Prudential Financial, Inc.
Q2 2014 Earnings Call Transcript

Published: 7 Aug 2014

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the second quarter 2014 earnings teleconference. [Operator Instructions] And as a reminder, today's teleconference is being recorded. I would now like to turn the conference over to Mr. Eric Durant. Please go ahead.

[Eric Durant:]

Thank you, Cynthia. Thank you for joining our call. We hope we're not interrupting your summer vacation. Representing Prudential today are John Strangfeld, CEO; Mark Grier, Vice Chairman; Rob Falzon, Chief Financial Officer; Charlie Lowrey, Head of International Businesses; Steve Pelletier, Head of Domestic Businesses; and Rob Axel, Controller and Principal Accounting Officer. 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 2014, which can be found on our website at www.investor.prudential.com. In addition, this presentation may include references to adjusted operating income or to earnings per share, or EPS; or return on equity, or ROE; which are determined based on adjusted operating income. Adjusted operating income is a non-GAAP measure of performance of our Financial Services businesses that exclude certain items. Adjusted operating income is not a substitute for an income determined in accordance with generally accepted accounting principles, GAAP, and the excluded items are important to an understanding of our overall results of operations. For a reconciliation of adjusted operating income to the comparable GAAP measure, please see our earnings press release on our website. Additional historical information related to the company's financial performance is also located on our website. Over to you, John.

[John Robert Strangfeld:]

Thank you, Eric. Good morning, everyone. Thank you for joining us. The central message today is that we had strong results in the second quarter, and we are on pace to achieve our goals for the year. While we've clearly benefited from some tailwinds, including strong investment results and favorable mortality, business fundamentals are the main driver of our improving results. We think it's significant that each of our divisions produced higher earnings than a year ago. Mark and Rob will review the quarter in greater detail in a few minutes, but here are a few highlights. Our Asset Management business achieved its 27th consecutive quarter of positive institutional flows. Also, retail flows were positive. Sustained growth in assets under management is driving growth in asset management fees and in operating income. Our Annuities business has benefited from a sustained period of favorable equity markets, which has driven higher earnings, improved returns and a lower risk profile. We are very comfortable with the expected profitability, as well as the risks of the products we are selling today. Over time, we expect the risk profile of this business to improve as the composition of our block gradually shifts to products with less equity market exposure. Retirement continued to produce outstanding results, largely because of strong investment spreads, including a contribution from non-coupon investments that was modestly higher than our average expectation. Although we recorded no pension risk transfer transactions in the second quarter, we completed 3 PRT deals in July, including a landmark longevity reinsurance transaction, which will hit our books in the third quarter. We continue to believe that PRT, both funded transactions like GM and Verizon, as well as those where we solely reinsure longevity risk, is an attractive business opportunity for Prudential. Individual Life Insurance and Group Insurance both achieved higher adjusted operating income this quarter. In Individual Life, the Hartford integration continues on track, and expense synergies contributed to the positive earnings result this quarter. In Group Insurance, experience was more favorable than a year ago in both life and disability. We are confident that Group Insurance is on the right track, but improvement will not be linear. Finally, International Insurance recorded solid results in the face of difficult sales comparisons and currency headwinds. Life Planner results benefited from sustained business growth and improved claims experience. Gibraltar's earnings topped $500 million for the first time, modestly above the strong result a year ago and a seasonally strong second quarter. Productivity in the Life Consultant channel is back to pre-acquisition levels, and the rate of decline in agents is slowing. And over time, we expect the number of life consultants to stabilize and then to grow, and that will give the business a further boost. So overall, we feel very good about our quarter and our business trends. And with that, Mark, over to you.

[Mark B. Grier:]

Thank you, John, and thank you, Eric. Good morning, good afternoon or good evening. And thank you, all, for joining our earnings call today. I'll take you through our results for the quarter. And then, I'll turn it over to Rob Falzon, who will cover our capital and liquidity picture. Using Slide 2, I'll start with an overview of our financial results for the quarter. On a reported basis, common stock earnings per share amounted to $2.49 for the second quarter based on after-tax adjusted operating income of the Financial Services businesses. This compares to EPS of $2.30 a year ago. After adjusting for market-driven and discrete items in both the current quarter and the year-ago quarter, EPS was up by 12%, amounting to $2.51 compared to $2.24 a year ago. This is largely the result of 4 things

[Robert Michael Falzon:]

