Principal Financial Group, Inc.
Q4 2007 Earnings Call Transcript

Published: 5 Feb 2008

[Operator:]

Good morning and welcome to the Principal Financial Group fourth quarter 2007 conference call. There will be a question and answer period after the speakers have completed their remarks. (Operator Instructions). I would now like to turn the conference over to Tom Graf, Senior Vice President of Investor Relations.

[Thomas J. Graf:]

Thank you. Good morning and welcome to the Principal Financial Group’s quarterly conference call. If you don’t already have a copy, our earnings release and financial supplement can be found on our website at www.principal.com/investor. Following a reading of the Safe Harbour Provision, CEO Barry Griswell, Chief Operating Officer Larry Zimpleman, and CFO Mike Gersie will deliver some prepared remarks. Then we’ll open up for questions. Others available for the Q&A are

[J. Barry Griswell:]

Thanks, Tom, and welcome to everybody on the call. This morning I will continue my pattern of briefly commenting on our performance for the year and the quarter. Mike Gersie will then provide a detailed review of our financial results. Larry Zimpleman will follow Mike with an operational overview. As communicated our investor day, we have three key growth engines

[Michael H. Gersie:]

Thanks, Barry. This morning I’ll spend a few minutes providing financial detail for each of our four operating segments, but before I do, a brief overview at the total company level. While reported earnings were down from the year-ago quarter, after isolating the sources of the decline – primarily health division results in the impact of falling equity markets – we see a much better picture with a continued strong underlying performance in our asset management and accumulation businesses. Before I begin the operating segment discussion I’ll highlight a change in our reporting format. US asset management and accumulation is now separated into two segments

[Larry D. Zimpleman:]

Thanks, Mike. As indicated, I will now provide an overview of operations covering our ongoing focus on three areas

[Operator:]

(Operator Instructions). Your first question comes from Suneet Kamath of Sanford Bernstein.

[Suneet Kamath:]

Thanks and good morning. A question on the health business. Barry, you said many times in the past that all of your businesses have to perform well to remain in the business portfolio and based on your comments now we’re looking at flat earnings in 2008 and, per your comment, the multi-year turnaround. So my question is, how much longer or how much runway are you going to give this business to turn around before you consider other options?

[J. Barry Griswell:]

Good morning, Suneet. I appreciate the question. You know, I do stay, we stay committed to all of our businesses having to perform solidly and that continues to be true for health. It is a little more complicated when you’re dealing with a business that has a significant amount of renewals on an annual basis. It takes a longer amount of time to know if your turn around is being effective. I just continue to believe that the best thing we can do for long-term shareholder value is to turn the business around. We’re focused on that. I think we’ve said and I would say it’s on a short leash. We have to prove that it is going to turn around and we have some internal metrics that we look at to make sure that’s true and we’ll continue to do so. We’re not just sitting here letting the business deteriorate. We’re working very hard on turning it around and I think we’re going to see some signs of that in 2008. As I say, we have some metrics we’re looking at and we’ll do the appropriate thing over time.

[Suneet Kamath:]

Okay. Thanks.

[Operator:]

Your next question will be from Tamara Kravec of Banc of America.

[Tamara Kravec:]

Thank you. Good morning. A couple of questions. First, in terms of your investment portfolio, at your investor day you talked about your sub-prime exposure and I think it was around $700 million or around 1% of your invested assets and you’ve currently realized losses on $49 million of it roughly in the fixed maturity security category. How comfortable are you feeling now given no real improvement in the credit environment this year that you’re not going to have additional issues with your sub-prime exposure? And the second question is, I know you touched on this in your comments, but you talked about your hedging program and I wanted to delve more into that in terms of how it’s working across your segments and what you would expect to change this year given the environment. Thanks.

[J. Barry Griswell:]

Thanks, Tamara. I think I’ll ask Julia Lawler, our chief investment officer, to handle the first and maybe the second as well.

