enjoy positive net sales, which were roughly $500 million for the fourth quarter and $2.2 billion for the year.

With our transition to products with the highest daily or HD features, a growing proportion of our account values with living benefits, 54% at year-end compared to 37% a year earlier, are essentially self-hedging as to equity market risk, since the customer agrees to our daily rebalancing from the selected funds to fixed income investments in support of the guarantee when there are equity market declines.

In addition to reducing our risk profile and decreasing our exposure to changes in hedging costs, this rebalancing has protected our customers from substantial account value declines through recent financial market conditions. About $14 billion of account values were transferred to fixed income investments under this program during the past year.

The retirement segment reported adjusted operating income of $133 million for the current quarter compared to $131 million a year ago. As Rich mentioned, current quarter results benefited by $33 million from refinement of our reserve for a block of traditional group annuity business based on an actuarial review of the beneficiary population that drives the length of time that we expect to pay benefits.

Stripping that benefit out of the comparison, results for the retirement business were $31 million below the year-ago quarter, primarily as a result of lower fees due to market value declines and customer account values. These market value declines more than offset the impact of positive full-service net flows for the past four consecutive quarters, which amounted to roughly $4 billion for the year.

Current quarter full-service gross sales and deposits were $6.5 billion, bolstered by two major case wins totaling $2.4 billion. Our full-service persistency is over 95%, and our stable value funds have proven especially attractive to plan participants in the recent market environment, growing by $1.5 billion in the second half of the year and reaching $35.3 billion at year-end.

The asset management segment reported a loss of $69 million for the current quarter compared to adjusted operating income of $198 million a year ago. In proprietary investing, we coinvest with our institutional clients in funds we manage including fixed income, public equity and real estate strategies, and we record changes in the value of our interests in the investments.

Current quarter results included mark-to-market driven losses of about $150 million from fixed income and equity investments, as Rich mentioned. This compares to income of about $30 million from these investments a year ago.

In addition, performance-based fees were down from the level of a year ago, when we benefited from a stronger commercial real estate market. We registered net inflows of third-party institutional funds of more than $9 billion for the year, with positive contributions from equities, fixed income and real estate investments.

Adjusted operating income from our Individual Life Insurance Business was $9 million for the current quarter compared to $129 million a year ago. Most of the negative swing in results came from the higher net amortization of deferred policy acquisition costs and other items, together with related costs, driven by unfavorable separate account performance in the current quarter, as Rich mentioned. We estimate that these market-driven costs had a negative impact of about $105 million in comparison to the year-ago quarter.

The remainder of the decrease came almost entirely from the lower level of fees that track the market-driven decline in average separate account balances for our variable life business. Market value declines over the past year more than offset positive net flows into our separate accounts, resulting in a $6 billion decline in separate account balances compared to a year ago.

The Group Insurance business reported adjusted operating income of $69 million in the current quarter compared to $66 million a year ago. More favorable Group Life claims experience in the current quarter was partially offset by a lower contribution from investment results.

Turning to our international businesses, within our international insurance segment, Gibraltar Life's adjusted operating income was $160 million for the current quarter, up $39 million from a year ago. The increase came mainly from improved investment margins, reflecting the strategies we implemented to lengthen maturities and increase US dollar investing, based on our economic investment in Gibraltar, and from continued growth of our book of US dollar fixed annuity business.

Part of the benefit from duration lengthening, both in Gibraltar and in the Japanese life planner business, came from some interest rate risk management derivative positions that we have now terminated in view of recent market conditions.

Gibraltar's current quarter results also benefited from more favorable mortality experience in comparison to a year ago, and from the $9 million income from the sale of a branch office property that Rich mentioned. Sales from Gibraltar Life based on annualized premiums in constant dollars were $99 million in the current quarter compared to $96 million a year ago. The sales increase was driven by the bank channel, where we are starting to register sales of our life insurance protection products.

