Prudential Financial, Inc. (PRU) Q2 2012 Earnings Report, Transcript and Summary

Eric Durant John Robert Strangfeld - Chairman, Chief Executive Officer, President and Member of Executive Committee Richard J. Carbone - Chief Financial Officer, Executive Vice President, Chief Financial Officer of Prudential Insurance and Senior Vice President-Prudential Insurance Mark B. Grier - Vice Chairman Edward P. Baird - Chief Operating Officer and Executive Vice President of International Businesses Charles Frederick Lowrey - Head of Asset Management Business, Executive Vice President, Chief Operating Officer of Us Businesses, Chief Executive Officer of Prudential Investment Management, President of of Prudential Investment Management and Executive Vice President of Prudential Financial & Prudential Insurance

Christopher Giovanni - Goldman Sachs Group Inc., Research Division A. Mark Finkelstein - Evercore Partners Inc., Research Division Nigel P. Dally - Morgan Stanley, Research Division Steven D. Schwartz - Raymond James & Associates, Inc., Research Division Edward A. Spehar - BofA Merrill Lynch, Research Division John M. Nadel - Sterne Agee & Leach Inc., Research Division

Ladies and gentlemen, thank you for standing by. Welcome to the Second Quarter 2012 Earnings Teleconference. [Operator Instructions] As a reminder, today's conference call is being recorded. And I'd now like to turn the conference over to the Senior Vice President of Investor Relations, Mr. Eric Durant. Please go ahead.

Thank you, Leah. Good morning. On behalf of my Prudential colleagues, John Strangfeld, CEO; Mark Grier, Vice Chairman; Rich Carbone, Chief Financial Officer; Charlie Lowrey, Head of U.S. Businesses; Ed Baird, Head of International Businesses; and Peter Sayre, Controller and Principal Accounting Officer, we thank you for joining our call. We'll start today with prepared comments from John, Rich, and Mark, and then we'll have at your questions. Before we begin, 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 second quarter of 2012, which can be found on our website at www.investor.prudential.com. In addition, in managing our businesses, we use a non-GAAP measurement 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 are expected to ultimately accrue to contract holders and recorded changes in contract holder liabilities resulting from changes in related asset values. Our earnings press release contains information about our definition of adjusted operating income. The comparable GAAP presentation and the reconciliation between the 2 for the 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. Now let's get started. Here is John Strangfeld, CEO.

Good morning, everyone, and thank you for joining us. I'll begin by headlining what Rich and Mark will be describing to you more specifically regarding our second quarter. Our drivers continued strong, and in fact, in some cases, very strong, and our underlying financial performance improved from the first quarter. Rich will take you through the market driven and discrete items included in this quarter's earnings. Stripping these items from each second quarter, our earnings per share amount to $1.67 this year versus $1.64 in the second quarter of 2011. This quarter's results includes the effect of significant improvement in the benefit ratios of our group life business, confirming, we believe, that last quarter's elevated ratio was an aberration. On the other hand, this quarter's result also includes a drag of significantly worse-than-expected mortality in Individual Life, stemming from several large claims on seasoned policies. This unfavorable result, the largest in relation to our expectations since the fourth quarter of 2003, is also in our judgment, a random event. ROE this quarter amounts to an annualized return over 11%, again, based on adjusted operating income, excluding the small number of market driven and discrete items that Rich will describe in a moment. Keep in mind that this 11% return -- 11-plus percent return, reflects the earnings drag from significant capital capacity, and that we intend to deploy approximately $3 billion of this capacity in the next 4 quarters. A portion of that deployment is slated for the GM pension buyout transaction we expect to close by year end. And in addition our board has authorized $1 billion in share repurchases in the 12 months ending June 30, 2013. Through business expansion, synergy realization and capital deployment, we expect our ROE to improve. And we continue to believe our stated ROE objective for 2013 of 13% to 14% is achievable, and achievable in a variety of economic and market environments. We are focused on execution and realization of this ROE objective. Additional expense synergies related to Star and Edison and the broader financial impact of the strong momentum in international will continue to be important drivers of performance. The successful deployment of capital with an accretive impact on ROE is critical as is the improvement of our operating performance in our U.S. businesses. Fundamentals are exceptional in international and strong in most of our U.S. businesses. This is what gives us the confidence in our ability to distinguish ourselves with distinctive returns and high-quality businesses. Our strong drivers demonstrate our commercial momentum and support our ability to improve our earnings and returns. In annuities, sales for the quarter amounted to just over $5 billion, roughly in line with their levels since early last year. Our new living benefit product will be launched later this month. In Retirement, flows in institutional investment products remain strong largely because of our growth in investment only wrap products. In addition, we believe the pension risk transfer business holds great promise. We look forward to the fourth quarter closing of the GM transaction, and we believe our agreement with GM may kindle interest among other planned sponsors. In Full Service retirement, we experienced our first quarterly net inflow from case activities since 2010, driven by a single large sale. Nevertheless, we're maintaining pricing discipline in a highly competitive environment. Asset Management, once again, recorded excellent retail flows, but Institutional flows were flat for the first time in a long time as equity outflows essentially offset positive flows into our fixed income businesses. Individual Life also delivered a healthy increase in sales as competitors have raised prices, bringing them closer to ours or have withdrawn products. Finally, International Insurance is benefiting from exceptional business growth even while we continue to integrate Star and Edison into Gibraltar. As for the Star/Edison integration, cost savings are on track, and integration expenses are running below our original expectations. More broadly in Japan, sales are strong in all distribution channels, captive agency, banks and independent agencies. To sum it up, Prudential is doing well, and we expect to do better. With that, I'd like to hand it over to Rich and Mark. So, Rich?