[Julia M. Lawler-Johnson:]

Yes. Good morning, Tamara. On the sub-prime portfolio you’ll recall from investor day – and we’re going to put out a, re-file the 8K and update all the numbers, but you can see on the supplement that our home equity loan for about $557 million. And that is the category, you’ll recall, we said is our higher quality older (inaudible). That remains high quality and it would take a tremendous amount of deterioration, even from our current (inaudible) and residential mortgages for those to be harmed. So we still feel very good about those. Then you recall that the rest of our sub-prime is up in that CDO category. That is where all of our impairments occurred is the sub-prime inside of those CDOs. And we took probably more impairment than I would have anticipated. A couple reasons for that. There were probably more sub-prime issues that occurred than we anticipated and the values of those declined even more than we anticipated. I’m not sure we believe that we’re going to see full impairment down to those levels, but those are probably two things. So what’s left over in those CDO categories is about – and you’ll see this in the 8K, but I think we can say this – about $56 million. And while it’s a small number, again, it would take a substantial amount of deterioration yet on the sub-prime market for those to be affected. So, I think for now we have reflected pretty conservative impairment numbers for our sub-prime portfolio. So before I move on to the next question I want to make sure I answered that one for you.

[Tamara Kravec:]

Yes. Thank you.

[Julia M. Lawler-Johnson:]

On the hedging program, you know, we worked really hard to make sure our asset liability management is tightly managed and we do that through derivatives. So despite the volatility in the market, I think that causes us to continue to be very, very disciplined in our hedging program. So the interest rate movement that you see is related to our duration management. And the only time you really see that market through net income is when we can’t get hedge accounting treatment, which means that we’re either doing it short term for daily cash position or at a portfolio level. So I would see no change and, in fact, continued discipline in that hedging program.

[Tamara Kravec:]

Okay. And then one other quick question and actually follow upon Suneet’s question, Barry. Is the life and health business – and I guess more the health business – is it at all in your mind a matter of scale or is it really just more the fine tuning of the size of the organization that you have?

[J. Barry Griswell:]

Well, you know, certainly scale in that business is important. We don’t think scale in that business is terribly important at a macro level. In other words, you don’t have to be a certain size in total. But what you do need to have is scale within individual markets. And that’s really been a key part of our strategy is to reduce the number of markets we operate in and to make sure that we’re in markets where we do have scale or where we think we can achieve scale. There are a lot of things going on in the business that are not necessarily related to that. They’re related more to some of the shifts to consumer-driven health care, health savings accounts. There’s quite a bit of movement in discounts and the way discount networks are working. And quite frankly, some behaviour changes on how people try to get around limits within discounts. So I would say it’s more around fine tuning and getting the business on track with the current way of running the business and not so much around scale. But we do watch scale and obviously scale is important. One other area that’s important is in discount networks and we try to get around that in certain ways, as I mentioned or Larry mentioned. We’re doing more direct contracting on discounts and we’re also, on the fee-for-service business, as you know, we have the Etna (sic) signator national discounts, so those are just a few things that we’re doing and hope responds to your question.

[Tamara Kravec:]

Okay. And you had said in your opening comments that this business is a benefit in terms of the credit markets. I guess, what specifically did you mean by that?

[J. Barry Griswell:]

Well, I think what we would argue broadly is that being in the risk business is a good diversification of earnings and it’s a good point that unfortunately the health business has gotten a little sideways at a time when the equity markets are more volatile. But generally speaking you would think being in the risk business is a good thing during times of volatility. It just happens to be at this very moment that our health business is a bit off. But I would remind people that the run rate on that business is still double-digit ROE and even on a reporting basis it’s about 7%. So it’s not altogether bad to be in the risk businesses, we just need to focus on getting the health business turned around. As was mentioned, specialty benefits in the life division are performing very, very well.

[Tamara Kravec:]

Okay. Thank you.

[Operator:]

Your next question will be from Jeff Schuman of KBW.

[Jeff Schuman:]

Good morning. Question on the realized and unrealized capital losses. We have the GAAP number, I believe $212 million. What did that map to on a statutory basis?

[J. Barry Griswell:]

You know, we don’t have that number exactly yet. I know there’s some question about that. We don’t think it’s going to be significantly different, but we don’t really have the refined number. When we do we’ll find a way to get that out.

[Jeff Schuman:]

And I guess what we’re seeing with some companies is that there is a spread between the GAAP write off and the stat write off and, Mike, to the extent there are stat and GAAP differences at this point would we still look to the stats joint capital position as being kind of the governing determinant of your capital adequacy?