Our Life Planner business, the international insurance operations other than Gibraltar Life, reported adjusted operating income of $261 million for the current quarter, up $29 million from a year ago. The increase tracked continued business growth in Japan. The Life Planner operations also benefited from improved investment margins and more favorable mortality.

Sales from our Life Planner operations, based on annualized premiums in constant dollars, were $183 million in the current quarter compared to $210 million a year ago. The decline was driven by lower sales in both Japan and Korea. We believe that sales were negatively impacted for virtually all United States-based companies in these markets, particularly in the early part of the fourth quarter, from concerns arising from the well-publicized financial difficulties of one company.

Foreign currency translation was not a major factor in the comparison of our international insurance results due to our currency hedging programs.

The international investment segment reported a loss of $434 million for the current quarter compared to an adjusted operating income of $40 million a year ago. The current quarter loss resulted from the impairments of joint venture investments and goodwill that Rich mentioned. We reduced the carrying value of several joint venture interests by a total of $316 million. The goodwill write-off of $123 million represented the segment's entire balance of goodwill.

Stripping these impairments out of the comparison, adjusted operating income from the international investment segment was down $35 million from a year ago, reflecting a lower contribution from our asset management operations in Korea.

Corporate and other operations reported a loss of $264 million for the current quarter compared to a $52 million loss a year ago. The current quarter loss included a charge of $117 million to write off all of the goodwill for our real estate and relocation business. Excluding that charge, the real estate and relocation business reported a loss of $42 million for the current quarter compared to an $8 million loss a year ago. Both the goodwill charge and the greater loss reflect the challenging market conditions in the residential real estate market and a lower level of corporate relocation activity.

Absent the impact of the real estate and relocation business, the loss from corporate and other results for the quarter was $105 million compared to a loss of $44 million a year ago. The main drivers of the increased loss were higher interest expense, reflecting our issuance of $1.5 billion of hybrid securities in mid-2008, and expenses in the current quarter as the market downturn triggered our obligations to policyholders under previous sales practices settlements.

The gain we had on the early redemption of about $850 million of our convertible debt amounting to $41 million pretax was a partial offset.

And briefly on the closed block. The results of the closed block business are associated with our Class B stock. The closed block business reported net income of $74 million for the current quarter compared to $79 million a year ago. The current quarter results include $354 million of pretax net realized investment gains, as mark-to-market on derivatives of $751 million, together with realized gains from portfolio activities, more than offset $432 million of impairments in credit losses in the quarter. We measure results for the closed block business only based on GAAP.

To sum up, our reported results and market values in our investment portfolio continued to be negatively affected by the difficult financial markets. We have positioned our investment portfolio defensively, and we remain comfortable with this risk profile.

Our capital position remains consistent with AA ratings objectives for our insurance subsidiaries, measured at an RBC of 400 as of year-end 2008. We continue to feel confident that we have the capital resources to manage our insurance company balance sheets to AA standards through continued financial market dislocations.

We had ample liquidity to fulfill our commitments, and the balanced mix of risks and businesses that we have built since becoming a public company leaves us in a good position to manage through the current environment and emerge with our competitive position intact or enhanced.

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

(Operator Instructions) Suneet Kamath, Sanford Bernstein.

Thank you, and good morning. Two questions, please. First, on your guidance, if you think back to Investor Day, I think your market return assumption was a lot lower than -- or your market level -- average level was a lot lower than what your current assumptions are. I think it was 850 back then, and I think now is something closer to 940 on the 2% market appreciation assumption.

Just wondering what is the logic there. I'm not sure that the market is so different from where it was in terms of absolute levels back in early December, but for some reason you decided to change that assumption. So I'm just curious about that.

And then second, on the Wachovia put option, obviously there has been some talk in the press about Wachovia Securities perhaps combining their retail brokerage business with that of another company. I'm not asking you to predict what is going to happen, but if something like that conceptually does happen, what happens to your put option? In other words, who becomes the counterparty to that? Does it stay with Wells, or does it travel with the business? Thanks.

