Prudential Financial Inc. (NYSE:PRU) Q4 2008 Earnings Call February 5, 2008 11:00 AM ET
Executives
Eric Durant – Senior Vice President of Investor Relations
John Strangfeld – President
Richard Carbone – Chief Financial Officer
Ed Baird – Executive Vice President
Bernard Winograd – Executive Vice President
Peter Sayre – Executive Vice President
Analysts
Nigel Dally – Morgan Stanley
Suneet Kamath – Sanford Bernstein
Jimmy Bhullar - JP Morgan
Andrew Kligerman - UBS
John Nadal - Sterne Agee
Tom Gallagher - Credit Suisse
Ed Spehar - Banc of America
Eric Berg - Barclays Capital
Darin Arita - Deutsche Bank
Operator
Ladies and gentlemen thank you for standing by. And welcome to the Fourth Quarter 2008 Earnings call. At this time all participates are in a listen only mode.
Later we will conduct the Question and Answer Session. Instructions will be given to you at that time. (Operator instructions). And as a reminder today’s conference call is being recorded. I would now like to turn the conference over to Mr. Eric Durant. Please go ahead.
Eric Durant
Thank you Cynthia and thanks to all of you for joining us this morning. We always welcome the opportunity to tell you our story, to hear your questions and we hope to provide responses that are helpful to you.
Our presenters today are John Strangfeld, Rich Carbone and Mark Grier. And for the Q and A they will be joined by Ed Baird, Bernard Winograd and Peter Sayre. John?
John Strangfeld
Thank you, Eric and good morning everyone. We appreciate you joining us and we appreciate your interest in Prudential.
First a general comment about the quarter relative to what we said yesterday. The fourth quarter results are largely what we anticipated and presented to you in December. I say largely for two reasons. First, we identified then but did not quantify the goodwill JB write-offs.
Outside of the goodwill JB write-offs our results were actually modestly better than we indicated in December. Second, our year end liquidity ended a bit stronger than we had shown. We will talk about this more a little later.
Now regarding the fourth quarter earnings, anticipated or not, we’re not satisfied with these results. Yes, the market conditions were horrendous for any business sensitive to the public markets.
What we see is unsatisfactory and frankly, frustrating is that the extreme market impact on some of our businesses completely overshadowed the fact that most of our businesses had pretty darn good fundamentals. In fact, businesses representing nearly half of our normalized earnings actually produced record results.
Our response to this challenging environment is not to simply ride this out but to actively manage through it. Of course, there’s a lot of judgment involved in this process because on the one hand we do not perceive everything that’s going on as a trend that’ll go on forever.
As such we don’t want to manage the short term in a manner that does not – we want to manage the short term in a manner that does not compromise the long term.
On the other hand, where we have thought appropriate we have reduced the risk profile of certain products and activities in what we believe a very material ways that will reduce volatility in the future , even in the event of another extreme environment.
The most notable example of this is our annuities product re-designed. Which we described at investor day and is fully reflected in all new annuities product sales. In these times we also recognize investor concerns with capital and liquidity. And Rich will walk you through the details in a few minutes.
The headline is that we believe we have resources to maintain RBC and solvency margins for our insurance companies at double A levels even under stressed equity market scenarios similar to those presented at our presented at our investor day.
We have ample liquidity to meet our commitments, as well. Now let me take a moment on the long term view. We continue to see Prudential as having a balanced set of businesses and a balanced set of risks. This balance was especially evident last year as our international insurance operations achieved record earnings.
Among domestic businesses, group insurance also recorded its best ever result and retirement held up well. While more market sensitive businesses sustained sharp declines or in the case of annuities, a loss.
But it’s not just a mix. It’s also the quality of these businesses. Our businesses are good businesses. They help people manage risks and that’s more relevant today than ever. They serve attractive markets and we are competitive in those markets as our solid sales and flows last quarter and last year would reflect.
Bottom line, we’re weathering the storm and we’re doing it by tacking our way through it not simply down the hatches. We remain confident that we can manage through this and emerge in better shape than most and stronger for it. That’s our expectation and our aspiration is to gain ground.
However, in the near term we face continuing challenges in this extraordinary environment as everyone else does. And considering current financial market conditions we continue to expect Prudential’s 2009 common stock earnings per share will fall within the range of $5.25 to $5.65 based on adjusted operating income.
Our guidance assumes appreciation of 2% a quarter in the S&P 500 commencing with its close as of December 31, 2008. Now Rich and Mark will walk you through the details and then we welcome your questions.
Eric Durant
But before Rich begins, this is Eric Durant. I know Rich Carbone and I am not Rich Carbone. But I forgot to give you a commercial before John’s talk and I’ll do that now. In order to help you to understand Prudential Financial we will make some forward looking statements in the following presentation.
It is possible that actual results may differ materially from the predictions we make today. Additional information regarding factors that could cause such a difference appears in the section titled “Forward Looking Statements and Non-GAAP Measures of our Earnings Press Release for the fourth quarter 2008 which can be found on our website at www.investor.Prudential.com.
In addition in managing our businesses we use a non-GAAP measure we call Adjusted Operating Income to measure the performance of our financial services businesses. Adjusted operating income excludes net investment gains and losses as adjusted and related charges and adjustments, as well as, results from divested businesses.
Adjusted operating income also excludes recorded changes in assets values that will ultimately accrue to contract holders and recorded changes in contract holder liabilities resulting from changes and related asset values. The comparable GAAP presentation and the reconciliation between the two for the fourth quarter are set out in our earnest press release on our Website.
Additional historical information relating to the company’s financial performance is also located on our Website. So here’s the real Rich Carbone.
Richard Carbone
Thanks, Eric. And good morning everyone. I’m going to begin with a fourth quarter adjusted operating income. I’m going to talk about net income. I'll discuss capital and liquidity. I’ll go into some of the Goodwill write-offs and the impairments of of JB’s in some detail.
And all of the references that I’m about to make are, of course, related to the financial services businesses. Now as you’ve seen from yesterday’s release we reported a loss of $2.04 for common share for the fourth quarter based on adjusted operating income. This includes a charge of about $1.32 per share for impairments, of goodwill and investments in operating joint ventures.
Excluding the impact of these impairments we would have reported a loss of about $0.72 per share. This compares favorably to the guidance that we provided at our investor day in December when we were expecting a loss of between $1.10 and $1.30 per share.
Now to be fair that was that was an assumption of an S&P of 800 at year end. But to also be fair it was before impairments of goodwill and investments in operating joint ventures. Adjusted operating income for the fourth quarter of 2007 was $1.74 per share.
The operating results of our businesses are once again substantially impacted by various discreet items which are in most cases closely tied to unfavorable financial market conditions. As I just mentioned our guidance range at investor day assumed that the S&P index would close at 800 on December 31st.
The actual close of the S&P at year end was 903. Still down 22% for the quarter but less punitive to DAC amortization and other market driven measures in our assumptions.
On the other hand, as we pointed out on investor day, and I just mentioned our guidance did not include any impact for the impairments of goodwill or investments in operating JVs since it was premature to estimate this impact before conditions as of December 31st were known.
At end year we had about $1 billion of goodwill subject to impairment testing and another $600 of investments in joint ventures in our international investments business which needed to be evaluated.
Now next I’m going to take you through the goodwill evaluation process and how in a way we arrived at these write-offs. Testing for goodwill impairments is a two step process performed annually, generally at the segment level.