Thanks, Mark. I'm going to provide you an update on some key items under the heading of Financial Strength and Flexibility. Starting on Slide 24. We continue to manage our insurance companies to levels of capital that we believe are consistent with AA standards. As of year-end, Prudential Insurance reported an RBC ratio of 456%, with total adjusted capital, or TAC, of $13.9 billion. While we don't perform a quarterly bottoms-up RBC calculation, we estimate that our RBC ratio continues to be well above our 400% target at Prudential Insurance, after giving effect to the results for the first half of the year. In Japan, Prudential of Japan and Gibraltar Life reported strong solvency margins of 777% and 955%, respectively, as of March 31, their fiscal year-end. These reported solvency margins are also well above our targets. Looking at the overall capital position for the Financial Services businesses on Slide 25. We calculate our on-balance sheet capital capacity by comparing the statutory capital position of Prudential Insurance to our preset RBC ratio target and then add capital capacity held at the parent and other subsidiaries. As of year-end, we estimated that our on-balance sheet capital capacity was about $3.5 billion, including about $1.5 billion that we considered readily deployable. During the first half of this year, we've returned about $1 billion to shareholders. These returns came in the form of quarterly common stock dividends of $0.53 per share in each quarter, for a total of about $500 million, and a repurchase of $500 million of our common stock. The net results of these returns of capital and the capital generated by our businesses in excess of their organic growth needs left us with available on-balance sheet capital capacity of over $5 billion, including about $1.5 billion that we consider readily deployable. Our $500 million of share repurchases in the first half of the year, including $250 million in the second quarter, completed the $1 billion of repurchases authorized under the program that ended on June 30 of this year. As you know, we announced a new $1 billion repurchase authorization in June, which extends through June 30 of next year. Turning to the cash position of the parent company. Cash and short-term investments, net of outstanding commercial paper, amounted to $4.1 billion as of the end of the second quarter. The cash in excess of our targeted $1.3 billion liquidity cushion is available to repay maturing operating debt, to fund operating needs and to deploy, over time, for strategic and capital management purposes. Now I'll turn it back over to John

[John Robert Strangfeld:]

Thank you, Rob. And we would like to open it up for questions.

[Operator:]

[Operator Instructions] And our first question will come from the line of Erik Bass with Citi.

[Erik James Bass:]

I was hoping that you could provide some more details on the economics of the BT longevity swap transaction. And how should we think about the earnings contribution? Also, how do returns for longevity swaps compare to those for pension closeouts?

[Stephen P. Pelletier:]

Erik, this is Steve. I'd be glad to address that. The returns on both longevity transactions and funded transactions are very much consistent with our corporate ROE objectives. In regard to looking at longevity deals, vis-à-vis funded deals, I'd point to 2 key distinctions. First would be the relative capital intensivity [ph] of these transactions. Obviously, every deal is different, and you need to account for that. But if you were going to use a general rule of thumb that said that longevity deals are about 1/5 as capital intensive per dollar of notional amount as funded deals, that would be pretty accurate. The key distinction there obviously being that, in longevity reinsurance, we're not taking on the assets and therefore, not taking on the credit risk that characterizes funded deals. The second point I would make is the emergence of earnings. The longevity reinsurance and funded transactions are highly complementary in this regard. So from both a strategic and a financial aspect, being active in both sides of the market in that regard is very attractive to us. Funded deals, the earnings level -- the annual earnings level gradually decreases over time. In longevity reinsurance transactions, the earnings emergence gradually increases over time. So those are the 2 key distinctions I would make.

[Erik James Bass:]

That's helpful. So I guess, is the right way to think about then kind of a ballpark, maybe 1% to 2% of the amount swapped is a reasonable estimate for kind of the required capital?

[Stephen P. Pelletier:]

Yes, I think that would be fair.

[Erik James Bass:]

Okay. And then, I guess one follow-up is that we've seen a number of longevity swap transactions in the U.K. but very little activity in the U.S. And what do you think is driving this? And is there any reason that longevity swaps wouldn't become more prevalent in the U.S. over time?

[Stephen P. Pelletier:]

I think the longevity market may well develop in the U.S. Certainly, the U.K. has been the leader in that. We also look for potential emergence of the longevity market in Canada, and the U.S. may well follow. But no question that, for us and for the market, in general, the U.K. has been the main leader in longevity reinsurance activity.

[Operator:]

Our next question will come from the line of Jimmy Bhullar with JP Morgan.