[Michael H. Gersie:]

That’s correct. Yes. And it’s very sad. I think there’s some differences of approach in terms of will it have the same impact on stat capital versus GAAP capital. Our expectation is it’s probably close to the same, but obviously, I’ll say from a capital adequacy standpoint we’re exploring avenues as to making them different.

[Jeff Schuman:]

Okay. And then lastly I want to make sure I understood you right. When you talked about your capital position you talked about modest debt capacity, I believe was your phrase. I thought I understood you to say that the capital was sort of right sized relative to the rating agencies at this point. Is that sort of the correct understanding?

[Michael H. Gersie:]

That’s correct.

[J. Barry Griswell:]

That’s correct.

[Jeff Schuman:]

And so if you think in terms of free cash flow generation or excess capital generation in ’08, kind of look at the whole picture including the credit environment, what would be sort of excess capital generation, do you think, in ’08?

[J. Barry Griswell:]

That’s a good question. We’re actually just, obviously we put together capital plans and actually update those capital plans periodically. We’re just going through the process of updating our plan right now. I would have to say, compared to prior years our capital plan is probably a little more subdued for 2008 than it was, let’s say, in 2007.

[Jeff Schuman:]

Okay. Thank you very much.

[J. Barry Griswell:]

Thanks. And I might have to remind everybody too, we need to kind of move along. We have quite a few people in the cue on this call. So maybe if you could limit your questions to just one or two that would be appreciated.

[Operator:]

Your next question will be from Andrew Kligerman of UBS.

[J. Barry Griswell:]

Andrew? I hope I didn’t scare him away.

[Operator:]

Andrew, please check to see if you have your phone on mute. Your next question will be from Tom Gallagher of Credit Suisse.

[Tom Gallagher:]

Good morning. The only questions I had were, I just want to understand what’s driving the big change in impairment methodology here. Are you seeing a much more conservative assessment for bid-versus-ask spread? And then also, how does that change involved to your outlook for investment losses through the balance of ’08? Thanks.

[J. Barry Griswell:]

Tom, I would say that the values have not changed. We think we’ve had the values right. A lot of these assets were sitting in other comprehensive income categories and I think just being prudent you at some point say, well, over what type, if they are going to recover over what time would it be? And you have to make a judgement. And our judgement is let’s be transparent, let’s be conservative, and let’s mark them to, and yeah, it’s a tough thing to do because there’s not a lot of good ask out there. So you end up taking a hit and that’s why we’re pretty confident a lot of these assets will come back over time. But really the only change is that time to look over what period of time they might recover and just making the decision to go ahead and permanently impair them. We think that’s the right, conservative, prudent thing to do.

[Tom Gallagher:]

And then in terms of just expectations for ’08 in terms of investment.

[J. Barry Griswell:]

Maybe Julia can answer that. Obviously we’re in a difficult environment to predict. Julia, do you want to?

[Julia M. Lawler-Johnson:]

Well, actually I think if you look at what we did at the end of ’07 in these numbers and the approach we took to be more conservative for the end of ’07, I actually feel barring any major recession I feel very good about the outlook for ’08. Because we were so conservative in our position at the end of ’07. So I’m actually feeling a little bit optimistic about our outlook for ’08.

[Tom Gallagher:]

And Julia, that also captures any substantial changes we’ve had in spreads just for the full month of the year.

[Julia M. Lawler-Johnson:]

Yes, although I would tell you that interestingly enough on some of the structured assets that we permanently impaired at the end of the year we’re actually seeing improvement in the market values on those assets already this year. So now, we have seen some spreads widening yet this year and I think we are going to see some volatility. I’m not going to say we’re not going to see volatility in the markets, but I am optimistic about where our impairments might be in ’08.

[Jeff Schuman:]

Okay. Thanks.

[J. Barry Griswell:]

Thank you.

[Operator:]

Your next question will be from Ed Spehar of Merrill Lynch.

[Ed Spehar:]

Thank you. Good morning. Two quick questions. Number one, Mike, I think you said that there was an increase in capital of $130 million at the other operating segments and I was wondering if you could talk about what the driver is. I mean, if it’s in the fee businesses, sort of help us understand why. And then the second question was that the higher loss in the corporate line when it seems like there should be more capital there, could you go over that one more time why you’re looking for that? Thanks.