First we compare the estimate fair value of the entire business based on current market conditions and estimated future cash flows to our carrying value.
If the carrying value exceeds this fair value estimate we then go through a process similar to purchase accounting to measure the goodwill that we would record if we purchased the entire business today.
If our recorded goodwill is higher than that we have to write-off the difference. For operating joint ventures we also estimate a fair value based on current market conditions and compare this carrying value – to which we compare this carrying value, excuse me.
If we find that the carrying value is higher than this fair value and determine that the decline is other than temporary, again we have to write-off the difference. Current market conditions were a significant driver in our impairment analyses.
In addition to the negative impact of projected cash flows we are required to consider earnings multiples that would apply in today’s market, as well as, current market based discount rates on future cash flows which are higher than the discount rates we would applied in more normal markets.
Impairments of goodwill and joint venture investments amounted to $653 million on a pre-tax basis. This charge reflects the write-off of the entire balances of goodwills for three of our areas.
The variable loading business we acquired from Allstate, our international investments business and our real estate and relocation business, as well as, a portion of our operating joint venture investments in our international investments business.
We included all of this in our fourth quarter adjusted operating income. I would note that these impairments have no impact on our statutory capital position.
Now I’ll go through the remaining discreet items that affected the adjusted operating income results for the fourth quarter.
In our individual annuity business we increased amortization of deferred policy acquisition and other cost producing a charge of about $0.89 per share and we increased our reserves of guaranteed minimum death and income benefits resulting in a charge of $0.73 per share.
This substantial market decline in account values for the fourth quarter leading to expected future lower fees and higher expected benefits in addition to the unfavorable experience in the quarter was responsible for these charges.
We no longer apply a (inaudible) at the market performance in the annuity business. Or I should say we will no longer apply a (inaudible) for market performance in our annuity businesses.
So our updates of amortization and reserves take into account the entire market related decline and account values for the quarter as we re-project future fees and benefit costs similar to an annual unlocking.
In addition while we use a reversion to the mean approach to this projection that assumes some recovery and account values over a four-year look forward period the benefit to our calculations is limited because we apply a cap in the overall gross returns on the account values.
Also in the annuity business, hedging breakage reflecting the highly volatile financial markets of the fourth quarter resulted in a net charge after DAC of about $0.23 per share. In our asset management business, results from fixed income and equity investments within our proprietary investing activities resulted in losses equal to $0.27 per share.
Our individual life insurance business also recorded an increase in the net amortization of DAC and related costs of $0.19 per share as a result of the market decline in the fourth quarter. The mechanics are similar to the Annuity Business meaning in the current quarter charge is determined like an annual DAC unlocking.
There were a few one-time positives. Our retirement businesses did benefit from a reserve refinement on our traditional group Annuity Business, based on an accrual study of the beneficiary population to drive the length of time that we expect to pay benefits. This contributed about $0.06 per share on the positive.
In our International Insurance Business, the sale of Florida branch office at (inaudible) contributed another $0.02 per share and we repurchased about $850 million of convertible debt issued in 2007, which has a put date of June 2009 at a discount resulting in income of $0.07 per share, less that $3 billion total convert that is due in June, again we repaid $850 in December.
In total, the goodwill and joint venture impairments and the other discreet items that I mentioned had a net unfavorable impact of about $3.50 on our earnings per share for the fourth quarter. Now bear in mind that these declines in account values during the fourth quarter in several of our domestic businesses will continue to affect our results going forward and the full year effect of that will be felt in 2009.
So adding back all these items I mentioned to our recorded results for the quarter to arrive in a near term run rate may not be a useful or accurate exercise in these markets.
Mark will discuss our business results in much greater detail in a moment. Now moving on to our GAAP results, we reported a net loss of $1.6 billion or $3.85 per share for the quarter or $3.85 per share for the quarter. This compares to net income of $792 million or $1.75 per share a year ago.
Our current GAAP pre-tax results include net realized investment losses of $511, this compares to realized losses of $91 a year ago. Net realized losses of $511 for the quarter have three main components.
There are $1.2 billion of impairments on fixed income, and equity investments, and losses from sales of credit impaired investments. Three hundred and four million representing the mark-to-market declines for our externally managed European fixed income investments, and gains on derivatives used in hedging – in our hedging and duration management programs, amounted to roughly $900 million in the quarter. And these partially offset the above losses.
The $1.2 billion of impairments and credit related losses on sales include $570 million for fixed maturities, $601 million for the equities, and $21 million from other investments. The $570 million for fixed maturities reflected $506 million of impairments, including $400 million that were credit related and $64 million for sales of credit impaired securities, $214 million of these losses were on sub-prime paper with the remainder primarily on corporate holdings in services, manufacturing, and finance sectors.
The credit related impairments and losses on sales totaling about $460 compared to a range of $300 to $400 million that we had estimated for credit losses on our Investor Day back in December.
The $601 million of equity impairments came mainly from declines in values reaching 12 months in duration and relate primarily to Japanese equities and domestic mutual fund holdings that are invested in high-yield bonds. For equities we record our other than temporary impairments when there is a decline in value of 50% or more for six months or for any decline in value that persists for 12 months.
We also impair equities for declines in value if we don’t intend to hold them until recovery. The $601 million of equity impairments compares to a range of $300 to $400 million that we had estimated at Investor Day and reflects the continued decline in credit spreads for the bonds underlying domestic mutual funds, as well as, the decline in Japanese equity securities.
The $304 million negative market and our externally managed European and fixed income investments is essentially a result of credit spread widening similar to what had taken place in the United States.
We hold about $1 billion of these investments through a structure that requires us to record market value changes through the income statement rather than through unrealized investment gains and losses as we move it for direct holdings of bonds. About 90% of the underlying securities are investment grade.
The roughly $900 million of realized gains recorded as a result of increases in market value of derivative positions during the quarter came from a decrease in the base interest rate that drives the value of the derivative positions we hold as part of our management of interest rate risks for our international and domestic portfolios.
Our GAAP results for the quarter also included $230 million of pre-tax losses from the divested businesses mainly driven by a loss from our share of the Wachovia Retail Brokerage joint venture, as it reflected absorption of cost related to an earlier settlement with regulators concerning auction rate securities. As well as transition costs for the integration of A.G. Edwards. Now I would like to turn to our capital and liquidity picture.
First, let's look at capital. Risk-based capital for Prudential Insurance, our 2008 statutory financial statements will not be finalized until the end of February. However based upon where we are today we would expect to print an RVC ratio for Prudential Insurance comfortably above 400 and consistent with the double A balance sheet strength.
But somewhat below the level of 400 that I had estimated (inaudible) – oh I'm sorry, but somewhat below the level of 450 that I had estimated at our Investor Day in December, based on an S&P close of 900 at year end.
The primary driver of this short fall from an RVC of 450, at an assumed S&P of 900, was credit migration in the latter part of the year in excess of what we had anticipated. As we discuss that Investor Day we utilized internal resources to bolster the capital position of Prudential Insurance. Most significantly the Wachovia Joint Venture Investment, which was contributed at a book value of $2 billion.
Other international insurance companies are also expected to have sovereignty margins at or above a double A standard as of their fiscal year end which is March 31st, 2009.
As we look ahead to 2009, we have the financial flexibility to manage our capital position of our insurance subsidiaries and environment of continued financial market dislocations. We have additional internal resources that we can contribute to insurance companies if necessary through intercompany transactions.