Thanks, John, and good morning, everyone. Last night, we recorded common stock earnings per share of $1.34 for the second quarter, and that's based on adjusted operating income for the Financial Services businesses. This compares to $1.57 per share in the year ago quarter. We have a short, but not insignificant list of items related to markets and other discrete items, events, affecting the quarter's results. In the Annuities business, the equity market dropped in the quarter, causing us to strengthen reserves to guaranteed minimum debt and income benefits and at an increase in amortization of deferred policy acquisition costs, resulting in charges totaling $0.17 per share. In the Asset Management business, we recorded a charge of $0.10 per share for an impairment related to our investments in our real estate funds. In International Insurance, Gibraltar absorbed integration costs of $0.05 per share relating to the Star/Edison acquisition. And in Retirement, we recorded a charge of about $0.01 a share on the transfer of bank deposits to third parties, in connection with our decision to convert our savings and loan association to a trust-only organization. In total, the items I just mentioned had an unfavorable impact of about $0.33 per share on the quarter. Our results in the year ago quarter included net charges of about $0.07 per share for a number of items, including claims costs and expenses from the earthquake and tsunami disaster in Japan, and again, on the partial sale of a seed investment in the asset management business. Taking these items out of both the current and year ago quarters, the EPS comparison would be $1.67 for the current quarter versus $1.64 a year ago. Now this comparison reflects an adverse fluctuation in Individual Life mortality for the current quarter and higher expenses in our U.S. businesses, which largely offset the benefit of continued organic growth on our International Insurance business as well as the realization of cost savings from the Star/Edison integration. Mark will discuss the details in a few moments. Moving to GAAP results of our Financial Services business. We reported net income of $2.2 billion or $4.64 per share for the second quarter, compared to $779 million or $1.58 a share a year ago. GAAP net income for the current quarter includes amounts characterized as net pretax realized investment gains of $2 billion. The main driver of the $2 billion in current quarter gains was a $1.9 billion of asset liability value changes driven by currency fluctuations. These current quarter gains effectively reversed similar currency-driven losses that were incurred in our first quarter. As I mentioned in discussing first quarter results, we regard this as noneconomic accounting driven mainly by revaluation of dollar and other non-Yen liabilities on the books of the Japanese companies, whose functional currency is Yen. For example, we have significant U.S. dollar-denominated products in our Japanese businesses. When the Yen weakens in relation to the U.S. dollar, as it did in the first quarter, we record a loss in the income statement for the increase of the U.S. dollar liabilities when measured in Yen on the Yen books, because it will take more Yen to pay them off. When the Yen strengthens, as it did in the second quarter, we record a gain in the income statement for the reduction of the liability, because it will take less Yen to pay them off. We consider this noneconomic because the liability is in U.S. dollars and is matched with U.S. dollar assets. This income statement impact is offset by adjustments made in AOCI, a component of equity, but not through the income statement. The end result is that our GAAP equity, including AOCI, is essentially neutral despite the volatility running through the income statement. The remainder of the $2 billion of realized gains in the quarter of roughly $170 million, came from net gains of $259 million and product-related hedging activities and modest gains from general portfolio activities, partially offset by $117 million of impairments in credit losses. Book value per share on a GAAP basis amounted to $78.07 at the end of the second quarter, and this compares to $69.07 at year end. At the end of the second quarter, gross unrealized losses on general account fixed maturities stood at $3.1 billion, and we were in a net unrealized gain position of roughly $15 billion. Excluding AOCI, book value per share amounted to $60.77 as of the end of the second quarter, up from $58.02 at year end. This increase of $2.75 reflects the benefit of 500 million of shares purchased at an average cost below book value under the $1.5 billion authorization, which ended in June of this year. Over the past 12 months, we've returned $2.2 billion to shareholders in the form of current stock dividends and share repurchases. Turning to our capital position. First, I'll focus on our insurance companies. We continue to manage these companies to levels consistent with what we believe are AA standards. We managed Prudential Insurance to a 400 RBC. We began the year with an RBC of 491. During the second quarter, Prudential Insurance paid a dividend of 600. While this dividend had no impact on our overall capital position, it did reduce the statutory capital for Prudential Insurance, essentially moving the excess capital to the parent company, which enhanced our capital flexibility. While we do not perform a quarterly bottoms-up calculation of RBC, we remain above our 400 threshold after giving the effect of the dividend and statutory results for the first quarter. In Japan, Prudential of Japan and Gibraltar Life reported solvency margins of 721 and 810, respectively, as of March 31, their fiscal year end and under the new calculation method that became effective this year. The reported solvency margins are strong in relation to our targets and supported the position of our Japanese companies as well capitalized and financially strong insurers. Looking at the overall capital position for the Financial Services business, we calculate on balance sheet capital capacity by comparing the statutory capital position of Prudential Insurance through our 400 RBC threshold and then add capital capacity at the parent and the other subsidiaries. Now as you saw on Investor Day in May, our estimate of balance sheet capital capacity is in the range of $4.0 billion to $4.5 billion as of December 31, 2011, with about half of this capital capacity considered readily deployable, meaning that it was held in cash or monetizable assets and available for share repurchases and strategic uses that would call for the external deployment or actual use of cash. Factoring in the net impact of our year-to-date results, the capital we've deployed in our businesses and the $500 million of share repurchases during the first half of the year, our capital position has not changed materially since year end in total or in the mix -- that is, the amount we consider redeployable. I won't be more specific than that today, because many of the influences to our statutory capital are based on annual calculations. Also, as Mark explained a couple of months ago on Investor Day, we plan to deploy approximately $3 billion of capital over the next 4 quarters beginning on July 1 of this year. As you know, we announced a new $1 billion repurchase authorization in June, which extends through June 30 of next year. Investment in our businesses in the form of outsized organic growth based on market opportunities, is also part of our capital deployment plans. Pension risk transfer agreement with General Motors, which is scheduled to close by year end, is an example of such an opportunity and will allow us to deploy a significant amount of capital within Prudential Insurance for appropriate returns in a business we know well. Turning to the cash position at the parent company. Cash and short-term investments net of outstanding commercial paper and other short-term borrowings amounted to about $4 billion at the end of the second quarter. The excess of our cash position over our currently targeted $1.2 billion liquidity cushion is available to repay maturing debt, fund operating needs and to be redeployed over time. Now, Mark will provide a more detailed view of our business results.