This is Mark. Let me tackle both questions. With respect to the equity market assumption, that assumption is consistent with our past practice. We've taken previous quarters and we have consistently assumed 2% appreciation. So everything is very volatile and very uncertain. We've presented a consistent scenario. And as I said, it is based on our past practice of assuming 2% appreciation from wherever the market ended before.

I don't want to speculate on what may or may not be going on with respect to Wells Fargo and any other counterparties. And I think it is probably also too early to think about how the put might move around in the context of any deal. Our contract is public, so anybody who wants to look at what is in our joint venture agreement can find that contract and review it. But I can't speculate on what might happen in the context of a deal.

Can I just quickly follow up on the guidance? Maybe I'll try it another way. If we went back to your average 850 assumption that you had at Investor Day, do you think you would still be within the EPS range that you have?

Well, we're not forecasting where we would come out within the range. The current market would be stressful relative to our scenario. But there are a lot of moving parts in this. But I would say that the current market would be stressful relative to our scenario.

Okay, thanks.

Nigel Dally, Morgan Stanley.

Thank you and good morning, everyone. Just to follow up on the put option, can you just clarify whether or not you've provided formal notification to Wells of your intention to put your stake in the JV?

Second, for Rich, substantial increase in liquidity. Can you discuss what drove the nearly $1 billion increment versus your Investor Day expectations?

And then just last on acquisitions, given it doesn't seem like you have a lot of meaningful excess capital on balance sheet, what does this mean for your acquisition appetite? I'm guessing that given where your stock price is, issuing stock would be somewhat unattractive and to the detriment of existing shareholders. Thanks.

Just quickly on the put, and then I'll hand it over to Rich. We have not provided formal notice to Wells yet.

And if you can discuss why not.

Well, contractually we don't have to, and we are -- as Rich said, we are considering how we want to think about that right now, although we have made clear our intent to at some point notify them of our exercise of the put.

Okay.

Nigel, at Investor Day, I was being a bit conservative, because I did say that we had the majority of the proceeds from that convert downstream to unregulated entities. And prior to that point in time, when the put would be put to us in June, we would be winding down positions, as planned, and bringing that back up to the holding company.

There was a throwaway comment in there. I said if I can get the process begun earlier, I'll get the process done earlier. Wound up, though, the process began earlier; we were able to bring in sooner $900 million. It is as simple as that.

And then, Nigel, just to respond to your question about M&A, and maybe to respond a little more broadly and then come back to your particular comment about financing. We do have a pattern of doing acquisitions in choppy markets such as Gibraltar or Skandia or Cigna, as examples. So in theory, the pendulum has moved our way in terms of the environment in which we tend to be more active. Although the term choppy markets hardly does justice to the environment we are in today.

And yet having said that, I think it is also fair to say that from our point of view, acquisitions are nice to do, not have to do, which is very different than we found ourselves three or five years ago, where we had a number of subscale businesses that we needed to either double up or get out. So we view this timeframe as being elective and opportunistic, not essential for hitting our long-term objectives.

The added complication, as you identify, is the issue of financing. Number one, as you identified and Rich had mentioned, we -- for anything sizable in nature, we would require external capital. Number two, we would finance it very conservatively in this environment, which means that number three, it would be need to be highly compelling for it to be attractive to us in this environment.

That's great. Thank you.

This is Eric. I would like to go back to one of Suneet's questions with just a slight elaboration to what Mark said, in case it wasn't clear. Obviously, as Suneet indicated, a market expectation of an average S&P at 940 versus at an 850, everything else being the same, would have given us a lift in our expectations. So put another way, had our expectations today been the same as those we stated on Investor Day, all else the same, they would have been lower than they were at that time.

Jimmy Bhullar, JPMorgan.

I have a couple of questions. The first one is on your Wachovia look-back. And I've seen the contract, but just to clarify, how is the final value of your share going to be determined? I think it is as of the beginning of '08.

And also, if you can discuss if there are any provisions that would allow Wells Fargo to either delay payment or something that allows them to contest what they owe to you.