The gain we expect on exercise of our put for the Wachovia JV, which we estimated at roughly $1 billion after tax – $1.7 billion after tax and that is the gain not the gross, is still off balance sheet.
Since our current RBC position takes credit only for the book value of the JV, which is the $2 billion that I just mentioned. We are continuing to evaluate alternatives for possible realization prior to January 2010.
We continue to believe it is ill advised to quantify an enterprise measure of excess available capital with the financial market conditions changing so rapidly and frequently. And the market for hybrid securities is not functional. However, holding capital at a double A standard would suggest no on balance sheet excess capital at year end. And as I said at investor day we benchmark this measure at a double A standard or said another way a 400 RBC target at Prudential Insurance Company of America and several of our other subs.
It is premature to estimate RBC levels for 2009. The closing S&P level, credit migration, derivative gains and losses, internal capital management action, and the timing of the realization of the Wachovia Joint Venture will all play into this outcome.
Now let's turn to the liquidity. At year end we will have $4.4 billion of cash and short-term investments on the parent company balance sheet. You know, when we look at the parent company cash position we exclude any amount of commercial paper and short-term intercompany borrowings.
This was the basis on which I described our projected year end capital – cash position on investor day. So while the parent company balance sheet will show $4.4 billion of cash at year end you should think about this net of those two items. That is net of the CP and net of the intercompany borrowings, which would bring the parent companies cash down to an adjusted basis $2.6 billion on hand versus the $2.5 billion estimate I had made in December.
Now to make these numbers apples-to-apples we need to keep in mind we did repurchase $800 million of the 2007 converse. (Inaudible) in June 2009. So our cash position at December 31st is really $900 million better than the estimate I gave you on investor day.
In December we also repaid $2 billion of the convertible debt issued in 2006 when it was put to us as expected. As I mentioned earlier, we repurchased about $850 million of our $3 billion convertible issued in 2007 at a discount. We have adequate resources to pay the remaining $2.1 billion of that issue as it is put to us in June of this year.
Other than the remainder of the $3 billion convertible, which would be the $2.1 billion I just mentioned, and an $816 million bridge loan, the nominated and yen that we expect to refinance internally this month we have no significant debt securities at the parent company until 2011.
We have planned our cash flow for 2009 on our assumption that the dividend capacity from Prudential Insurance the parent company would be constrained. Excluding capital market availability the parent company has sources of cash from continued repayment of intercompany borrowing supporting subsidiary activities that we can wind down as well as return of capital associated with those activities.
Our commercial paper programs both of our commercial paper programs are qualified for and our participating in the Federal Government Commercial Paper Funding Facility or CPFF. By year end commercial paper outstanding amounted to $1.2 billion for the parent company including $600 million under CPFF, and $4.4 billion for Prudential Funding including $450 million under CPFF.
Based on CPFF guidelines the program that accept up to $1.3 billion of parent company paper and $9.8 billion of Prudential Funding Paper, that's the PICA-sub. The Federal Reserve announced earlier this week that the CPFF program has been extended through the end of October 2009.
Now the membership of Prudential Insurance and the Federal Home Loan Bank of New York, which commenced in June of last year, provides additional liquidity. Under this program financial insurance can pledge up to 5% of its admitted assets excluding separate accounts to collateralize borrowings.
As of December 31st, our estimated borrowing capacity under this program considering the statutory limit and holdings of qualified securities at Prudential Insurance was $6.3 billion. Among the qualifying securities our AAA sub-prime paper held by Prudential Insurance, which is PICA the acronym I used a moment ago.
We consider this an attractive form of financing and have $3 billion of outstanding borrowings under this program as of year-end. This leaves us with $3.3 billion of uncapped borrowing capacity and further liquidity in Prudential Insurance.
Our security lending program amounted to $7.5 billion for the financial services businesses as of year-end. We have generally limited this program to liquid securities that are requested by counter parties rather than pushing securities out to the market. And have carefully managed the maturity risk. We estimate that as of year-end we have an additional $14 billion of lendable securities within the financial services business.
And lastly, we have $4.3 billion of committed credit lines that may be accessed by the parent company Prudential Insurance or Prudential Funding subject to satisfaction of customary conditions. The agreements expire in late 2011 through 2012. Now Mark will comment on the investment portfolio for the financial services business and he will review more detail our business results for the quarter.
Mark Grier
Thank you, Rich. Good morning, good afternoon, good evening, or good night. As we've stated in the past we've had a cautious view of the U.S. credit markets for several years. And we have managed our portfolio accordingly.
As a result we are coming into this difficult environment with a deep offensively positioned diversified portfolio in which we have purposely selected our risks and adhered to risk limits in order to avoid undue concentrations.
We continue to believe that today's market values from many classes of investments are in effect a negative bubble with prices disconnected from underlying cash flow prospects. We should all be sensitive to the fact that many financial institutions are reporting evaluations on assets that the Treasury and the Federal Reserve have repeatedly said can't be valued. Volatility and uncertainty remain high.
As a long term investor with primary focus on matching the cash flow characteristics of our liabilities these cash flow prospects are much more relevant to us than market value changes during the period of ownership. With that said, I'll start with our fixed maturity portfolio.
Gross unrealized losses on fixed maturities in our general account stood at $11.3 billion at year end. About 80% of the total $11.3 billion gross unrealized losses relate to investment grade securities. We have the intent and ability to hold these securities to recovery and the market driven declines and value do not have a negative impact on our statutory capital position.
Gross unrealized losses increased by $5.4 billion from September 30th, reflecting the accelerated spread widening that was experienced across virtually all classes of fixed income securities during the fourth quarter. About $3.3 billion of our increase came from corporate securities across virtually all sectors and most pronounced in manufacturing.
Another $1.1 billion of the increase came from commercial mortgage back securities where spread widening resulted in declines and value for virtually all holdings regardless of quality. The remaining $1 billion of the increase came from asset back securities including our sub-prime holdings.
Roughly $1.8 billion of total gross unrealized losses at year end relates to sub-prime holdings. An increase of $600 million from the third quarter as the market for these securities weakened when expected government purchases under the TARP program failed to materialize and the residential housing market continued to decline.
Total sub-prime holding were $5.4 billion at the end of the quarter comprising less than 3% of our portfolio. Our holdings based on amortized cost are down roughly $500 million from the third quarter reflection just under $325 million of pay downs and the $214 million of impairments and credit related losses on sales that Rich mentioned.
Virtually all of our sub-prime holdings were priced as of the end of the quarter using third party pricing services. We are continuing to monitor delinquency rates and cash flows for collateral underlying our sub-prime paper. Our estimate of potential losses of principle from sub-prime holdings under stress scenarios has not changed substantially during the fourth quarter.
And we believe our GAAP results have already absorbed most of the exposure through the other than temporary impairments we have recorded for these securities. At December 31st, the general account fixed maturity portfolio included $8.5 billion of commercial mortgage back securities at amortized cost. Over 94% of these holdings have AAA credit ratings. For commercial mortgage back securities there are three distinct classes within the AAA category and super senior AAA securities with 30% subordination representing over 80% of our holdings stand at the top of the cash flow structure.
These super senior AAA securities are further stratified in the shorter and longer durations.
Our purchases of recent vintage commercial mortgage-backed securities have focused on the shorter duration super senior tranche and about $4.6 billion or 54% of our holdings have cash flow priority which we believe would result in full repayment before the structures reach 30% cumulative net losses.