[Jamminder S. Bhullar:]

A couple of questions. First, on the earnings overall. Obviously, the $2.49 number was pretty strong. You mentioned in the release the DAC unlocking in Individual Annuity, also the Hartford Life integration costs. But wondering if you could just highlight some of the other items, whether they were seasonal or related to mortality, morbidity or non-coupon income that might have inflated the reported earnings numbers. And how do we think about earnings going from third -- second quarter to the third quarter? And I think, Mark, you mentioned some of those in your remarks, but if you could just highlight those. And then, secondly, on the Life Planner business. The Life Planner count was down this quarter, and it slowed -- the growth in that has slowed over the last few years. Can you still grow sales in the Life Planner business in Japan if your Life Planner count growth remains sluggish and remains in the sort of low-single-digit range?

[Charles Frederick Lowrey:]

Sure. Jimmy, let me -- this is Charlie. Let me take the second one first, and then we'll get back to you on the first one. Let me go through the Life Planner count in Japan, and then I might just comment on the rest of the Life Planner count as well. But in Japan, when you think about Life Planners, there are really 3 ins and outs to the business, and you really have to peel back the onion and look at them. So first, there are the recruits and the terminations, how many people do you actually recruit during a quarter and how many people leave for a variety of reasons. And that was about normal. The second is, as you know, we take Life Planners and some Life Planners choose to become sales managers. And the sales manager's job is to recruit, develop and retain Life Planners. And so over time and in different quarters, you'll get a number of different Life Planners who choose to become sales managers. In this particular quarter, we had more Life Planners who want to become sales managers. That is actually a good thing for the future because we expect the increase in sales managers, over time, to help with Life Planner recruiting in the future. So that actually bodes well in the long term. The third area is when Life Planners go to the bank channel. And here, these are the secondies [ph] we actually introduce into the bank channel. And here, what we do is we take lower-performing LPs, or Life Planners, and give them the opportunity to become secondies [ph] in the bank channel. And as you know, we only hire 2 or 3 applicants out of every 100. We're extremely finicky about who we actually choose to become a Life Planner. And we train them incredibly well to perform 3 different tasks, and that's to prospect, present and to close. But if an LP fails, an LP usually fails because he or she can't prospect. That's the toughest part of the job. But in banks, they don't need to prospect. So as secondies [ph] to the bank, they can perform really well over time. And that's what's happened in this particular quarter as well, is we had more LPs go to become secondies [ph] in the bank channel. So as a result, Japan was down some. If these folks hadn't transferred, the growth rate would have been about the long-term average that POJ has, which is sort of 1% to 2%. But the growth rate isn't unlikely to materially accelerate in terms of hiring LPs because of the number of LPs we have and also our maniacal focus on quality. We're not going to change the quality of our hiring. But I think the long-term average has been sort of 1% to 2%. It'll probably be that way in the future as we go forward. And that's really Japan. In Brazil, it's a slightly different story. You have -- Brazil's up a lot, about 25%. So we have over 800 Life Planners. And there, we expect, in some of our other markets, we would grow Life Planners at a more rapid rate.

[Eric Durant:]

Jimmy, it's Eric. Let me just take...

[Jamminder S. Bhullar:]

And actually, just one follow-up on that. The sales have exceeded -- sales growth has done better than the Life Planner count has done recently. So can you keep that up? And do you see further improvements in that business, especially in Japan?

[Charles Frederick Lowrey:]

I think you may see some improvement, probably not on the productivity side, because Life Planners already are at a very high level of productivity. On the premium side, over time, what we've seen is that there has been a sort of constant -- and this is over time. It'll vary from year to year, quarter to quarter. But there has been an increase in premium over time. Not going to be huge, but it will add to the growth rate that you would expect on the Life Planner side.

[Eric Durant:]

Jimmy, it's Eric. Let me have at your first question. We had a number of favorable items in the second quarter that may not be trend-able, and that amounted to about $100 million altogether pretax. They would include, in the Retirement segment, non-coupon investment income about $10 million higher than our average expectation. We had favorable mortality in Individual Life, in the Life Planner businesses and in Gibraltar, again with experience being more favorable than our average expectation. The amounts there are $15 million, $10 million and $11 million, respectively. We had favorable seasonality at Gibraltar, as Mark mentioned, that we estimate was about $30 million in comparison to the first quarter and all else the same in comparison to the third quarter. And we had a favorable level of net expenses in Gibraltar of about $20 million. So again, all else the same, you would expect the expenses to be about $20 million higher in the third quarter than in the second quarter. Again, the sum of all these items is about $100 million. It's actually $96 million or about $0.12 a share.