And then secondly, if you can talk about Life Planner recruiting. It has been sluggish the past few quarters. Do you believe that is the trend or do you think it is going to pick up, specifically talking about Prudential in Japan? And that's it.

This is Mark on the first part. To be clear with respect to the valuation, the reason we use the phrase look-back is that this provision of the contract lets us go back to the environment that assumes that the next big deal, meaning the A.G. Edwards deal, hadn't occurred. So the valuation would be as of January 1, 2008. And the contract calls for an appraisal process. And we expect that that appraisal process is what would give rise to the number around $5 billion that you've heard us talk about several times.

We believe we have a very solid contract, and we would anticipate that exercising the put would result in things playing out as we have described.

And perhaps Ed Baird on the Life Planner topic.

Yes, I would agree with you. The growth in the Life Planner over the last year has been sluggish. To put a number on it, it is about 2% in POJ, when you adjust for the transfers. And as a result of that, what we have done is over the years steadily been increasing our number of sales managers. On a year-over-year basis, it is about almost a 15% increase. And while it takes a little time for that to have an impact, as you know, sales managers tend to be the key driver in the increase of recruiting. So we are optimistic that in '09 we will see an improvement over what has been a sluggish '08.

Thank you.

Andrew Kligerman, UBS.

Good morning. I have a couple of quick questions. But first, just on where Suneet was coming on earlier, because I was thinking of the same question. Very simply put, last -- at Investor Day, you gave guidance, the same guidance you are giving now, at $5.25 to $5.65, assuming the S&P ended the year at 800. Now you are giving the same guidance, assuming the S&P ends the year at 900, and obviously we are very much in the hole now, given that the S&P is lower.

What is the difference in earnings that same guidance, two different S&P's, where is that chunk of earnings? How much is it? And what was it that caused you to change it? And then I have some follow-ups.

I can't exactly qualify it because there are a lot of moving parts, but I know what you guys are driving at. We had a guidance of $5.25 to $5.65, with an ending S&P of 900. And now we are saying the S&P is going to end at -- if you did the math, 2% to the [4th], you would wind up at 975. That 75 basis points allowed us to stay -- that [75 points] -- excuse me -- that 75 basis points -- 75 points in the S&P did allow us to stay within the range, but we do believe that is a better assumption for the year.

We changed the assumption because we have a different expectation for the S&P for the year. Had we not done that, we probably would have been below the [$5.25], the bottom end of the range. I think that is your question.

I mean, it generally is. It is just kind of -- maybe just off-line -- but it is just kind of unusual that there is that missing chunk. And maybe we could get into later what the exact change was.

Well, I would want to say, though, is our traditional procedures here were we start at the (inaudible) point of the year, which was 900, and we accreted 2% a quarter.

But I just don't understand (multiple speakers). I thought on the Investor Day, you said that you were going to end the year at 800, and now you are saying that you are going to end the year at 900. So there is a 100 --.

Let's be clear. We talked about ending 2008 at 800 on Investor Day.

Right. Now it is 900.

(Multiple speakers) Now -- the actual number was 900 at the end of 2008. And the new assumption is that we will appreciate at 2% per quarter from that actual 900 base, which would get you to Rich's number of 975 at the end of 2009.

One significant difference from Investor Day, we didn't know on Investor Day what our reprojection of gross profits would be in those businesses like annuities in particular, but also Individual Life, where you reproject based on where the market is at the end of the period. And the K factor, to be a little bit technical here, doesn't go away. So a larger proportion of our earnings before DAC will be absorbed in DAC amortization in 2009 than we would have expected when we give you our guidance on Investor Day.

Okay. And then just next question, what is -- how did your impairments on statutory capital stack up with what you did on GAAP?

They would have been very similar.

Very similar, great. In terms of additional resources to bolster RBC, in addition to that 100 -- I'm sorry the $1.7 billion from the Wachovia put, you mentioned other additional resources. What would those be?