Our exposure to CDOs is limited. General account holdings at December 31 are about $500 million, mostly our own, with virtually no underlying subprime exposure in the CDO mix. We also have very limited exposure to hybrid securities which amount to less than one half of 1% of the general account portfolio.
Based on amortized cost, non-investment grade securities comprised about 7% of the $128 billion fixed maturity portfolio at year-end, essentially unchanged from last quarter. Gross unrealized gains on the fixed maturity portfolio were $4.7 billion at December 31, up $2.3 billion from a quarter earlier, reflecting interest rate related increases in market value, bringing net unrealized losses to $6.6 billion at year-end.
One last comment on the investment portfolio, we had $22 billion of general account commercial mortgage and other loan holdings as of year-end. While commercial real estate is entering a down cycle, we believe that we are well prepared for it. These are mortgages that we originate and our holdings reflect and emphasis on high underwriting standards.
At December 31, the average loan-to-value ratio using conservative capitalization rates for our commercial mortgage holdings is 58%, and the average debt service coverage ratio is 1.9 times. The mortgage portfolio is seasoned and well diversified by geography and property type.
Now I'll cover our business results for the quarter. As you've seen in our earnings release, we've modified our domestic business divisions to better reflect the way we think about our business today. Our U.S. retirement solutions (inaudible) management division includes our annuity, retirement and asset management business and our U.S. individual, life and group insurance division includes our domestic protection businesses.
I'll abbreviate my comments on business drivers in order to leave more time for questions and answers, but if I neglect to cover subjects of interest to you, we'll be happy to address them in the question and answer session.
I'll start with our U.S. businesses. Our annuity business reported a loss of just over $1 billion for the fourth quarter, compared to adjusted operating income of $171 million a year ago. The current quarter loss is driven by four market-driven discreet items in the quarter that Rich mentioned with an overall negative impact of $1.1 billion.
Current quarter results include accelerated amortization of deferred policy acquisition and other costs amounting to $498 million reflecting market performance, essentially a DAC unlocking like we had in the third quarter.
Current quarter results also include charges of $409 million to strengthen our reserves for guaranteed minimum death and income benefits. This increase in reserves is based on the same projection of where account values will be over time that we use for DAC starting with the year-end balances as Rich described.
In setting these reserves, we estimate the extent to which our guarantees will be in the money over time and apply a dynamic lapse assumption that considers the tendency of contract holders to keep their annuities in force when the guarantees are in the money, since we expect more of the guarantees to turn into claims than if these customers lapsed at average rates.
In addition, the adjusted operated income we report also includes breakage between changes in the values of our living benefits guarantees and our hedging instruments. With the continued turbulent financial markets in the fourth quarter, we experienced negative breakage of $130 million after related amortization of DAC. To keep this breakage in perspective, I would note that we are hedging exposure on about $21 billion of account values as of year-end.
Lastly, we wrote off the entire $97 million balance of goodwill from our acquisition of Allstate's variable annuity business. The remainder of the decline in adjusted operating income for the annuity business from a year ago came from lower fees in the current quarter due to the market-driven declines in account values with spread income from funds rebalanced to the general account a partial offset.
Our gross variable annuity sales for the quarter were $2.1 billion compared to $3 billion a year ago. We feel that our gross sales have held up quite well in relation to the overall market. We are also continuing to enjoy positive net sales which were roughly $500 million for the fourth quarter and $2.2 billion for the year.
With our transition to products with the highest daily or HD features, a growing proportion of our account values with living benefits, 54% at year-end compared to 37% a year earlier, are essentially self-hedging as to equity market risk since the customer agrees to our daily rebalancing from the selected funds to fixed income investments in support of the guarantee when there are equity market declines.
In addition to reducing our risk profile and decreasing our exposure to changes in hedging costs, this rebalancing has protected our customers from substantial account value declines through recent financial market conditions. About $14 billion of account values were transferred to fixed income investments under this program during the past year.
The retirement segment, reported adjusted operating income of $133 million for the current quarter compared to $131 million a year ago. As Rich mentioned, current quarter results benefitted by $33 million from refinement of our reserve for a block of traditional group annuity business based on an actuarial review of the beneficiary population that drives the length of time that we expect to pay benefits.
Stripping that benefit out of the comparison, results for the retirement business were $31 million below the year ago quarter primarily as a result of lower fees due to market value declines in customer account values. These market value declines more than offset the impact of positive full service net flows for the past four consecutive quarters which amounted to roughly $4 billion for the year.
Current quarter full service gross sales and deposits were $6.5 billion, bolstered by two major case wins totaling $2.4 billion. Our full service persistency is over 95% and our stable value funds have proven especially attractive to plan participants in the recent market environment, growing by $1.5 billion in the second half of the year and reaching $35.3 billion at year-end.
The asset management segment reported a loss of $69 million for the current quarter compared to adjusted operating income of $198 million a year ago. In proprietary investing, we co-invest with our institutional clients in funds we manage including fixed income, public equity and real estate strategies, and we record changes in the value of our interests in the investments.
Current quarter results included mark-to-market driven losses of about $150 million from fixed income and equity investments as Rich mentioned. This compares to income of about $30 million from these investments a year ago.
In addition, performance based fees were down from the level of a year ago when we benefitted from a stronger commercial real estate market. We registered net inflows of third party institutional funds of more than $9 billion for the year with positive contributions from equities, fixed income and real estate investments.
Adjusted operating income from our individual life insurance business was $9 million for the current quarter compared to $129 million a year ago. Most of the negative swing in results came from the higher net amortization of deferred policy acquisition costs and other items together with related costs driven by unfavorable separate account performance in the current quarter as (inaudible).
We estimate that these market-driven costs had a negative impact of about $105 million in comparison to the year ago quarter. The remainder of the decrease came almost entirely from the lower level of fees that tracked the market-driven decline in average separate account balances for our variable life business. Market value declines over the past year more than offset positive net flows into our separate accounts resulting in a $6 billion decline in separate account balances compared to a year ago.
The group insurance business reported adjusted operating income of $69 million in the current quarter compared to $66 million a year ago. More favorable group life claims experience in the current quarter was partially offset by a lower (inaudible) results.
Turning to our international businesses, within our international insurance segment, Gibraltar Life's adjusted operating income was $160 million for the current quarter, up $39 million from a year ago. The increase came mainly from improved investment margins reflecting the strategies we implemented to lengthen maturities and increase U.S. dollar investing based on our economic investment in Gibraltar and from continued growth of our book of U.S. dollar fixed annuity business.
Part of the benefit from duration lengthening both in Gibraltar and the Japanese Life Planner business came from some interest rate risk management risk derivative positions that we have now terminated in view of recent market conditions.
Gibraltar's current quarter results also benefitted from more favorable mortality experience on comparison to a year ago and from the $9 million income from the sale of a branch office property that Rich mentioned.
Sales from Gibraltar Life based on annualized premiums in constant dollars were $99 million in the current quarter compared to $96 million a year ago. The sales increase was driven by the bank channel where we are starting to register sales of our life insurance protection products.
Our Life Planner business, the international insurance operations other than Gibraltar Life, reported adjusted operating income of $261 million for the current quarter, up $29 million from a year ago. The increase tracked continued business growth in Japan.
The Life Planner operations also benefitted from improved investment margins and more favorable mortality. Sales from our Life Planner operations based on annualized premiums in constant dollars were $183 million in the current quarter compared to $210 million a year ago.