Thank you, John and Rich. And good morning, good afternoon, good evening or good night, depending on where you are. Thanks for joining us. I'll start with our U.S. businesses. Our annuity business reported adjusted operating income of $107 million for the second quarter compared to $207 million a year ago. The reserve true-ups and DAC unlocking that Rich mentioned had a net unfavorable impact of $124 million on current quarter results. This included a charge of $90 million to strengthen our reserves for guaranteed minimum debt and income benefits and a charge of $34 million from increased amortization of deferred policy acquisition and other costs; in both cases, reflecting unfavorable market performance in the quarter in comparison to our assumptions. Results for the year ago quarter included a net charge of $35 million from an unfavorable DAC unlocking and reserve true-ups, also largely driven by market performance. Stripping out the unlockings and true-ups, annuity results were $231 million for the current quarter compared to $242 million a year ago or an $11 million decline. This decrease reflects the impact of a higher level of base DAC amortization and higher expenses in the current quarter, which together, more than offset the benefit of growth in our fees. Policy charges and fee income in the quarter increased $31 million from a year ago reflecting an increase of $7.5 billion in average variable annuity separate account values. The increase was driven by $11.6 billion in net flows over the past 12 months. While we have benefited from improvements in our amortization factors since our negative unlocking in the third quarter of last year, we are still amortizing DAC at a more rapid pace than a year ago. As a result, our base level of DAC amortization increased more than proportionally with the increase in our fees. In addition, current quarter expenses were higher than a year ago, partly as a result of business development costs. Our gross variable annuity sales for the quarter were $5.3 billion, up from $4.5 billion a year ago. Current quarter sales benefited from actions taken by several key competitors that made our products relatively more attractive to clients and their advisors. We are comfortable with our sales level, which is roughly in line with our average of about $5 billion per quarter since we introduced our HDI product early last year. As we mentioned at our Investor Day in May, we expect to launch the next generation of our variable annuity product, HDI 2.0, in the coming weeks. The new product will increase our rider fee to 100 basis points on individual contracts and 110 basis points on spousal contracts and 95 basis points under our current HDI product. In addition, the new product will increase the minimum issue age by 5 years to age 50, and will reduce the payout rate from 5% to 4% for the age 59.5 to 65 band. The new product continues our successful highest daily value proposition backed by auto-rebalancing tailored to the risk profile of each contract while adapting the product economics to our views of market conditions and drivers of profitability and returns. In addition, we discontinued sales of our x shares or bonus products in July based on our view that other share classes we offer will continue to provide broad market appeal across our distribution channels while offering more favorable return prospects in the current environment. The Retirement segment reported adjusted operating income of $147 million for the current quarter, compared to $171 million a year ago. Current quarter results include a $9 million onetime charge resulting from our transfer of bank deposits to third parties, as Rich mentioned. Excluding this charge, retirement results were down $15 million from a year ago. The decrease came mainly from a lower contribution from net investment results. The impact of lower reinvestment yields over the course of the past year was partly offset by crediting rate reductions we implemented on our Full Service stable value business in mid-2011 and in January of this year. On July 1 of this year, we implemented further crediting rate reductions averaging about 15 basis points on roughly $15 billion of semiannual reset business. Lower net investment contribution also reflected the loss of about $7 million in spread income from bank deposits that we transferred during the second quarter to third parties in connection with our decision to restructure our savings and loan to a trust-only organization. Total retirement gross deposits in sales were $12.8 billion for the quarter compared to $9.7 billion a year ago. Full Service retirement gross deposits in sales were $4.4 billion for the quarter, up from $4.1 billion a year ago. While we continue to see limited activity in the mid- to large-case market, which is our major focus, current quarter sales included a major case win of about $850 million, which contributed to positive Full Service net flows of about $700 million for the quarter. Stand-alone institutional gross sales amounted to $8.5 billion in the current quarter compared to $5.6 billion a year ago. We are continuing to experience exceptionally strong flows of stable value wrap products, sold to plan sponsors and fund managers on a stand-alone basis which contributed $8 billion of gross sales in the current quarter versus $4.8 billion a year ago. Current quarter sales included several large cases and benefited from the exit of a major provider of these products from the market. Overall, net additions for the retirement business were $6.3 billion for the quarter, and account value stood at $245 billion at the end of the quarter, up 11% from a year ago. The asset management business reported adjusted operating income of $48 million for the current quarter, compared to $227 million a year ago. While the segment's basic earnings come from asset management fees, the decline in results in relation to the year ago quarter was mainly driven by a decrease of $175 million in the contribution from what we now call Other Related Revenues. This bucket encompasses results from incentives, transactions, strategic investing and commercial mortgage activities, which are variable in nature and partly driven by changing valuations and the timing of transactions. In total, these activities produced a loss of $57 million in the current quarter and pretax income of $118 million in the year ago quarter. As Rich mentioned, current quarter results from these activities include a $75 million charge for an impairment related to our investment in a real estate fund. The investment dates back several years to our formation of the fund, which focuses on international properties and has experienced significant declines in value. And the impairments stem from our completion of an analysis concerning our ability to recover our investment. Results for the year ago quarter included a $61 million gain from the sale of part of our interest in a real estate seed investment. In addition, results from our real estate co-investments and interim loan portfolio were more favorable in the year ago quarter than in the current quarter. Stripping out results from activities that come under the heading of Other Related Revenues, the Asset Management business produced adjusted operating income of $105 million in the current quarter compared to $109 million a year ago. The benefit of higher Asset Management fees driven by growth in assets under management was more than offset by higher expenses in the quarter, including fund start-up costs that are charged to expenses when incurred. The segment's assets under management stood at $650 billion as of the end of the quarter, up $67 billion or 11% from a year earlier. Adjusted operating income for our Individual Life Insurance business was $61 million for the current quarter compared to $135 million a year ago. An adverse fluctuation in mortality experience, driven mainly by several large claims from business written in the late 1990s and early 2000s, drove nearly all of the earnings decline. While mortality experience fluctuates from one quarter to another, cumulative