We have outstanding at PFI a medium-term note program that goes -- with funding already on balance sheet -- that goes beyond 2012. It's a typical medium-term note program. Today, we use that program to fund spread lending -- a matched spread lending portfolio in PICA. We've analyzed the asset liabilities. We analyzed the underlying assets. And throughout the year, we can wind down that program, bring the funds back up to the holding company and hold them as a cushion.

Got it. And then in terms of your guidance on another area, you were assuming what was it -- $400 million to $600 million in losses versus the $1.2 billion that we saw today. What surprise -- I know, Rich, you gave some detail on the areas -- but what kind of threw you off there in terms of what actually came in?

I just need to (inaudible) you on one thing. My guidance -- my estimate on Investor Day -- I'm doing this from memory, but I think I'm right -- was $300 million to $400 million in credit, and then a number around $400 million from equities. So --.

I thought it was (multiple speakers).

So I think about at the upper end of that, I was around $800 million.

I see.

And it came in at the $1.1 billion. And what threw us off, there was one specific large credit that happened, and it was a public announcement, which we are not going to get into, in December that threw us off on the credit side. And then it was a further exacerbation of spreads inside these mutual funds that were holding high yield bonds. And the two added a couple, $300 million to that estimate.

Got it. And one last one and I'm done. Fixed annuities, one of your competitors showed a big pickup in that product area, given some of the weaknesses among their competitors. Any interest in picking up the fixed annuity business here in the US?

Bernard will speak to that, Andrew.

Andrew, I think the short answer to that is we are participating in that market, but we don't see it as a big strategic opportunity, given what we see as the margins in that business on an ongoing basis.

Got it. Thanks a lot.

John Nadel, Sterne, Agee.

Good afternoon. I have a couple quick ones. So I wanted to follow up a little bit on the impairments as it relates to Moody's. And understanding that you won't necessarily step in and comment on behalf of Moody's, but in their recent release, when they talked about you, they sort of put a couple hurdles. In their 350% RBC ratio, it looks like you check that box. But they also talked about impairments and investment losses not exceeding $1.5 billion.

If you strip out the derivatives gains -- and I'm not sure that's appropriate -- but if you strip that out, your impairments ran pretty close to that level. Any commentary you can provide with where you stand relative to Moody's, and have you discussed the fourth-quarter results with them and any idea there?

I really hate to comment about how the rating agencies are thinking. There are a lot of things they put into their ratings, the general environment being -- today being one of the biggest things. You know they have us on negative outlook at both PFI and PICA, but we haven't had any further conversations with them since that occurred, I think, back in the fourth quarter. So I can't say any more than that.

Okay. One for John. Thinking about TARP, I guess it seems at this point that the insurance industry will never hear from the government as to whether it is being invited in or not to participate. But nonetheless, if you are invited to participate, it appears that it is pretty onerous relative to where maybe it was a couple of months ago, some of the limitations on compensation and all sorts of other things. Any commentary on whether if you were invited to participate it, you would actually have any desire to?

John, I think the right way to say it is we would evaluate it based on the conditions and circumstances at that time.

Okay.

There's an awful lot going on. There is a lot of speculation. It is really hard to know where that is all going to come out. So it would be -- it would be, I think, just appropriate to evaluate it when and if that arises.

Okay. Last one for you. Any change to the statutory capital level that would be associated with your estimate of somewhere north of -- comfortably north of 400% RBC?

No.

And then last one, just to go back to the guidance thing one more time, beat a dead horse, average S&P was at Investor Day assumed to be 850 for 2009. Now looking like 940 is the average -- roughly a 90 point increase on average, yet guidance stays intact. Something else is dragging that. Is that -- is it the K factor? Is that really what we're talking about there?

It's partially the K factor, but it is pretty arcane, so we will go through the math because there are several of you who have asked this.

I appreciate that. Thank you.

Let's move away from the average for a moment. So we said we would end the year -- we thought we would end the year at 800. We ended the year at 900. We thought we would end 2009 at 900, and let's stick with that example. So if we began the year at 900, and we ended the year at 900, we would not meet the mean reversion assumptions we have in our DAC calculations, and we would have to write off DAC because we didn't reach the mean reversion assumptions.