[Michael H. Gersie:]

Sure, Ed. The place where we sopped up the capital it was returned to corporate. A little bit of it was in the corporate sector and I actually think maybe the majority of it was in the corporate segment. And I think there was a little bit of additional capital that was allocated over the retirement and investor services business unit. And so you’d say, well, in terms of, shouldn’t that, because you have more capital now in corporate, shouldn’t you then be generating a little more investment earnings on that capital? Actually, no, compared to the beginning of the year. So one of the things you’re seeing is you look at very low losses in the corporate segment at the beginning of the year. We had a lot of access capital in corporate and, remember, we bought in $750 million worth of shares in 2007. Didn’t issue any debt, so we sopped up a lot of that excess capital in 2007. As we got to the end of the year fewer invested assets in corporate and so that related to much lower investment earnings. On top of that we talked about higher JV gains, income during the first half of the year, more subdued in the second half, so that gets you to why is the big number in the fourth quarter. Well, it’s a number that we kind of expected. Look at it on a go-forward basis, again maybe just a shade of tick-up in capital because of some of the returns from the life and health business, but for the most part get lower level of capital expecting lower joint venture earnings. Last year was a very big year for joint venture earnings.

[Ed Spehar:]

So that $130 million of higher capital at other operating segments, you’re saying that included an increase in corporate, but that’s versus the end of ’07, right? Or the second half? What was that versus?

[J. Barry Griswell:]

That was, the capital was returned basically at the end of the year. So that would fall into corporate at the, retransferred in the corporate at the end of the year. So it’s like, think of it, Ed, as taking money out of one pocket and putting it in another.

[Ed Spehar:]

Got it. Thanks.

[Operator:]

Your next question will be from Colin Devine of Citi.

[Colin Devine:]

I just have a couple quick questions. First on the investment portfolio. I appreciate the conservatism of the approach. Could you just give us a few comments on how the commercial mortgage business is looking? Second on the health business, is it fair to say, Barry, that this is really the first chance that you’ve had to re-price this business since you felt it went off the rails in fourth quarter of ’06, just given the annual re-pricing cycle? And then for Larry, in terms of 401K business, and I think sometimes what gets lost is your (inaudible) generating cash flows. In terms of assets this year, if you didn’t make another sale how much do you think you’d bring in in new money? Is the number $11 billion or $12 billion or is it higher? Thanks.

[J. Barry Griswell:]

We’ll start with Julia on the investment commercial mortgage outlook.

[Julia M. Lawler-Johnson:]

Good morning, Colin. Thanks for asking about the commercial mortgage portfolio. That portfolio continues to perform incredibly well. Again, the loan to values on our portfolio are very low. We’re sitting at about 59% loan to value on that portfolio, very high coverages. We’ve seen very, very little stress in that portfolio. And I’m not just talking about things that we are immediate issues. We can survey that portfolio pretty closely. That’s the beauty of having secured assets and if we can look to see what sort of leasing we have on our properties, the values, we’re constantly surveying that portfolio. So I feel very good about our commercial mortgage portfolio.

[J. Barry Griswell:]

On the second point, indeed we do have most of our renewal in probably January and I think June and July, so yeah, we are just now getting into the build of the price increases starting to take, or some of them starting to take effect. It will take a full 18 months for all to take effect, I suppose, so yeah. But I would also point out that perhaps a bigger issue right now is getting our network discount in place and doing more Principal specific. We are working very, very hard on that, putting some resources on it and we’re hopeful that will bite in and start to pay off more quickly, perhaps, than just pure price increases. Larry, I think you got a specific question on –

[Larry D. Zimpleman:]

On deposits? Yeah, Colin, good morning. I think in our financial supplement we do have a breakdown for you in there between transfer deposits, which would be deposits received on new sales versus recurring deposits. Generally speaking, the recurring deposits on existing clients is somewhere between 65% and 70% of the total deposits. So I think a reasonable expectation would be we’d probably be around $14 billion or so for 2008.

[Colin Devine:]

That’s the number I was looking for. Actually a little bit better. Thank you very much.

[J. Barry Griswell:]

And actually, we expect to make some sales in 2008. ---Laughter

[Colin Devine:]

I kind of figured that, but thanks.

[J. Barry Griswell:]

Thanks, Colin.

[Operator:]

Your next question will be from Eric Berg of Lehman Brothers.