[Operator:]

Next, we'll go to the line of Tom Gallagher with Crédit Suisse.

[Thomas G. Gallagher:]

Just, first, a quick one on the Retirement business. Just given the visibility that John mentioned to open the call on the deals that have been booked so far in 3Q, in terms of the PRT and the longevity deal, do you have visibility that flows will be meaningfully positive in 3Q? That was my first question.

[John Robert Strangfeld:]

I wouldn't look to characterize our overall Retirement flows in the third quarter, Tom, the way that, for example, the longevity reinsurance deal for BT will show up, as it will show up in our flows and in our account values, but it won't show up on our balance sheet, given the fact that we're not holding assets vis-à-vis that deal. I would also point out that while we're very pleased about the kind of multiple transaction count in the month of July, we think it reflects a good pace of activity and good pace of our profile in that industry. The other 2 transactions, while we're very happy about them, they were significantly smaller. One was a longevity deal for about $1.7 billion, and the other was a funded deal for approximately $350 million.

[Thomas G. Gallagher:]

Okay. And also just to follow up on the Full Service side. Just given some of the items you laid out on the large cases that went away this quarter or lapsed this quarter, would you expect some improvement there? Or is it just hard to tell, given the lumpiness of that business?

[John Robert Strangfeld:]

I think it is, as you say, Tom, inherently lumpy. The -- what we saw in this quarter was actually, on the Full Service side, some pretty good flow in terms of transaction count and number of deals we closed. However, only one of them was above the $100 million mark that we use to characterize large transactions and that one just barely, while we had 4 lapses that we'd characterize as large and a significant portion of that was driven by M&A activity, in other words, our clients being acquired and the business being merged away from us to the other provider. And that's obviously inherently difficult to predict. But we're -- while we still see this as a very, very competitive business and we do not see that there's any near-term change in the -- in those competitive dynamics, we're pleased with the degree of activity that we see in this business. We're pleased with the condition of our pipeline. I think that's reflective of the investments we've made in the business, so that is encouraging.

[Thomas G. Gallagher:]

Okay. And then just one last one for me, if I could shift gears to Japan. The -- just, I guess, more of a broad industry question. We're seeing this with peers, too, that the sales environment seems to be becoming more challenging. I'm not sure if that's a function of the currency-related products that were sold and now those have become less attractive or has the competition just intensified. Can you give a bit more color with what's going on, whether it's on the sales front or the recruiting side?

[Charles Frederick Lowrey:]

Sure. I'll take the recruiting first. We don't see in -- we don't see a lot greater competition there because we recruit a very different kind of individual. So what we look for are generally people who haven't been in the insurance industry before but have sales experience that want to do something different, that want to be more in charge of their own compensation structure. And as a result, we continue to recruit a fair number of people. By a fair number of people, meaning the level that we want. So on the recruitment side, we don't see a lot of competition in the vein in which we operate. In terms of products, I would almost say the same thing. There is a fair amount of competition. There's a lot of competition for individual products in the third sector. And in the first sector, if you say just life insurance and savings, we concentrate on Death Protection. That is the core of what we do, and we see less and less people in the death protection market. In other words, a lot of people are moving over into savings products, and savings products are more competitive in terms of pricing. But in terms of traditional life insurance, in which we operate, we -- first of all, we compete as much on service as we do on pricing. And second of all, we are able to hold our prices. So we still feel pretty good about the margins we're getting and the products that we're selling. We have tapped the brake on certain products, as Mark talked about, whether it's the yen retirement income product or in the bank channel, the single-premium yen-denominated whole life. We obviously slammed on the brakes there, but that was our doing for specific purposes. Much have had to do with business mix as opposed to profitability. So on the profitability side, we still feel very good about what we offer, but more importantly, how we offer it. We -- it's a very different kind of sale. We have a needs-based selling process that we started in Japan 25 years ago, and we still adhere to that. So our core is Death Protection. Our core is leads-based [ph] selling, and our core is quality recruits. And we're continuing with that strategy.

[Operator:]

Our next question comes from the line of John Nadel with Sterne Agee.

[John M. Nadel:]

A question on Gibraltar, and I know upfront in the prepared remarks you talked about, over time, the life consultant count there starting to stabilize. But as you've implemented these higher production standards, particularly for the Edison and Star consultants, are -- where in the ballgame are you? Are you in the late innings there in terms of stabilizing that agent count? Should we expect that to fall significantly from here still or no?