So now that we started the year at 900, we are assuming the S&P would appreciate throughout the year at our standard 2%, and that 2% would allow us -- or not allow us -- that 2%, when you work it through the calculus, would have an amortization of DAC that might not require an unlocking.

So it had to do with the higher amortization of DAC. If you grow from 900 to 975, spot to spot, which is our new assumption, the DAC will roll off in the normal course of business. If you start at 900 and you end at 900, you're going to have to accelerate the write-off of DAC. And it is as simple or as complicated as that.

Very helpful. Could you just remind us where year-end '08, after all the charges and the annuities segment, where the variable annuity DAC balance ended the year?

I could. Just give me one.

It is $2.3 billion.

Thank you very much.

Tom Gallagher, Credit Suisse.

First question, I guess for Rich, just want to talk about liquidity. Just overall liquidity plan to the Company, specifically your CP, I noticed most of your CP is being rolled to private investors, not the government.

Yes, the vast majority.

Okay. Can you talk a bit about what is going on in that market? You hear a lot of speculation that it is frozen. Clearly, it is not frozen to Pru, considering who is actually purchasing your paper. But you also brought it down, at least as it relates to Pru Funding, from $7 billion to $4.4 billion.

Is that a conscious decision? Is that something you're looking to continue to take down? Should we assume that Pru, over the course of the year, is looking to term its debt out through this FHLB by borrowing more there, reducing CP overall? That is my first question.

Let me address the first part of that, and that has to do with the robustness of the program. A couple things have happened. We've got 150 investors in our Pru Funding program, our A1P1 program. And that I think is up from a [specifically] lower number throughout last year. So our investors are more. That is number one.

Number two, in the last couple of months we found we can extend the tenor. We were all in this thing on a weekly basis, daily basis, and now we found that we can roll this paper beyond 30 days. So in all fairness, I think the commercial paper program at Prudential Insurance Company is stronger than it has been in several quarters.

As far as dropping the program down from the $7 billion to the $4 billion zone, there weren't opportunities to pick up any spread in that extra $3 billion. So without those opportunities, we brought the program down to where it is really operating as sort of working capital for some of our businesses.

One more comment. We do want to keep this market warm, because we anticipate at some point a return to a normal environment. But just to emphasize an aspect of liquidity that Rich has talked about -- we don't factor in this commercial paper balance when we talk about the liquidity picture as Rich paints it.

So we have a presence in the market. We want to keep it warm. We anticipate a return to normal at some point. But right now, we are in good shape there, as you've commented and Rich, it is a healthy market for us. And we don't need it even if it weren't.

Mark was referencing the piece up at the holding company, which I don't count at all. And we really are only keeping that in place to keep warm. And to test out -- and to understand how to operate under CPFF. But all of that commercial paper, the $1.2 billion at the holding company, can be completely wound down within 10 days. None of that is being used in the operations.

And in terms of the FHLB borrowings, I know you have more capacity to go there. Can you -- is that -- were the borrowings there how you took the CP down or was the CP unwound through asset sales done on its own?

It was mostly through asset sales and a bit, perhaps -- I mean cash is fungible -- and a bit perhaps from the Federal Home Loan Bank. But there is no direct line of sight between those two.

Okay, and Rich, just a final question on that. So bottom line here, no plans to really take CP down beyond where it is today. Are you at a level that you feel good about going forward?

As long as it is the most effective form of funding of working capital, we will use CP. If there is a cheaper form, like securities lending, we might use securities lending.

Okay, last --.

It's been bounced around between those two for years.

Okay. Last question I have is in your 8-K, it talked about a sort of downgrade scenario, collateral posting, that if you got downgraded to an AM Best A- level -- and I realize you are far away from that -- but just curious what this relates to. It says you would have to post $1.6 billion of collateral.

It is a letter of credit requirement. I don't know off the top of my head.

It has to do with our term financing -- our term insurance financing around our captive.

Triple X.

That's related to the Triple X financing?