experience, looking back over several years, has been essentially in line with our expectations. Mortality in the current quarter was about $50 million less favorable than our average expectations representing the most adverse variance from expected levels since late 2003. Individual Life sales, based on annualized new business premiums, amounted to $91 million for the current quarter, up from $68 million a year ago. The increase was mainly driven by third-party sales and reflects our improved relative competitive position, especially in the universal life market where some key competitors have recently raised rates, bringing them more in line with our pricing, or even withdrawn products from the market. The Group Insurance business reported adjusted operating income of $46 million in the current quarter, essentially unchanged from $49 million a year ago. Current quarter results benefited from a more favorable group life claims experience than that of the year ago quarter. I would also note that the current quarter group life benefits ratio of 88.6% is well in line with our historical range, in contrast to the 95.4% ratio for the first quarter of this year, which represented our most unfavorable experience in the last 5 years. Going the other way, expenses were higher in the current quarter than a year ago. The higher level of expenses was mainly driven by updates of our premium tax estimates, which produced a charge of about $10 million in the current quarter and a modest benefit a year ago. Group Insurance sales for the quarter were $65 million compared to $52 million a year ago. Most of our Group Insurance sales are reported in the first quarter based on the effective date of the business. Turning now to our international businesses. Gibraltar Life's adjusted operating income was $307 million in the current quarter compared to $185 million a year ago. As Rich mentioned, Gibraltar's current quarter results absorbed $38 million of integration costs for the Star and Edison acquisition. As we noted in our Investor Day, we now expect about $450 million of total integration costs, down $50 million from our original estimate. We have incurred about $270 million of these costs through the end of the second quarter and expect roughly $70 million more over the remainder of this year. Results for the year ago quarter included charges of $56 million, representing our estimate of claims and expenses from the earthquake and tsunami in Japan, which was a second quarter event for Gibraltar due to its 1-month reporting lag. Year ago quarter results also absorbed $29 million of integration costs. Excluding the integration costs and the year ago impact of the earthquake and tsunami, Gibraltar's adjusted operating income was up $75 million from a year ago. This increase reflects business growth and cost savings from business integration synergies. We are benefiting from business growth across all of our channels, captive agents, banks and independent agencies. The benefit from business growth includes a contribution from margins on higher sales of cancer whole life products in the current quarter. Since these products -- since these policies typically have annual premium payments, the profit contribution mainly occurs in the quarter of sale and at anniversary rather than pro rata over the year. Current quarter results reflect about $40 million of cost savings achieved thus far as a result of the business integration, compared to about $5 million of early saves that benefited the year ago quarter. Our cost saves are driven largely by consolidation of field offices, integration of systems platforms and reduction of support staff. We are well on track to achieve our targeted annual cost savings of about $250 million after the business integration is completed. In addition, foreign currency exchange rates, including the impact of our hedging program, contributed $12 million to the increase in earnings from a year ago. Our life planner business reported adjusted operating income of $374 million for the current quarter compared to $315 million a year ago. Current quarter results benefited from continued business growth. On a constant dollar basis, insurance revenues including premiums, policy charges and fees were up 13% from a year ago. In addition, foreign currency exchange rates contributed $15 million to the increase in earnings from a year ago. International Insurance sales on a constant dollar basis amounted to $1.1 billion for the second quarter, an increase of $356 million from a year ago. The current quarter reflects accelerated sales of several products due to market developments and the updating of our product portfolio, as well as the continuing benefit from expanding distribution and the broad appeal of our protection and retirement solutions. Current quarter sales of our cancer whole life product, which is popular in the business market in Japan, amounted to $212 million, up $150 million from a year ago with the increase reflecting purchases in anticipation of a tax law change that became effective in late April of this year. Current quarter sales of our U.S. dollar retirement income in whole life products amounted to $351 million, up $171 million from a year ago, reflecting purchases in advance of crediting rate reductions that we implemented during the current quarter at both Gibraltar and Prudential of Japan. Gibraltar Life sales were $735 million in the current quarter, up $211 million from a year ago, accounting for close to 2/3 of the overall increase in International Insurance sales. Bank channel sales contributed $112 million of the increase, driven primarily by our Yen-based single premium whole life products. These products, which have been popular in the bank channel, gained momentum as competitors limited sales of Yen-based single premium whole life products through banks. Sales from the life consultant channel increased $47 million from a year ago mainly driven by greater sales of our U.S. dollar retirement income products. The remainder of the increase or $52 million came from the independent agency channel, mainly driven by strong current quarter sales of our cancer whole life product in the business market. Life planner sales were $392 million in the current quarter, up $145 million from a year ago. Sales by life planners in Japan were up $136 million, including increases of $82 million from U.S. dollar retirement income and whole life products and $19 million from our cancer whole life products. Life planner sales outside of Japan were up $9 million or 12% from a year ago. Corporate and other operations reported a loss of $261 million for the current quarter compared to $237 million loss a year ago. The greater loss in the current quarter was mainly a result of higher interest costs net of investment income, mainly reflecting our deployment of capital debt in our businesses and less favorable results from non-coupon investments. To sum up, I would say that while our current quarter headline results were negatively affected by market driven and discrete items, our underlying earnings power remains solid. Our U.S. Retirement Solutions and Asset Management businesses are continuing to build a strong base of fee-generating account values and assets under management benefiting from strong competitive positions in our selected markets, including pension risk transfer where we see a major opportunity. The benefits of growth were offset in current quarter results by higher expenses, including business development costs. While results from our U.S. protection businesses were negatively affected in the quarterly comparison by an adverse fluctuation in individual life mortality, group life underwriting experience for the quarter returned to well within our historical range, following an adverse fluctuation in the first quarter. And our International businesses had an exceptionally strong quarter benefiting from growth across multiple distribution channels and cost savings from business integration synergies on track with our targets. Thank you for your interest in Prudential. Now, we look forward to hearing your questions.