The decline was driven by lower sales in both Japan and Korea. We believe that sales were negatively impacted for virtually all United States-based companies in these markets, particularly in the early part of the fourth quarter, from the concerns arising from the well publicized financial difficulties of one company.
Foreign currency translation was not a major factor in the comparison of our international insurance results due to our currency hedging programs. The international investment segment reported a loss of $434 for the current quarter compared to an adjusted operating income of $40 million a year ago.
The current quarter loss resulted from the impairments of joint venture investments and goodwill that Rich mentioned. We reduced the carrying value of several joint venture interests by a total of $316 million. The goodwill write-off of $123 million represented the segment's entire balance of goodwill.
(Inaudible) impairments out of the comparison, adjusted operating income from the international investment segment was down $35 million from a year ago reflecting lower contribution from our asset management operations in Korea.
Corporate and other operations reported a loss of $264 million for the current quarter compared to a $52 million loss a year ago. The current quarter loss included a charge of $117 million to write off all of the goodwill for real estate and relocation business. Excluding that charge, the real estate and relocation business reported a loss of $42 million for the current quarter compared to an $8 million loss a year ago.
Both the goodwill charge and the greater loss reflect the challenging market conditions in the residential real estate market and a lower level of corporate relocation activity. Absent the impact of the real estate and relocation business, the loss from corporate and other results from the quarter was $105 million compared to a loss of $44 million a year ago.
The main drivers of the increased loss were (inaudible) expense, reflecting our issuance of $1.5 billion of hybrid securities in mid 2008 and expenses in the current quarter as the market downturn triggered our obligations to policy holders under previous sales practices settlements. The gain we had on the early redemption of about $850 million of our convertible debt amounting to $41 million pre-tax was a partial offset.
And briefly on the closed block, the results of the closed block business are associated with our class B stock. The closed block business reported net income of $74 million for the current quarter compared to $79 million a year ago.
The current quarter results include $354 million pre-tax net realized investment gains as mark-to-market on derivatives of $751 million together with realized gains from portfolio activities more than offset $432 million of impairments and credit losses in the quarter. We measure results for the closed block business only based on GAAP.
To sum up, our reported results in market values in our investment portfolio continue to be negatively affected by the difficult financial markets. We have positioned our investment portfolio defensively and we remain comfortable with its risk profile.
Our capital position remains consistent with AA ratings objectives for our insurance subsidiaries measured at an RBC of 400 as of year-end 2008. We continue to feel confident that we have the capital resources to manage our insurance company balance sheets to AA standards through continued financial market dislocations.
We have ample liquidity to fulfill our commitments and the balanced mix of risks and businesses that we've built since becoming a public company leaves us in a good position to manage through the current environment and emerge with our competitive position intact or enhanced. Thank you for your interest in Prudential, and we look forward to hearing your questions.
Question-and-Answer Session
Operator
(Operator instructions). The first question will come from Suneet Kamath from Sanford Bernstein. Please go ahead.
Suneet Kamath – Sanford Bernstein
Thank you and good morning. Two questions please, first on your guidance, if you think back to Investor Day, I think your market average level was a lot lower than what your current assumptions are, I think was $850 back then and I think now it's something closer to $940 on the 2% market appreciation assumption.
I'm just wondering what the logic is there. I'm not sure that the market is (inaudible) different from where it was in terms of absolute levels back in early December, but for some reason you decided to change that assumption, so I'm just curious about that.
And then second, on the Wachovia put option, I would say there's been some talk in the press about Wachovia securities perhaps combining their retail brokerage business with that of another company. I'm not asking you to predict what's going to happen, but if something like that conceptually does happen, what happens to your put option? In other words, who becomes the counterparty to that? Does it stay with Wells or does it travel with the business? Thanks.
Mark B. Grier
This is Mark. Let me tackle both questions. With respect to the equity market assumption, that assumption is consistent with our past practice. We've taken previous quarters and we have consistently assumed 2% appreciation. So everything is very volatile and very uncertain. We've presented a consistent scenario, and as I said, it's based on our past practice of assuming 2% appreciation from wherever the market ended before.
I don't want to speculate on what may or may not be going on with respect to Wells Fargo and any other counterparties, and I think it's probably also too early to think about how the put might move around in the context of any deal. Our contract is public, so anybody who wants to look at what's in our joint venture agreement can find that contract and review it, but I can't speculate on what might happen in the context of a deal.
Suneet Kamath – Sanford Bernstein
Can I just quickly follow-up on the guidance? Maybe I'll try it another way. If we went back to your average $850 (ph 0:08:20) assumption that you had at Investor Day, do you think you would still be within the EPS range that you have?
Unidentified Company Representative
Well we're not forecasting where we come out within the range. The current market would be stressful relative to our scenario, but there are a lot of moving parts in this. But I would say that the current market would be stressful relative to our scenario.
Suneet Kamath – Sanford Bernstein
OK, thanks.
Operator
Thank you. Our next question will come from Nigel Dally from Morgan Stanley. Please go ahead.
Nigel Dally – Morgan Stanley
Great. Thanks and good morning, everyone. Just to follow-up on the put option, can you just clarify whether or not you've provided full notification to Wells of your intention to put your stake in a JV? Second for Rich, substantial increase in liquidities; can you discuss what drove the nearly $1 billion increment versus your (inaudible)?
And then just last on acquisitions, given it doesn't seem like you have a lot of meaningful excess capital on balance sheet, what does this mean for your acquisition appetite? I'm guessing that given where your stock price, issuing stock would be somewhat unattractive and to the detriment of existing shareholders. Thanks.
John Strangfeld
Just quickly on the put and then I'll had it over to Rich. We have not provided full notice to Wells yet.
Nigel Dally – Morgan Stanley
And if you can discuss why not?
John Strangfeld
Well, contractually we don't have to and we're, as Rich said, considering how we want to think about that right now; although we have made clear our intent to at some point notify them of our exercise of the put.
Richard J. Carbone
Yes, Nigel, at Investor Day I was being a bit conservative because I did say that we had the majority of the proceeds from that convert downstream to unregulated (inaudible), and prior to that point in time when the put would be put to us at June, we would be winding down positions as planned and bringing that back up to the holding company.
There was a throw way comment in there. I said, if I can get the process begun earlier, I'll get the process done earlier, wound up there were process began earlier, we were able to bring in sooner $900 million, it's just simple as that.
John Strangfeld
And then Nigel, this is John, just to responding your question about M&A maybe a respond a bit a little more broadly and then come back to particular comment about financing. We do have a pattern of doing acquisitions in choppy markets such as Gibraltar or Skandia or Cigna as examples.
So it clearly depends on as moved our way in terms of environment which we tend to be more active although, the term choppy market hardly justice to the environment that we are in today. And I accept that, I think its also fair to say that from our point of view acquisitions are nice to do, not have to do which is different that we found ourselves three or five years ago where we had a number of subscale businesses that we needed either double up or get out.
So we view this timeframe is elective and opportunistic, not essential for hitting our long-term objectives. If we added to complication as you identify is the issue of financing number one, as you identify and Richard mentioned, we for anything sizable nature we would require external capital. Number 2, we would finance it very conservatively in this environment, which means a number 3, it need to be highly compelling for be attractive to us in this environment.
Nigel Dally – Morgan Stanley
That’s great, thank you.