[Eric Berg:]

Thanks very much. Good morning, Barry, and to the rest of your team. I have a couple of questions. I want to push a little bit more on the health issue and I have a question regarding investments for Julia. I’m just trying to understand better than I do the basis for your hope or optimism that you can turn this thing around. The reason I ask the question is that, in the face of price increases and in the face of efforts to focus the business you’ve been steadily losing customers. So all year you lost customers. And your ability to attract new target customers was also down dramatically. So my question is, if you have been working on this business for two years, and we know you have been working on it for a while because this concept of target customers goes back at least 2005, if you’ve been working on your strategy for two years and all that we can see in the financials – maybe there’s some other things going on good behind the scenes that we cannot see – but if all we see in the financials is a steadily shrinking business in the face of your efforts, what is the basis for your optimism that this can be fixed?

[J. Barry Griswell:]

That’s your only question, Eric?

[Eric Berg:]

No, I have a question for Julia.

[J. Barry Griswell:]

Well, I appreciate the –

[Eric Berg:]

Pardon me, Barry. I’m not trying to beat up on you. I’m just trying to reconcile the numbers which are clearly upsetting to your optimism. I genuinely want to know.

[J. Barry Griswell:]

Yeah, I appreciate that. I really do. I guess I will let John answer if I don’t get it all the way right. But I guess I would go back to two or three years ago when we embarked, maybe a little longer, on this strategy. We were making good progress. There were quarters and months when our target states were growing and, in fact, we hit a bump in the road. So our strategy has been derailed slightly because of some things that went on that we’ve explained around fine behaviour changes, claims behaviour changes, some changes in the discount networks. We think we’ve identified those things. We’ve been through lots of insurance turnarounds and there is a pattern here. You have to raise prices, you have to shrink the business slightly, but you do it with the right kind of thoughtfulness where you don’t run off good customers and you do it in ways that allow you ultimately to return to a growth mode. And that’s exactly what we’re doing. And yes, there are some things in the background around the discount networks. There’s a growth in the fee business that’s coming along very, very nicely. There’s growth in the wellness business. One of the things I’ve said and I think will turn out to be true is I’d like to grow the fee for service business, the national account business, to be a much, much bigger part of our business. We’d even be willing to invest some capital in that business. And it’s not a business that takes a lot of risk. It’s an administrative business and a business that we know very well. And we think the outlook for the wellness business is extraordinarily strong. So we’re not sitting here wishfully hoping and praying that this business will turn around. We have very specific plans in place and we have benchmarks and we have metrics that we’re looking at. And I would ask John if I’ve missed anything because I’ve not apparently gotten the message across a few times.

[John E. Aschenbrenner:]

No, I think you’ve done a good job. I would just re-emphasize some things that Barry said. One is, the business and the environment is changing and it was a very different picture the end of ’06 and the beginning of ’07 than what we were experiencing before then. So I would say this is a new environment, new challenges that hit us in early ’07. I would argue a little bit, we haven’t been addressing these same things as maybe as long as you would say we have. The other thing that I think is important is we are losing more of the business we want to lose as opposed to the business that we don’t want to lose. So that as we raise rates the people that are leaving tend to be the people that have the high loss ratios and the people that we’re losing money on. So we think that in addition to all the things Barry mentioned that we’re doing to improve the business, we think that as we lose the right people that’s going to help us going forward.

[Eric Berg:]

Okay. That was helpful additional information. My question for Julia or Mike relates to your comments about possible recovery in asset values. My question is, if the majority of what you did from a realized and unrealized gains, pardon me, loss perspective in the quarter, if the majority of it was on a realized basis how can, there can’t be any recovery. You’ve written off these bonds, right? Or written down the value of these bonds or written them off entirely. So I don’t quite understand whether there would be any, how there could be any positive financial statement, book value impact to a recovery of assets since you have written these off. How would that happen?

[Michael H. Gersie:]

Good question, Eric. Julia?

[Julia M. Lawler-Johnson:]

Eric, let me describe a little bit about GAAP accounting that’s kind of an interesting phenomena for us. When we permanently impair an asset it doesn’t mean that we’ve sold the asset necessarily. So for some of these structured assets that we’ve permanently impaired, when they perform we will continue to write those up through earnings because we’re going to get our interest on those deals and if we continue to hold them as we expect to we’ll actually write them up through earnings. It will be as if we bought those bonds at $0.50 on the dollar.