[Operator Instructions] First, we'll go to the line of Chris Giovanni with Goldman Sachs.

I guess, first question just on the VA pricing and product feature changes. And I guess we should prepare for an acceleration of sales here in 3Q ahead of the changes. But once the new product is in force, what sort of a pace of VA sales you'd be comfortable with on a quarterly basis given the refinement in the product?

Okay, well, I think, Chris, there are a couple of questions there. First, let me deal with flows. I think this quarter what we'd say is, flows were slightly higher than we wanted, but not higher than we expected. I think, as Mark said, we -- we're nothing if not consistent. And if you look at last year, we had flows of about $20 billion. So we've averaged about $5 billion a quarter. This quarter, they were slightly higher, I think because of the new product launch that's being made. But we try to manage any acceleration in sales as carefully as we can. Having said that, I think we'd expect sales to trend down somewhat over time, and that's what we hope for.

Okay. And then, I guess trying to think a little bit about Mark's comments in Investor Day about expectations to deploy more than $3 billion of capital over the course of the next 4 quarters. So -- and I guess with the GM transaction, the $1 billion buyback authorization and your common stock dividend, you get pretty close to $3 billion. So you kind of have that earmarked already. So I guess, how much more is more? And then how do we think about the outsized growth opportunities, like GM, as potentially more of those could be layered on as we go forward?

Chris, it's Mark. You can hear from the portrayal of the capital position that we still have capacity, and we still have the theme of being opportunistic with respect to finding things that make sense for us strategically and financially. And making sense financially right now, by the way, is very heavily influenced by the contribution that any capital deployment can make to the realization of our ROE objective. In terms of pension risk transfer, those deals will be lumpy. They're hard to forecast. The market has certainly taken notice of the transaction that we're doing with General Motors, and there is interest. And we believe that over time, this can be a very attractive deployment of capital for us, but it's hard to predict the timing. So I guess the net headline is that we have capacity, we'll be careful with respect to the way in which that capacity's used, we do see both business opportunities with respect to things like pension transfer, as well as other deployment opportunities, and we're going to do everything that's pointed in the direction of the realization of the ROE target.

And just as a quick follow-up on that. If there is another large transaction, would that offset the buyback authorization, so you wouldn't move ahead with the buyback? Or are you fully committed to deploying the $1 billion to share repurchases?

I wouldn't make an unqualified statement about the commitment to share repurchases. We'll be making the right economic decision. Having said that, pension risk transfer deals are very capital friendly. And so even a fairly substantial pension risk transfer deal may not put a lot of pressure on the availability of capital for share repurchases. We like the picture that's in front of us in terms of capital friendly deployment opportunities.

And keep in mind, Chris, that capital deployment means capital deployment of the non-monetizable capital that's in PICA. And these pension risk transfer businesses are done within PICA. That's a noncash requirement, right? It's a noncash use of capital.

And next we go to the line of Mark Finkelstein with Evercore Partners.

I actually want to go back to Chris's question for just one clarification. I think we've all been, kind of been operating under the assumption that the $3 billion between the dividend, between the buyback and the GM transaction is -- kind of gets you at or near that $3 billion. I just want to confirm that. Is that the right assumption to be making, or are there any other transactions that we should be thinking about that actually get us to that $3 billion or above, if there's upside?