Eric Durant
This is Eric, I would like to go back to one of Suneet's questions, well, this is slight elaboration to what Mark said in case it wasn’t clearly. And obviously, as Suneet indicated a market expectation of an average S&P at 940 versus an 850, everything else being the same would have given us all lift in our expectation. So put it another way had our expectations today than the same as those we stated on Inventor Day all else the same they would have been lower than they were at that time.
Operator
Thank you. Next we will go to the line of Jimmy Bhullar from JP Morgan. Please go ahead.
Jimmy Bhullar - JP Morgan
Hi, thank you, I have a couple of questions, the first one is Wachovia look back and I have seen the contract but just to clarify how is the final value of your share going to be determined, I think its as of the beginning of ’08, but and also if you can discuss if there any provisions that would allow Wells Fargo to either delay payment or something that allows them to contest what they owe to you?
And then secondly if you can talk about Life Planner recruiting it's been sluggish in the past few quarters, you believe that’s trend or do you think its going to pick up specifically talking about Prudential Japan? That’s it.
Mark Grier
Yeah, this is Mark on the first part. Yeah, to be clear with respect to the evaluation the reason we used the phrase look back, is that this provision of the contract lets us go back to the environment that assumes that the next big deal, I meaning the AG Edward’s deal hadn’t occurred.
So the evaluation would be as of January 1, 2008 and the contract calls for an appraisal process and we expect that appraisal process is what would arise to the number around $5 billion that you heard us talk about several times. We believe we have a solid contract and we would anticipate that exercising and what results would result in things playing out as we have described.
Jimmy Bhullar - JP Morgan
And perhaps, Ed Baird on the Life Planner topic?
Ed Baird
Yeah, Jimmy, I would agree with you. The growth in our Life Planner over the last year has been sluggish. To put a number on it, it's about 2% in POJ when you adjust for the transfers. And as a result of that what we have done is over the year, steadily been increasing the numbers in sales managers.
On a year-over-year basis its about almost 15% increase and while it takes a little time for that to have an impact as you know sales managers tend to be the key driver in the increase of recruiting. So we are optimistic that in ’09 we will see an improvement, although what has been sluggish '08.
Jimmy Bhullar - JP Morgan
Thank you.
Operator
Thank you. Next we’ll go to the line of Andrew Kligerman from UBS. Please go ahead.
Andrew Kligerman - UBS
Great, good morning, I have a couple questions. The first is on where Suneet was coming on earlier, because I was thinking the same question very simply put. At Investor Day, you gave guidance the same guidance you are giving now at 525 to 565 assuming the S&P ended the year at 800.
Now you are giving the same guidance assuming the S&P ended the year at 900 and obviously we are very much in the hole now. Given that the S&P is lower. What’s the difference in earnings that same guidance two different S&Ps where is that chunk of earnings. How much is it, and what was it that, that caused you to change it. I am going to have some follow-up.
Rich Carbone
Andrew, I can’t exactly qualify, but there is a lot of moving parts. But I know what you guys are driving there. We had a guidance out there 525 to 565 within ending S&P of 900 and now we are saying the S&P is going to end at, if you do the math 2% to 4%, we will land up at 975.
That 75 basis points allowed us to stay, that's 7 points, that 75 basis points in the S&P did allow us to stay within the range, but we do believe that is a better assumption for the year. We changed assumption, because we have a different expectation for the S&P for the year. Had we not done that, we probably would have below the 525, the bottom end to the range. I think that’s your question.
Andrew Kligerman - UBS
Yeah. It generally is, it's just kind of maybe just offline, but its just kind of unusual that, there’s that missing chunk and we could get into later what the exact change was?
Rich Carbone
Well, I would want to say, though, is our traditional procedures here were we start at the (inaudible) year which was 900 and we accreted 2% a quarter. So go ahead I'm sorry.
Andrew Kligerman - UBS
I am sorry. I just thought on the Investor Day you said that you are going to end the year at 800 and now you are saying that you are going to end the year at 900. So there is a 100.
John Strangfeld
We are talking about, let's be clear. We talked about ending 2008 at 800 on Investor Day. Now the actual number was 900 at the end of 2008. And the new assumption is that we will appreciate a 2% per quarter from that actual 900 base, which should get to the Rich's number of 975 at the end of 2009.
One significant difference from Investor Day, we didn't know on Inventor Day what our re-projection of gross profit would be. And those businesses like annuities in particular but also under the July. Where you project based on where the market is at the end of the, end of the period.
And the key factor to be a little bit technical here. Doesn't go away, so a larger proportion of our earnings for DAC will be absorbed in DAC amortization in 2009 than we would have expected when we gave you our guidance on Investor Day.
Andrew Kligerman - UBS
Okay and then just. Next question, how did your impairments on statutory capital stack up with what you did on GAAP?
John Strangfeld
They would have been very similar.
Andrew Kligerman - UBS
Very similar? Great. In terms of the additional resources to bolster RBC in addition to that 1.7 billion from the Wachovia put, you mentioned other additional resources. What would those be?
Rich Carbone
We have outstanding PFI medium-term note programs that goes with funding already on balance sheet that goes beyond 2012 to typical meeting terminal program. Today we that program to fund this spread lending, match the spread lending portfolio in Tyco. We've have analyzed the asset liabilities, we analyzed the underlying assets and throughout the year we can wind down that programs, bringing the funds back up to the holding company and hold them as a cushion.
Andrew Kligerman - UBS
Got it and then in terms of guidance on another area, you were assuming what was it 400 to 600 million in losses versus the $1.2 billion that we saw today, what surprised I know Richard you gave some detail on the areas, but what kind of do you ask there in terms of what actually came in?
Rich Carbone
Yeah, Andrew I just need re-launching on one thing my guidance, my estimate on Investor Day I am doing this for memory, but I think I'm right. $300 million to $400 million in credit and then a number around $400 million in from equities.
Andrew Kligerman - UBS
Okay I thought it was.
Rich Carbone
We had added the 2, so thinking about the upper end of that I was around $800 million.
Andrew Kligerman - UBS
I see.
Rich Carbone
And it came in at $1.1 million, and what threw us off, there was one specific large credit that happened and then it was public announcement which we are not going to get into. In December that threw us off on the credit side and then it was further exacerbation of spreads inside these mutual funds that were holding high yield bonds and the two added a couple of $300 million to that estimate.
Andrew Kligerman - UBS
Got it and one last and I am done. Fixed annuities one of your competitors showed a big tick up in that product area given some of the weaknesses among their competitors. Any interest in picking up the fixed annuity business here in US?
John Strangfeld
Bernard, will speak to that Andrew.
Bernard Winograd
Andrew, I think the short answer to that is we are participating in that market but we don't see it as a big strategic opportunity given what we see as the margins in that business on an ongoing basis.
Andrew Kligerman - UBS
Got it, thank you.
Operator
Thank you and our next question will come from the line of John Nadal from Sterne Agee, please go ahead.
John Nadal - Sterne Agee
Hi good afternoon, I have a couple of quick once. So Ed, want to follow-up a little bit on the, on impairments as it related to Moody's and understanding that you won't necessarily step in and comment on behalf of Moody's but and there is a release when they talked about you there sort of put a couple of hurdles in there, 350% RBC ratio looks like you checked that box. But they also talked about impairments in investments loss is not exceeding $1.5 billion. If you had strip out the derivatives and I am not sure that, that’s appropriate but if you strip that our impairments ran pretty close to that level. Any commentary you can provide, with where you stand relative to Moody's and have you discussed the fourth quarter results with them and any idea there?