[Eric Berg:]

Okay. I didn’t know that. I had thought that permanent means permanent and that’s it. But you say you can write them even though you’ve permanently impaired them under US GAAP.

[Julia M. Lawler-Johnson:]

Correct. If they continue to perform they can be written up. If they don’t perform, I mean, obviously then you’ve written them off and they’ve been written off. But if they perform as we expect them to, ultimately over time we can write those up through earnings.

[Michael H. Gersie:]

The key point there is through earnings. That means that the extra earnings that we had not, it’s over and above what we had written it down to come back through earnings. You can also get there by changing, I think, classification of the asset and that may or may not be an option under 2008 GAAP accounting. But on the accounting as it stands now they could come back through operating earnings.

[Eric Berg:]

Thank you.

[Operator:]

Your next question will be form Dan Johnson of Citadel Investments.

[Dan Johnson:]

I want to ask questions about this unrealized losses. Just to be clear, what we’re calling unrealized is just the, other than temporary impairments, we’re just talking about unrealized as it went through the income statement. Can you help me get my hands around the unrealized losses that actually went through the balance sheet only? I’m just having a hard time sort of reconciling AOCI and other things like that that aren’t sort of as nicely laid out as you did for us here on page 48 in the supplement.

[Julia M. Lawler-Johnson:]

Well, let me make sure I understand your question, Dan. What we’ve separated out on the realized and unrealized, I think we tried to show you both in Mike’s discussion and in the release is that which is truly realized or permanently impaired. So the two things that cause something to be realized is you sold it, you unwound it if it was a derivative, or you permanently impaired it. Those are realized. Unrealized going through that section would be marks on derivatives. So we didn’t realize them, we’re just marking them to mark it. So remember, derivatives, no matter what kind of derivatives, not getting hedge accounting treatment is going through this same section on page 48 and that’s what’s called unrealized. So now that’s the two realized and unrealized going through our net income. What’s going through our balance sheet in OCI is everything else. The mark on all of our bonds would be going through OCI that’s not being permanently impaired.

[Michael H. Gersie:]

Which would include interest rates.

[Dan Johnson:]

Exactly. So what we’ve got going on is the positive effective interest rates. I’m just trying to figure out, especially since we took losses, there’s stuff that would have been NAOCI last quarter that wouldn’t this quarter. So if you just tried to sort of narrow down the bond, or what is it called? The invested asset impact to AOCI in the fourth quarter, that’s actually where I was going. Thanks.

[Michael H. Gersie:]

Thank you.

[Julia M. Lawler-Johnson:]

I don’t have the unrealized number in front of me for OCI. I apologize. It will be out in our 8K this month and I didn’t bring that number with me. But is that what you’re asking for is what’s going to run through OCI?

[Dan Johnson:]

Yeah, for the most part. Just in some ways it just helps me understand how you’re marking assets in the quarter, even though you’ve determined that they’re not worthy of other than temporary impairment.

[Julia M. Lawler-Johnson:]

Well, all of our assets, all of our bonds, are being marked at their market value. So either we’re getting trading values or we’re getting bid values. So all of our bonds are getting marked to market. And the only thing that’s running to realized would be the impaired assets. So as of December 2007 we showed a growth unrealized loss of about $1.2 billion on that portfolio. So what we’re saying is, and you can see it broken down by sector, you can see that we’ve reduced the value on some of those bonds by that amount. So we are truly marking to market our bond portfolio. Is that –

[Dan Johnson:]

(Inaudible) is a cumulative number, correct? Not an impact in the fourth quarter?

[Julia M. Lawler-Johnson:]

Correct. That’s the total cumulative number.

[Dan Johnson:]

Okay. Tell you what, I’ll circle back in, Tom. I wanted to get in one other one on the CMBS portfolio. Can you give us some colour again? This is not the mortgages that you have underwritten, but can you tell us a little bit more about that portfolio in terms of vintage and rating, please?

[Julia M. Lawler-Johnson:]

I don’t have all the vintages. I can tell you that these are, in fact, we put this out in our 8K as well, but the quality of that portfolio – and you’re talking about just what we’re holding in our investment portfolio CMBS?

[Dan Johnson:]

Yes, please.