We haven't parsed it with too sharp a pencil in terms of the pension risk transfer deal. But having said that, the answer to your question, is yes, that's the ballpark.

Okay, great. I wanted to talk a little bit about Gibraltar earnings. And I understand that there was kind of an anomaly that hopefully recurs at this quarter annually relating to the cancer whole life sales. And when you kind of put a margin on that, I mean, should we really be thinking of a normalized earning closer to that $310 million level? Or how should we think about that $340 million plus, if you back off the Star/Edison integration costs?

Sure, let me talk a little -- this is Ed Baird speaking. Let me talk a little bit about the product profitability and the sales and the factors that are driving them. As you observed correctly, the -- one of the drivers for the bump in earnings in Gibraltar was the increased sales in the cancer whole life product. And as Mark explained, there is a particular accounting treatment of that, such that you recognize it in the quarter in which the annual premium is received. That's not particularly unique, that's part of the seasonality that influences certain sales. So yes, you will see that in this quarter. You'll see it recur in the same quarter next year and the years thereafter. What you can't be able to predict, however, is what these other sales are going to do to earnings. Let me give you a few examples of this. There are elements this quarter that are advancing, as Mark accurately described them, future sales. So, for instance, the change in the tax treatment from the cancer, the change in the crediting rates on the dollar-denominated products. So those things are advancing some future sales. The flip side of that, however, is that we're just starting to see the emergence of factors that will strengthen sales. What I have in mind here, for example, within Gibraltar specifically, is the growth in the number of banks. We're up to about 60 banks that we're now active with. As you know, we've reported that we inherited almost 100 in total when we combined what we got from Star and Edison with what we had. And we've just been slowly going through those relationships to see which ones we want to add and how much we want to commit to it. So there's a positive trend there that is yet still emerging. Another factor is that one of the things we have done in the independent agent channel, which again gets reported through Gibraltar, is we have just introduced in this past quarter what has long been our leading product in Japan. And that is the very profitable dollar-denominated retirement income product. That's just been introduced during the second quarter. So there are some aspects of the sales in this quarter, and thus, in the profitability that are advancing future things, but on the other -- and those should not be sort of linearly extrapolated into the future. But on the other hand, there are still some emerging very strong positive trends that will net against that. So consequently, it makes it very difficult to say exactly how you should normalize the quarter.

Next we go to the line of Nigel Dally with Morgan Stanley.

Firstly with interest rates. 10 years, clearly meaningfully below where it was when you provided guidance. So hoping to get some color as to how this may impact fundamentals if rates remain unchanged at the current level? On a related topic, rates have also declined since you announced the GM transaction. Does that change your return expectation for that transaction? Then lastly with international, clearly very strong sales. But given a significant portion was kind of buy or sell in nature, ahead of the crediting rate reductions, can you discuss the profitability of those sales?

This is Mark, I'll start with the interest rate question, and then Charlie can discuss the GM question, and Ed can discuss the international question. But with respect to interest rates, I think the low rate scenario that we had contemplated when we were responding to questions 2 years ago about low rate scenarios is coming through. And the impact on us is unfolding pretty much as we had described at that time. If you look at GAAP earnings, we do see a negative impact from lower reinvestment rates either because absolute returns on some of our assets are lower or because there is spread compression with respect to some of the particular products that we sell. But as we have reinforced our belief in the earnings power of the company and the achievability of our ROE target, obviously now, we're in the middle of the low-rate scenario. And we still believe that, that ROE objective is a fair representation of our earnings power in a range of outcomes that includes continued low rates.

Okay, Nigel, in terms of the GM transaction -- this is Charlie. We can't say too much about it because obviously it hasn't closed yet, it's supposed to close in the fourth quarter, but I'll make a couple of comments here. One, we think GM did a very good job in terms of managing its pension fund. So we started the process from a very good place. In particular, it's not surprisingly that the -- but not surprising, the assets and the liabilities were relatively well matched, so that helps. More to your point, there's a true-up mechanism at the end of the process that takes into account a variety of different market factors. That's built in. But I'd conclude by saying that we and GM tried to put together, what I call, a very durable agreement that contemplated a lot of market movements. So I think we're feeling very good about our partner, and we're feeling very good about the business itself.

Regarding our product profitability, Nigel, let me offer you a couple of comments. First, I would bring your attention to the fact that the biggest increase in product was actually in the cancer-related products. And as you know, both for us and for others, those are among some of the highest margin products out there. Secondly, the single premium whole life, probably that's at the lower end of our targeted range of profitability given the current interest rate environment. But again, that represented only about 13% of our sales. Quite a bit higher is the increase taking place in our dollar-denominated retirement income. So if you actually look at our product breakdown, what you see is our #1 product is retirement income. Again, that's been our lead product for half a dozen years. Number 2, for this quarter, which is unusually high, would be the cancer product. Number 3, is our normal whole life. And you only get to single premium with sort of the number 4 product in our portfolio for this particular quarter. So when you look at the total mix, we're actually very comfortable with the profitability of the portfolio that was sold during this quarter.

Next we move to the line of Steven Schwartz with Raymond James. Steven D. Schwartz - Raymond James & Associates, Inc., Research Division: Nigel -- the Japanese question's the one that I want to go over. But I do want to address kind of a throw-away line from Mark. Mark, you mentioned the start-up costs in asset management. I believe you guys did quite a large closed-end fund during the quarter. I was wondering if that's what you were referring to. And maybe you could put a number on those costs?