Ed Baird
Well, we really, I really hated to comment about how the rating agencies are taking this. There are a lot of things that they put into their ratings. The general environment for today being one of the biggest things, they have us on negative outlook at those PFI. But we have not had any further conversations with them since that occurred I think back in the fourth quarter. So I can not say any more than that.
John Nadal - Sterne Agee
Okay, one for John. Thinking about tarp I guess it seems at this point that the insurance industry will never hear from the government as to whether its being invited in or not to participate but nonetheless if you are invited to participate, it appears that the, that its pretty onerous relative to where it may be it was a couple of months ago.
Some of the limitations on the compensation and also two other things. Any commentary on whether if you were invited to participate, it actually have any desire to?
John Strangfeld
John I think the right way to say is, we would evaluate I based on this conditions and circumstances at that time.
John Nadal - Sterne Agee
Okay.
John Strangfeld
There is an awful lot going on, there is lot of speculations real hard to know where that all going to come out so you will be. I think just appropriate to evaluate when and if that arises.
John Nadal - Sterne Agee
Okay last one for you in the, there any change to this statutory capital level that would be associated with your estimate of some where north of, comfortably North of 400% RBC?
John Strangfeld
No.
John Nadal - Sterne Agee
Okay and than last once, stick all back to the guidance thing on more time beat a dead horse. Average SMP was at investor day assumed to be aged 50 for 2009. Now looking like 940 is the average. Roughly on 90 point increase on average yet guidance stays intact, some thing else is dragging that is that the way, is it the case factor, is that really what we are talking bout there?
Bernard Winograd
Its actually, it’s possibly the case factor. But it’s pretty arcane so we will go through them it sounds this is several of you have asked this.
John Nadal - Sterne Agee
I appreciate that, thank you.
John Strangfeld
Okay and let’s move away from the average for a moment.
John Nadal - Sterne Agee
Okay.
Rich Carbone
So we said we end it here. We though we will end the year at 800, we ended the year at 900. we thought we will end 2009 at 900 and lets stick with that example. So if we begin the year at 900 and we ended the year with 900, we would not meet the mean reversion assumptions we had in our DAC calculations.
And we have to write off DAC because we did not reach the mean reverse assumptions. So now that we start the year at 900, we are assuming the S&P would appreciate throughout the year at our standard 2% and that 2% would allow us not allow us that 2% when you are working through the calculus would have an amortization at DAC that might not required unlocking.
So, we had to do with the higher amortization of DAC if you grow from 900 to 975 spot-to-spot which is our new assumption. The DAC will roll off in normal course of business. If we started 900 and we end at 900 you will have to accelerate the write off to DAC and it's simple or is complicated.
John Nadal - Sterne Agee
Very helpful. Could you just remind us where yearend '08 after all the charges in the annuity segment where the variable annuity DAC balance ended the year?
Rich Carbone
I could.
John Strangfeld
It's $2.3 billion.
John Nadal - Sterne Agee
Thank you very much.
John Strangfeld
Okay.
Operator
Thank you. Our next question will come from Tom Gallagher with Credit Suisse. Please go ahead.
Tom Gallagher - Credit Suisse
Hi. First question I guess for Rich. I just want to talk about liquidity, just overall liquidity plan to the company specifically your CP. I noticed most of your CP being rolled to private investors not the government.
Rich Carbone
Yes, the vast majority.
Tom Gallagher - Credit Suisse
Okay. Can you talk a bit about what's going on in that market, you hear lot of speculation that it's frozen, really it's not frozen through concerning who is actually purchasing your paper. But you also brought it down at least as relate to PRU funding from $7 billion to $4.4 billion.
Is that a conscious decision that something you are looking at, continue to take down and should we assume that PRU over course of the year is looking at term is get out through this FHLB, but borrowing were there reducing CP overall. That's my first question.
Rich Carbone
Let me address the first part of that and it has to do with robustness of the program. Couple of things it had, we got a 150 investors in our PRU funding program or A1, B1 program. And now I think is up from 63 lower number throughout last year, so our investors are more that's number one.
Number two, in the last couple of months we found that we extend and we were staying on a weekly basis, daily basis and now we found that we can roll this paper beyond 30 days. So, in all fairness I think the aggressive paper program at Prudential Insurance Company is stronger than it has been in several quarters. As far as dropping the program down from $7 billion to the $4 billion zone, and there were opportunities to pick up any thread and that extra $3 billion.
So with that opportunities we brought the program down to really operating as sort of working capital to some of our businesses.
Mark Grier
Just Tom, it's Mark, one more comment. We do want to keep this market warm because we anticipated some point of return to our normal environment, but just to emphasize and aspect of liquidity, that Rich has talked about we don’t factor in this commercial paper balance when we talked about the liquidity picture as Rich as paints it.
So, we have presence in the market. We want to keep it warm. We anticipate the return to normal at some point, but right now we are in good shape there as you commented and Rich it's healthy market for us. And we don’t need it even if it won't.
Rich Carbone
Mark was referencing at the holding company which I don’t count at all. And we are keeping that in place to keep warm and to test out and then to understand how to operate under CP effect. But all of the commercial paper the $2 billion with the holding company completely round down within 10 days. None of that is being used in the operations.
Tom Gallagher - Credit Suisse
In terms of the FHLB borrowing, I know you have some more capacity to go there. Is that where the borrowing there, how you took the CP down or was the CP unwound through asset sales done on its own?
Rich Carbone
There is CP assets sales and it bit perhaps, you can't just fund and it did perhaps from the Federal Home Loan Bank but there is more direct line of side between those two.
Tom Gallagher - Credit Suisse
Okay. And Rich just a final question on that, so bottom line here no plans to really take CP down, where it is today. Are you at a level that you feel good about going forward?
Rich Carbone
As long it is as it most effective form of funding of working capital, we will use CP. If there is a cheaper form, like securities lending we might use securities lending.
Tom Gallagher - Credit Suisse
Okay.
Rich Carbone
Between those years.
Tom Gallagher - Credit Suisse
Okay last question I have is in your 8-K, you talked about a sort of downgrade scenario collateral posting that if you got downgraded to an A minus level, and I realize you are far away from that, but just curious what this relates as you’ll have to post $1.6 billion collateral.
Rich Carbone
It’s a matter of credit requirement I don’t know of the top of my head. It has to do with our terms financing term insurance financing around our captive.
Tom Gallagher - Credit Suisse
That's related to the XXX financing?
Rich Carbone
Yes
Tom Gallagher - Credit Suisse
Okay. Thank you.
Operator
Thank you. Our next question comes from Ed Spehar from Banc of America. Please go ahead.
Ed Spehar - Banc of America
Thank you good afternoon. Rich a couple of questions on statutory. Could you tell us roughly where you think total adjusted capital was at the year-end '08 and some comment on statutory operating results in '08 as well, and then I got a quick follow-up.
Rich Carbone
Hi, Ed.
John Strangfeld
That's correct. You've had heard this speech before, we haven't yet followed our staff lag. And we would rather not comment on either of those two items until we have done so.
Ed Spehar - Banc of America
Can you give us a range, we get that from other companies including Met so I'm just curious. I'm sure you guys are looking at these types of numbers closer today than you have maybe in the past?
Rich Carbone
Here our controller is closer to this and we will talk if he feels comfortable giving a range even at this early stage; I am going to let him to do it.