[Julia M. Lawler-Johnson:]

The quality of that portfolio is very high. And again, as I said, we’ll put it out in the 8K, but over 50% of that portfolio – in fact, about 55% of that portfolio – is rated AA or better. And all but 2% of that portfolio is investment grade.

[Dan Johnson:]

Do you have a sense as to how much is sitting at A or BBB?

[Julia M. Lawler-Johnson:]

BBB we have, and again, we conservatively, I’m giving you our internal ratings here, which is more conservative than the external ratings, so keep that in mind. BBB is about 25%. That’s all BBB.

[Dan Johnson:]

And just by nature of vintage roughly, this is from more recent years? From four or five years ago?

[Julia M. Lawler-Johnson:]

Oh, we would have, I mean, we’ve been buying CMBS for many, many years. Again, this is a skill set that we have had in house for a very long time. So we would have vintages across the board. But I don’t have exactly how much would be 2001, 2002, 2003, 2004, 2005.

[Dan Johnson:]

That’s fine. Thank you very much.

[J. Barry Griswell:]

Thank you. I think we have time for one more, if we have somebody on the line.

[Operator:]

Your last question will be from Tom Kilmokie (sp) of Goldman Sachs.

[Tom Kilmokie:]

Yeah, good morning. Thank you. Two quick ones. I’ll try to be quick. One, in the group business, Barry, you mentioned rising prices and declining enrolment. To me that smells a little bit of potential for adverse selection in that your good people leave you and you’re stuck with your good folks who can’t get insurance elsewhere. What are you doing to prevent that from happening? And then just real curious, and I’m sorry if I missed this, you had provided guidance back in the fourth quarter for ’08 which incorporated a decline in the equity markets that you had seen in the third and fourth quarter. I just wanted to clarify why you haven’t really changed your guidance or given what’s occurred just in the month of January do you think that the market’s basically going to revert back to where you saw it originally back in the fourth quarter?

[J. Barry Griswell:]

Sure, Tom. Let me answer the last one and then I’ll ask John to maybe give a little more colour on how we’re avoiding adverse selection in the medical business. You know, some time ago we went to a methodology where we give annual guidance and that guidance is good at the time that we give it. And I think Tom even read into his statement that we don’t update it and we don’t make any assertions that it’s accurate or not accurate. And we really haven’t deviated from that. So we are not in the business of trying to go back and reconcile to guidance at this point. I would strongly suggest that we’ve tried to give everybody as much information as we can. We’ve got a full year behind us of earnings and everybody knows what those earnings were and we’ve tried to give you as much colour as we can around the balance of 2008 and the key areas that we think are different. And we think from there that you ought to be able to plug into your models good estimates as to what earnings will be. But we really don’t want to go back to giving guidance. John, do you want to?

[John E. Aschenbrenner:]

Sure. Tom, one of the things that helped is the cases that have the poor experience you’re going out with a larger rate increase for. So those are the ones with the larger rate increase that are more apt to shop it and more apt to move. We’re monitoring that very closely and in great detail, but at least one high level measure is that 40% of our total business has loss ratios in excess of the target and 55% of our lapses have lost ratio in excess of the target. So we’re actually lapsing more of the poor business than the percentages of what we have on the book. So we’re comfortable that we’re not getting that anti-selection spiral that you’re talking about.

[Tom Kilmokie:]

Okay. Great. Thank you.

[J. Barry Griswell:]

Thanks, Tom. Let me make a few brief closing comments. This has obviously been a more difficult call and quarter than we’re used to experiencing. That’s obviously reflective of the environment we’re operating in. Nonetheless, I think 2007 was really a very strong year for us and tried to make that point in my opening comments. We are very focused on continuing to show improvement in all of our operations, including especially the health business. But we think we’re in the right businesses. We think we have the right trends going for us in terms of the accumulation businesses, the asset management businesses, the international businesses. Our growth engines are doing extraordinarily well. We remain very confident about the long-term future of the operations. I would say that this is the same management team that took you through the IPO and has managed successfully over the last six years and we have done so in some very challenging environments. And I would just reiterate our commitment to getting through this challenging environment and doing so in a way that continues to create long-term shareholder values. Thank you all for being on the call. We appreciate it greatly. We hope you have a great year. Thanks.

[Operator:]

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