Yes. Charlie can answer that.

Sure. Well, we did do a closed-end fund. It was a very successful fund. It was about $700 million for a high yield strategy. And obviously, with closed in funds, you have an initial kind of IPO cost, if you will, and that was roughly $12 million. So that was a big part of the expense gain for the quarter. But we're really pleased with, obviously, the execution of this business and the start of a new sort of strategic direction for us. Steven D. Schwartz - Raymond James & Associates, Inc., Research Division: Okay, Charlie, while I have you, the mention of outflows in equities, would you term that to be the program related? Maybe your clients changing what they want to do, going from something to something else? Or would you equate that more to performance related?

No, I think it's very much the former. It's not performance related. We actually had good performance across all the asset classes this quarter. I'll divide the flows into a couple of ways. But if you look at the institutional flows, as John said, they were reasonably balanced between, obviously, the inflows and the outflows. We've had very good inflows in the fixed income. The outflows were from equity. About half of it was from our quantitative side, QMA, and about half of it was from Jennison. But within the QMA, the interesting thing is there was one passive mandate for which we virtually got very, very little fees. And that was just a client moving out of that particular strategy. The others were more rebalancing, either from equities into fixed income or from domestic into global. So it was not performance related; it was really rebalancing of client assets.

Next we go to the line of Ed Spehar with Bank of America Merrill Lynch.

Two questions. First, a follow-up on the single premium whole life product in Japan. Ed, should we interpret your comments to mean that perhaps there will be some price increases in that product line and some impact on sales? Because I think we're all thinking about the AFLAC commentary on -- and I don't know if it's the same product, but I'm wondering if we should be expecting some changes there? And then, Mark, question on your comments about closeouts being capital light. I think after the GM deal was announced, there was at least one rating agency that came out with maybe less favorable commentary on the risk profile of that business -- or perhaps, you could just sort of discuss how the agencies -- with your interaction with the agencies, how they think about this stuff?

I'll let Ed go first, and then I'll talk about the capital issue.

Sure, Ed. Let me talk a little bit about some of the marketplace dynamics. I wouldn't want to reference any one competitor, but I will talk a little bit about the performance of some of the competitors, both foreign and domestic and the influence it had on our sales and the relative profitability that you could expect. You will have noted that some of the companies who were very strong in their sales over the past year in some of these heavily investment oriented products have indeed retrenched, either by putting in place some kind of cap, lowering crediting rates, redesigning their product, or in the case of some of them, actually withdrawing the product. You will note that we've not done those things, because our view, frankly, is that if it is necessary to do that, that means that one was overreaching probably to begin with. So we have abstained from that kind of approach because we put less emphasis, as you know, on chasing market share that we do on chasing profitability. Secondly, the single premium product that we sell is Yen-based, and that, of course, is a currency that has been living at the low end of returns for a very long time, although in fairness even there, the JGBs have dropped as well. So even Yen-based products need to be evaluated as we continue to evaluate all products, but not with the urgency that the dollar-based products have had to be because they've not experienced that same degree of precipitous drop. So we're actually pretty comfortable with the range of these products, and we will continue to monitor. And if we think the returns don't hit ours, then we will make adjustments. But in general, the reason you saw the sales go up here on this product had not to do with the actions we took but rather the actions that the competitors took in pulling back to a position more comparable to ours. I would cite just one very simplistic example. In some cases, some of the competitors have pulled back the discount they were giving for advanced premium from 1% to say, 50 basis points. We were already at 50 basis points. So you could go through a whole litany of product features and find that there's a comparable movement that has made our product more attractive, not because of actions we have taken, but because of the relative rebalancing that some of the competitors have.

So, Ed, would it be fair to say that, prior to this quarter, over the past 12 months -- let's say, the prior 12 months, that you had lost some share in that type of product relative to these other players and now you're regaining it back? Is that reasonable?

I don't think -- I think it's very interesting; I don't know that we could say we lost it because we didn't have it to begin with. Could we have had more, had they not taken those actions? Possibly. As you know, we're still in the early growth mode with this channel. So that even though sales are up 80%, I believe, yes, in the bank channel for the quarter, and that's over a comparative quarter that was up 60%. So I can't complain that we're not getting growth. It's really just a matter of what's available on the shelf. And at the moment, I think we're seeing that our position on the shelf is looking relatively more attractive, because obviously, I think, both because of the pressure of the solvency margin rules, the new rules that I think are forcing some competitors to maybe take a more cautious approach, more conservative approach to their investment portfolio, and therefore, not be able to support maybe some of the higher yields they were providing on these kinds of products. So I think the trends there are to our favor.

All right, and then on the capital question. The expression that I've used on this is "capital friendly", and not necessarily "capital light". But this is a very efficient deal because of the way in which it goes on the statutory books. This is a good home for this kind of a transaction because of the way in which we recognize the liabilities and because of the way in which we can manage the cash flows on the asset and liability sides of our balance sheet. In terms of issues, the concentration question is the one that's been raised and it has sort of 2 branches to it. One branch is around the notion of a very large deal going on the books all at once. And as you might imagine, we have very carefully considered the impact on our balance sheet of this transaction, very carefully understanding the assets that we'll be receiving as part of the payment of the premium, as well as the investments that we'll have to make ourselves to properly manage against this liability. We believe also in the context, by the way, of total Prudential that although this General Motors transaction is large, it's not out of proportion. When you look at the kind of risk that we want to take and the skill sets that we have in both sides of the balance sheet managing this liability as well as managing the asset. The other branch of the concentration question relates to having all of the underlying lives covered by this annuity coming from 1 employer. And I guess you'd have to argue that there may be some unusual correlation or some unusual longevity outcome related to that population. We haven't seen it, so I think net, we are very comfortable with the capital efficiency, with the skill sets that we have to manage this asset liability and with the fit of this deal in the context of the risk we want to take and the things that we're good at.