[Charles Frederick Lowrey:]

Yes. I think you will still see it fall a little bit. I'd say we're in late innings, but we may have some extended innings. So let me just expand on that. In terms of the life consultant count, the rate of decreasing is decreasing, if you will. So we're down 11% this quarter. We were down 14% last quarter, 18% the previous quarter and 20% the quarter before that, so 20%, 18%, 14%, 11%. You can do the math. It's going to continue to come down, and we'll bottom out at some point probably late this year, first half of next year. But it's going exactly as we thought. But interestingly, in terms of the metrics, we're doing well. So in other words, the things that we hoped would happen and expected to happen, frankly, are. So John talked about productivity. Productivity has gone back to the pre-acquisition levels, as we had expected it would. 13-month persistency has increased from 89 -- sort of 89.5% back up to 91%. That's not quite up to the level we had before pre-acquisition, but we're getting back to that level. And finally, the policy -- policies are increasing in size. In other words, the in-force face amount has stayed relatively constant, but the number of policies has decreased slightly. And what that means, it gets back to my previous comment, which is this really makes sense, given the focus on Death Protection, as opposed to Star/Edison, which was really pushing more savings products. So our focus is Death Protection. You're seeing that in the metrics coming out, and you're seeing us, again, focus on quality of life consultants. So numbers will continue to come down for a little while, but they are, as you can see, in the bottoming-out phase. And again, that will probably happen in the next -- by the end of the year, first half of next year, something like that. But this is going all -- along exactly as we planned.

[John M. Nadel:]

Okay. That's helpful, Charlie. And then, a question on the Annuities segment. On a core basis, excluding some of these discrete items, it looks like the pretax ROA for that segment continues to run right around 100 basis points. Maybe it's slightly higher than that. So other than equity market performance, is there any reason why that level of ROA for the business should shift from current levels? Would the shift over time, for instance, toward the PDI product, alter this return profile?

[Stephen P. Pelletier:]

John, it's Steve. Equity markets will continue to be the major impact on the ROA going forward, the equity markets, in relation to our expectations. The business is at scale. The business is able to add business flows and account values without significant increase in expenses, so the ROA will continue to benefit from that. The -- in regard to the differentiation between PDI and HDI, those would not make a hugely significant impact on the ROA. There is a differentiation in fee basis between the 2 types of business, but if you're looking at the overall book of business, the -- that would not have a material impact on ROA.

[Mark B. Grier:]

Yes. John, also remember the mix of the in-force. Yes, remember the mix of the in-force. PDI is still small.

[John M. Nadel:]

Yes, understood. And then, if I could sneak one last one in for you. Maybe a little bit more philosophical for you on capital management. I know you've talked in the past about wanting to be a consistent buyer of your shares over time. And clearly, since you reintroduced the buyback, $250 million quarter has been right on. I'm wondering how you square that with the fact that your first half results are arguably the best first half -- best 6-month period Prudential has ever had, yet your stock is down 6% year-to-date against the overall market, which is up 4%, and you're underperforming most of your peers. So I'm just curious why you wouldn't advance the pace of your buybacks when your stock is underperforming the way it is.

[Robert Michael Falzon:]

John, it's Rob. I think the simple answer to that question is that we do not use stock buybacks to express a view on the relevant value of [indiscernible]. Rather, what we do is we look at buybacks as a deployment of excess capital that we generate on an annual basis, and we had sort of a waterfall that we've described and how we like to redeploy that. Obviously, it's, first, to finance the internal growth of our businesses; secondly, to provide for inorganic growth, like our PRT business, for M&A; and also, to provide a return to our shareholders. And we do that through the combination of the dividend and the stock buybacks. So not influenced by perception of relevant value of the stock in terms of the priority of how we would distribute that capital.

[John M. Nadel:]

No, I guess, I'd just -- I'd ask you guys to consider it. There are times when investors will be more interested in building positions in your stock than at other times, and I think this would be one of those times.

[Operator:]

Our next question comes from the line of Jay Gelb with Barclays.

[Jay Gelb:]

Mark, can you update us on what you view as the prospects for passage in the House of the bill to create a separate capital standard for the non-bank SIFI insurers?

[Mark B. Grier:]

Well, handicapping the political process is not my cup of tea. I will point out that there's a lot of momentum, significant sponsorship from both sides of the aisle and endorsements of the idea from a lot of different places, not just confined to Congress. But I can't tell you what's involved in making this happen and how that might play out.