Yes.

Okay. Thank you.

Ed Spehar, Banc of America.

Thank you. Good afternoon. Just, Rich, a couple questions on statutory. Could you tell us roughly where you think total adjusted capital was at year-end '08, and some comment on statutory operating results in '08 as well? And then I've got a quick follow-up.

You've heard this speech before. We haven't yet filed our [stat lank], and we would rather not comment on either of those two items until we've done so.

Can you give us a range? We get that from other companies, including Met. So I'm just curious. I'm sure you guys are looking at these types of numbers closer today than you have maybe in the past.

Peter, our Controller, is closest to this. And if he feels comfortable giving a range, even at this early stage, I'm going to let him do it.

I think we're expecting a [TAC] just north of $9 billion. But our GFO -- our gain from operations -- in PICA, in the Prudential Insurance Company of America, about $0.5 billion. But remember, we have other insurance subsidiaries, as well.

Could you remind us in terms of all the sources of statutory earnings? International, I guess is CIGNA, and the others. I mean, what is the total -- do you have any guess of the total number, maybe in a normal year. And I guess what I'm trying to get at is what is the operating -- statutory operating trend here for all of your companies, if we are trying to think about how much you could absorb on an annual basis of credit losses, given just the underlying statutory operating earnings trend?

Ed, we said we don't have that detail at this time.

Okay. Just one final question then. I think when we were at the Investor Day and were trying to back into the kind of capital hit that you could see from going to S&P 700, I believe -- from the equity market, I thought the number was around $2 billion or something, was kind of the hit. Is that correct, and has anything changed in terms of your view of what the statutory capital hit will be from various market levels?

I think you're right. The number that I believe I quoted was that a 700 S&P, we would be at around $3.70. Today, at a 700 S&P, you would probably be around closer to $3.50, but I think still above $3.50. And I think you are right about the $2 billion. Because you want to think $1 billion is 50 points in RBCs. That is roughly the gearing. So $1 billion is roughly 50 points in RBC. So $2 billion would be 100 points. 100 points off of $4.50 would take you down to $3.50.

Okay. Very helpful. Thank you.

This is Mark. I need to correct an earlier statement. I have some additional information on the letter of credit. It relates to the reinsurance structure associated with the Allstate deal. There is a ratings trigger in that reinsurance contract that would require either some cash collateral or this letter of credit structure.

Eric Berg, Barclays Capital.

Thanks very much, and good afternoon to everyone. Rich, towards the beginning of your remarks, you listed four different areas in which the goodwill write-downs or write-offs were taken, as well as in the same breath you were discussing the write-downs in the carrying amount of the JVs. I think you mentioned variable annuity business at Allstate, international investments, the relocation business and the joint ventures.

So in effect, you mentioned the international investments business twice in that discussion. And I'm trying to understand each of the two references and how they differed from each other.

Okay. No problem, Eric. Let's take goodwill first. The goodwill write-down in the international investments businesses was $123 million, and it was 100% of the goodwill in the international investments businesses. So now I've taken care of goodwill.

The JVs, which I think are all in the international investment businesses, the impairment was 316. Now the carrying value, the pre-impairment carrying value of our JV investments was 620. We took an impairment on those investments. Now we are talking about investments of about 316. We have a remaining carrying value of 304.

Eric, the reason it is mentioned twice is that it has those two flavors. There is a goodwill write-off and there is an equity impairment in the joint venture equity account.

So you have written off all of the goodwill related to the Allstate acquisition, all of the goodwill related to international investments business, all of the goodwill related to real estate. Can you remind -- the real estate business in your corporate area. Can you remind us of the remaining goodwill of the consolidated of the enterprise -- the dollar amount at this point?

It's about $700 million. Let me give you the pieces. $444 million would represent the acquisition of CIGNA Retirement. There is a little tiny piece in international for Aoba, a Japanese bank we bought a number of years ago. And the remainder is in asset management. And that is principally representative of an acquisition we made of an outfit called TMW.