John Strangfeld
I think we're expecting a in fact just north of $9 million GFO, gain some operations in Tyco Prudential Insurance of America about $0.5 billion, but remember we have other insurance subsidiaries as well.
Ed Spehar - Banc of America
And could you remind us of what are the other sources of statutory earnings international I guess it's Cigna and the others. Do you have any guess of the total number maybe in a normal year?
And I guess what I'm trying to get at is what’s the statutory operating trend here for all of your companies? If we are trying to think about how much you could absorb on an annual basis the credit loss given just the underlying statutory operating earnings trend?
Rich Carbone
Ed we simply don’t have that detail this time.
Ed Spehar - Banc of America
Okay. Just one final question then I think from sort of at the Investor Day and we're trying back into the kind of capital hit that you could see from S&P 700, I believe from the equity market, I thought the number was around $2 billion or something was kind of a hit is that correct and has there anything changed in terms of your view of what the statutory capital hit will be from various levels?
Rich Carbone
I think you are right. The number that I believe I quoted was that at 700 S&P, we would be at round 370. Today at 700 S&P it will probably around closer to 350, but I think still above 350.
And I think you are right about $2 billion, because you want to think of $2 billion is 50 points in RBC that's the roughly the gearing, so a $1 billion is roughly 50 points in RBC, so $2 billion will be a 100 points and 100 points of the 450 would take you down to 350.
Ed Spehar - Banc of America
Okay, very helpful thank you.
Mark Grier
This is Mark. I need to correct up an earlier statement I have some additional information on the Letter of Credit. It relates to the reinsurance structure associated with the all state deal. There is a ratings trigger in that reinsurance contract that would require either some cash collateral or this Letter of Credit structure.
Operator
Thank you. Our next question will from Eric Berg at Barclays Capital. Please go ahead.
Eric Berg - Barclays Capital
Thanks very much and good afternoon to everyone. Rich, towards the beginning of your remarks, you listed four different areas in which the goodwill write-downs or write-offs were taken. As well as in the same presentation, you were discussing the write-down in the carrying amount of the JVs I think you mentioned VA in variable annuity business in all states international investments, the relocation business and the joint ventures. So, in effect you mentioned the international investments did this twice in that discussion and I am trying to understand each of the two references and how they differed from each other.
Eric Durant
Okay no problem Eric. So let's take goodwill first, the goodwill write-down in the international investment businesses was $123 million and it was 100% of the goodwill in the international investments businesses. So now I am taking care of goodwill. The JVs which I think are all in the international investment businesses.
Okay, it was 316 and the carrying value the pre-impairment carrying value our JV investments was 620, we took an impairment on those investments and now we are talking about investments of about 316, we have a remaining carrying value of 304.
John Strangfeld
Eric, the reason it's mentioned twice is that it has those two flavors, there is a goodwill write-off and there is an equity impairment in the joint venture equity account.
Eric Berg - Barclays Capital
So you have written-off all of the goodwill related to the Allstate acquisition all of the goodwill related to international investments business, all of the goodwill related to real estate. Can you remind that the real estate business in your corporate area, can you remind us of the remaining goodwill of the enterprise the dollar amount?
Eric Durant
It’s about $700 million let me give you the pieces, $444 represent the acquisition of CIGNA Retirement. There's a little tiny piece in international for Aoba, a Japanese bank we bought a number of years to go. And the remainder is in asset management and that’s principally representative of an acquisition we made of an outfit called TMW.
Eric Berg - Barclays Capital
Last question. I think to when your comments Rich, you were discouraging us from sort of taking the reported operating EPS figure adding back the goodwill write-offs and the write-downs of the joint venture as well as all the other special items. You seem to want to discourage us from engaging in such an exercise to arrive at a quarterly run rate.
My question is assuming that markets stayed, at roughly the levels that they were on average in the December quarter, why wouldn’t that exercise be a prudent thing to do. Why wouldn’t that exercise give a good indication of the quarterly sort of normalized run rate of Prudential Financial?
Rich Carbone
Well what you are saying Eric and let's use the assumption, you are saying that the average balances on which we earn fees in the fourth quarter had that same average throughout 2009 whether it stands to reason that the fees we would earn in 2009 will be the same, so we wouldn’t take a hit in fees. We just do in that quarter and we can't do the full year.
The answer is in the K factor, because the K factor now is up from I think I am about right is going up from about 50% to almost on average above 75% to the three cohorts again the annuity business on which amortized that.
John Strangfeld
I see that’s a little bit high Rich, that includes based on some other factors. Going back the 10 point spread in the K factor as a result of the unlocking in the fourth quarter. But the point is the continuing impact of the K factor throughout 2009 is why you can't just do the run rate.
Eric Durant
And there is second factor to it Eric, this is your namesake, the level of balances on which we earn fees in the fourth quarter did not yet fully reflect the decline in the market that occurred in the fourth quarter. So baked in the cake even if the market would have been flat in 2009 the level of fee income will be all the same lower in 2009 been in the fourth quarter of 2008.
Eric Berg - Barclays Capital
Eric is that because not all of your fees are tied to daily balances but rather to quarters end balances.
Eric Durant
If you reverse that, yes because of the vast majority of our fees are tied to daily average. So, the daily average in the fourth quarter did not reflect a 900 S&P 500. They reflected a higher S&P 500 because the average in the four quarter was significantly above 900.
Eric Berg - Barclays Capital
Okay. I got it and I thank you Eric and the rest of the team. Thank you..
Operator
Thank you. And we have time for one final question. That will be from the line of Darin Arita of Deutsche Bank. Please go ahead.
Darin Arita - Deutsche Bank
Thank you. I just had a couple of questions. That’s okay. The first one is with respect to John, you mentioned that Prudential is reducing the risk profile of the products and in addition to variable annuities, can you talk about other areas where you're thinking about reducing the risk profile?
John Strangfeld
I would couple of comments. Variable annuities is one and number two, we have some other annuity line products in our retirement business. Some of the same dynamics and so we can feel we are in a process of doing some similar redesign applicable to that.
The two other examples of things we've done is as we've also heard from Mark's earlier comments that we also are backing down our magnitude our proprietary investing as a product related strategy and then finally, as an example a year ago, we also discontinued our activities in a mortgage conduit activities.
So these are all examples of things we are either in the product design or in the business activity itself. We've chosen to set our risk levels down and I think they will have a material impact on the results. As Mark described earlier, the annuity effect is beginning to flow through because of the continuing sales and the fact that actually some of that product we designed 18 months ago. We're seeing more manifestation of that as we go forward.
Darin Arita - Deutsche Bank
Thank you. And with respect, Mark, you mentioned you've on the variable annuities that Prudential has hedging on about $21 billion of the current values, if I supplement there is $30 billion of living benefits of the current value at Prudential. Can you help us understand that difference in $12 billion life Prudential has that unhedged?
John Strangfeld
No. That is part of it that’s hedged with embedded derivative structure. That’s where that hedge breakage issue shows up.
Darin Arita - Deutsche Bank
Okay. so, there is hedge breakage on $21 billion.
John Strangfeld
Yeah. That’s the underlying portfolio that hedge relates to. The whole portfolio has the mix of HD products in it and the highest daily which are by the embedded derivative products. So, it’s the segment or the piece of the portfolio with that hedge breakage types to it. Doesn’t if it's not hedged.
Darin Arita - Deutsche Bank
I see. Great. Thank you.
Operator
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