Next we go to the line of John Nadel from Sterne Agee. John M. Nadel - Sterne Agee & Leach Inc., Research Division: So I've got 2 questions. One, I wanted to ask a little bit about the regulatory environment. In particular, more recent commentary in Washington around SIFI, around insurance companies versus banks as it relates to Prudential standards. And then the second question that I had was a bit more, well, I guess it's -- I hate to ask a question that focuses on the corporate segment. But the volatility in the results in that segment are so significant that I think it would be really helpful if you could give us some sense of how to think about your outlook for that segment for the remainder of the year and maybe as part of your 2013 ROE objective as well. I mean, I feel like we have all kinds of data and information to make some informed modeling assumptions for your other business segments. But for this one, I feel like in any given quarter, it could come in $100 million above or below the previous quarter and I'm not sure exactly why.

Yes, so we'll start with the regulatory environment, Mark?

Yes, I think your references to recent both published, as well as oral comments about Prudential standards and the capital and solvency regime view of companies that are thrift-holding companies, but also predominantly engaged in insurance and other aspects, so the consideration of capital and solvency standards for insurance companies has kind of been on the front burner. I guess I'd start off by saying the same thing we've been saying for a long time around the SIFI issue, which is, it's a lot more important than we get it right than which label we wind up stuck with. And I think that gets right at the point you're making, which is, are the capital and solvency standards that are being contemplated appropriately consistent with our business models in the way in which risk is realized by a company like Prudential. And then from there you would go to the SIFI question and think about how to apply the right framework. But with respect to SIFI designation, it's very, very much up in the air. The process is underway. I would say it's uncertain with respect to how or where we may come out of that. With respect to the contemplation of capital and solvency standards for us, we're actively engaged in discussions around our interpretation of what's been put out there. We'll be considering either an individual or collective comment letter for the Fed on the solvency standards proposed for thrift holding companies. And we'll be making many of the same points that we've made for a long time, which is that the bank framework doesn't work very well. And that it's appropriate to think very differently about volatility and the way in which risk is realized and the cash consequences of different environments for insurance companies versus banks. And that's an ongoing process in which we're actively engaged. John M. Nadel - Sterne Agee & Leach Inc., Research Division: And, Mark, just as a quick follow-up to that. Have you guys internally attempted to conduct your own stress test using the bank, C Card [ph] standards?

We look at a lot of implications of different solvency regimes. The Basel frameworks that have come out, as well as other things that we do internally with our own capital management processes. I'm not going to comment on the specific outcomes related to any particular stress tests, except to tell you that we turn it over a lot of different ways and pay a lot of attention to what these things might mean for us. And that it informs us as we comment on the way in which the framework is shaping up.

And, John, this is Rich. We share your frustration on the corporate account. But let me give you a little bit of background on what's in there. There are legacy businesses in there that react to markets up and down. There are employee benefit plans, and there are many of them, several of them that react to the markets going up and down. And there's a whole bunch of corporate activities. So to go through each one of the activities and try to model what they're going to do, we're all going to be precisely wrong. What I should -- the way I think you can think about this is, we had about $40 million or $50 million worth of things that came out of those -- that stuff, that were bad guys in the first quarter. We had $40 million or $50 million that came out of that stuff that were good guys in the second quarter. If you average them out, or if you took them out, you'd probably come up with 310. 310 is more likely the run rate, typical run rate in 2012. And if you use that to model 2013, you won't get too much indigestion.

And this is John, I'd like to add a point. But I wanted to add a point, partly to something, John, you raised and something that Nigel raised a little bit earlier, which is related to both the environment and our conviction around our achieving a 13% goal. And just a couple of thoughts about that. Obviously, from our figures here, you can see a run rate of a bit more than 11%. And our -- so the real question is, how do we get from the 11% plus to the 13%? And from our point of view, what we're thinking about is the things that most principally are going to affect that, that are going to drive us from where we are to obtaining it, is the continuing momentum of the international businesses, which you're hearing a lot about, which you're seeing tangible evidence of; the realizations, number 2, the realization of the Star/Edison synergies -- and you heard comments about being on track with that; the improvement we expect to see from our U.S. businesses, the run rate impact; the GM transaction and active capital management. Those are really the 5 things that are the big drivers that take us from the mid-11% range to the 13%. And frankly, based on where we are and what it takes, we like our prospects for achieving it.

Ladies and gentlemen, we have run out of time for questions on today's call. With that, that does conclude today's teleconference. If you wish to access the AT&T replay service, you may do so at any time by dialing 1 (800) 475-6701 and enter the access code of 225937. International participants may dial (320) 365-3844 and use the same access code, 225937. Once again, that replay will be available after 1:30 p.m. Eastern time today through August 9 at midnight. That does conclude your conference for today. Thank you for using AT&T Executive Teleconference service. You may now disconnect.