[Jay Gelb:]

Okay. On a related issue, the treatment of corporate bond investments for life insurers without the ability to apply ratings from the rating agency seems to be something that needs to be addressed over time. Do you have any ideas on how that could be taken care of?

[Mark B. Grier:]

Well, let me start, and then I'll hand it over to Rob. There are approaches to this credit evaluation and link of solvency and capital that reflect the things that we think are important, particularly the probability of default and loss given default. And I'll let Rob add some comments to that.

[Robert Michael Falzon:]

Yes. So first and foremost, we expect that credit quality-sensitive capital construct for insurers would have to evolve. It would be imprudent for something other than that to manifest itself in sort of whatever regulatory outcome occurs here. With respect to the reliance on the rating agencies, there is a number of ways to do a workaround around that. Specifically within our own organization, we have internal ratings for all of our privates, including both the corporate bonds and the mortgages that we underwrite. And on the public side, we have mechanisms for being able to back into equivalent ratings without having to have to rely on the rating agency ratings themselves. And I suspect other institutions can get to the same place as well. So we don't view the lack of our reliance -- or the lack of the ability to rely specifically on the rating agencies to be -- as being an impediment to having a credit-sensitive metric ultimately put in place.

[Jay Gelb:]

Okay. So that should be able to have a workaround related to -- for the regulators treating all bond investments the same, regardless of rating, at least from an external rating standpoint?

[Robert Michael Falzon:]

We certainly would think so.

[Operator:]

Our next question comes from the line of Steven Schwartz with Raymond James.

[Steven D. Schwartz:]

A couple of questions going back to the BP [ph] pension -- longevity deal, excuse me. First, I'm flashing [ph] on Met's [ph] Investor Day and former CEO talking about problems in the U.K. with regards to regulation in that marketplace. It has become -- it had become significantly more difficult, significantly more conservative. Is that something that has not occurred on the longevity side?

[Stephen P. Pelletier:]

Steven, it's Steve Pelletier. I'd make a couple of comments. First of all, remember that in longevity, we are focusing purely on just that, on longevity reinsurance and not taking on the assets. Second, I'd emphasize the point that in these transactions, both the BT deal and the other longevity deal that I mentioned, we are operating strictly on an offshore basis. And that is a key distinction there. The regulatory picture is very different for us given that posture.

[Steven D. Schwartz:]

Okay, got it. And then, just one more quick one on the accounting for the longevity deal. I think you said that it was going to be in your flows, but -- the $27 billion I assume, but not on the -- not in your balance sheet. How will this be reflected in the earnings statement? Is it a premium and an associated loss? Or any ideas?

[Robert Michael Falzon:]

It's Rob. Essentially, you'll see a net fee coming through each quarter, representing the -- sort of the risk premium fee being applied.

[Steven D. Schwartz:]

Okay. Plus whatever the payments are, I guess. Or is that netted out?

[Robert Michael Falzon:]

Well, the payments will be in exchange of the premium payments and then any benefit payment outflows that we need to make in accordance with fulfilling our obligation.

[Operator:]

We'll take our final question from the line of Eric Berg with RBC Capital Markets.

[Eric N. Berg:]

I just had one question that I'm hoping you can elaborate on, something that perhaps we've touched on in the past in this forum, which is the changing mortality tables, or the changing lifespan tables that are coming in the pension area. While I realize that, that's not going to affect company's cash immediately as they restate their liabilities upward, it's going to have the effect of, all else the same, increasing underfunded-ness as the Society of Actuaries table is instituted, I guess, at the end of this year. My question is, what's your best sense of how plan sponsors will respond? Will they adjust to this change by just putting more cash into their plan? Or will they say, "We've had enough of this underfunded-ness," and they'll do more pension risk transfers? How will the typical CFO or Treasurer respond to this change in mortality table?

[Stephen P. Pelletier:]

Eric, it's Steve. I assume there will be some degree of response that covers both the bases you mentioned. But we certainly do look for the new mortality tables to, across -- pretty much on an overall basis, increase propensity to transactions. We think that aside from funding levels, there are a couple of -- as we highlighted on Investor Day, there are a couple of fundamental things going on in the marketplace in terms of how plan sponsors look at this liability. One is the new mortality tables, and the other is PBGC premium. And so we think that the ongoing trends on both those fronts will increase propensity to transact.

[Mark B. Grier:]

And this highlights longevity risk, and one of the big motives for transacting is the pure risk dimension. And this kind of puts it right in front of everybody again.

[Operator:]

And ladies and gentlemen, today's conference call will be available for replay after 1