Last question. I think, too, in your comments, Rich, you were discouraging us from sort of taking the reported operating EPS figure, adding back the goodwill write-offs and the write-down of the joint venture, as well as all the other special items. You seem to want to discourage us from engaging in such an exercise to arrive at a quarterly run rate.

My question is, assuming that markets stayed at roughly the levels that they were on average in the December quarter, why wouldn't that exercise be a prudent thing to do? Why wouldn't that exercise give a good indication of the quarterly sort of normalized run rate of Prudential Financial?

What you are saying, Eric, is let's use the assumption. You are saying that the average balances on which we earned fees in the fourth quarter had that same average throughout 2009. Well then, it stands to reason that the fees we would earn in 2009 would be the same. So we wouldn't take a hit in fees, right? You are just doing that quarter now; you can't do the full year.

The answer is in the K Factor. Because the K Factor now is up from -- and I think I'm about right -- is going up from about 50% to almost, on average, above 75% for the three cohorts in the annuity business on which we amortize that.

I think that's a little bit high, Rich. That includes maybe some other factors. But about a 10 point spread in the K Factor as a result of the unlockings in the fourth quarter. But the point is the continuing impact of the K Factor throughout 2009 is why you can't just do the run rate.

And there is a second factor, too, Eric. This is your namesake. The level of balances on which we earn fees in the fourth quarter did not yet fully reflect the decline in the market that occurred in the fourth quarter. So baked in the cake, even if the market were to be flat in 2009, the level of fee income would be, all else the same, lower in 2009 than in the fourth quarter of 2008.

Eric, is that because not all of your fees are tied to daily balances, but rather to quarter's-end balances?

No, you reversed it. It is because the vast majority of our fees are tied to daily averages. So the daily average in the fourth quarter did not reflect a 900 S&P 500. They reflected a higher S&P 500. Because the average in the fourth quarter was significantly -- sorry to tell you this -- it was significantly above 900.

Okay, I got it. And I thank you, Eric and the rest of the team. Thank you.

Darin Arita, Deutsche Bank.

Thank you. I just had a couple questions, if that's okay. The first one is with respect to John, you mentioned that Prudential is reducing the risk profile of the products. And in addition to variable annuities, can you talk about other areas where you are thinking about reducing the risk profile?

Well, I would offer a couple of thoughts. Variable annuities is one. Number two, we have some other annuity-like products in our retirement business, which have some of the same dynamics. And so we are in a process of doing some similar redesign applicable to that.

Two other examples of things that we've done is you also heard from Mark's earlier comments that we also are backing down our magnitude of proprietary investing, and that is a product-related strategy. And then finally, as an example of a year ago, we also discontinued the -- our activities in our mortgage-conduit-related activities. So these are all examples of things where either in the product design or in the business activity itself, we've chosen to dial risk levels down.

And I think they will have a material impact on our results. As Mark described earlier, the annuity effect is beginning to flow through, because with continuing sales and the fact that actually some of that product redesign actually began 18 months ago, we are seeing more manifestation of that as we go forward.

Thank you. And with respect to Mark, you mentioned on the variable annuities that Prudential had hedging on about $21 billion of account value. If I look at the supplement, it suggests there is $30 billion of living benefits account value at Prudential. Can you help us understand that difference in $12 billion, why Prudential has that unhedged.

No, that reference is to part of it that is hedged with the embedded derivatives structure. That is where that hedge breakage issue shows up.

Okay, so there is hedged breakage on $21 billion --?

Yes, that is the underlying portfolio that that hedge relates to. The whole portfolio has the mix of HD products in it and the highest daily, which are the embedded derivative products. So it is the segment -- or the piece of the portfolio that that hedge breakage ties to. It doesn't imply the rest of it is not hedged.

I see. Great. Thank you.

Thank you very much. Ladies and gentlemen, today's conference call will be available for replay after 1:30 p.m. today, until midnight February 12. You may access the AT&T Teleconference replay system by dialing 800-475-6701, and entering the access code of 975677. International participants, dial 320-365-3844.

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