Prudential Financial, Inc. (NYSE:PRU)
Q4 2015 Earnings Conference Call
February 11, 2016 11:00 AM ET
Alan Mark Finkelstein - Head of Investor Relations and Senior Vice President
John Strangfeld - Chairman and Chief Executive Officer
Mark Grier - Vice Chairman
Robert Falzon - Executive Vice President and Chief Financial Officer
Stephen Pelletier - Executive Vice President; Chief Operating Officer, U.S. Businesses
Ryan Krueger - Keefe, Bruyette & Woods Inc.
Erik Bass - Citigroup
Nigel Dally - Morgan Stanley
John Nadel - Piper Jaffray
Tom Gallagher - Credit Suisse
Suneet Kamath - UBS Securities LLC
Michael Kovac - Goldman Sachs
Ladies and gentlemen, thank you for standing by, and welcome to the Prudential Quarterly Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] And as a reminder, this conference is being recorded.
I would now like to turn the conference over to our host, Mark Finkelstein. Please go ahead, sir.
Alan Mark Finkelstein
Thank you, Roxanne. Good morning and thank you for joining our call. Representing Prudential on today’s call are John Strangfeld, CEO; Mark Grier, Vice Chairman; Charlie Lowrey, Head of International Businesses; Steve Pelletier, Head of Domestic Businesses; Rob Falzon, Chief Financial Officer; and Rob Axel, Controller and Principal Accounting Officer. We will start with prepared comments by John, Mark and Rob; and then, we will answer your questions.
Today’s presentation may include forward-looking statements. It is possible that actual results may differ materially from the predictions we make today. In addition, this presentation may include references to non-GAAP measures. For a reconciliation of such measures to the comparable GAAP measures and a discussion of factors that could cause actual results to differ materially from those in the forward-looking statements, please see the section titled Forward-Looking Statements and Non-GAAP Measure of our earnings press release, which can be found on our website at www.investor.prudential.com.
John, I’ll hand it over to you.
Thank you, Mark. And good morning, everyone, and thank you for joining us. 2015 was a good year for Prudential. Our ROE exceeded 14%. And in a challenging year, we met our financial objectives. Business fundamentals remain strong with both our strategic positioning and execution supporting superior performance.
Fourth quarter earnings of $2.07 per share based on adjusted operating income excluding market-driven and discrete items was adversely affected by higher expenses, which we had previewed on the third quarter call, and lower non-coupon investment income returns.
As many of you know who follow Prudential are aware, our recent results have tended to be stronger in the first-half of the year and weaker in the fourth quarter. For the full-year, earnings per share on the same basis of $9.86, was at the midpoint of the guidance we set out in our financial outlook call in December of 2014, achieved despite less favorable market conditions than were assumed in the guidance.
This translates to an ROE for 2015 of 14.2%, which was modestly exceeded the high-end of our long-term ROE objective of 13% to 14%.
Book value per share, excluding AOCI and foreign currency remeasurement grew nearly 14% compared to the fourth quarter of 2014. This strength reflects more consistently between our operating income and net income, one of our key priorities.
Mark and Rob will walk through the specifics of our results as well as our capital position in more detail. I will touch on a few highlights.
To start, our international businesses had a solid year. In the fundamentals and earnings power, these businesses are strong. On a constant currency basis, year-over-year earnings excluding market-driven and discrete items grew modestly, and constant dollar sales grew 8% at both our Life Planner and Gibraltar businesses.
Additionally, we are seeing positive trends in our distribution network. While the interest rate actions taken by the Bank of Japan are clearly a headwind, and we will react appropriately, as we’ve done in Japan over many years, our Japanese businesses have historically generated ROEs in the 20% range. And we expect them to continue to generate superior returns.
Earnings for our U.S. businesses excluding market-driven and discrete items were down from 2014, though this was due to more than $300 million swing in non-coupon investment income from the favorable results of the prior year. But underneath the headline numbers, we are seeing solid fundamental growth drivers in several businesses.
Asset Management generated unaffiliated third party net flows of $22 billion for the year, representing its 13th consecutive year of positive institutional flows. And individual life insurance sales grew 31% across products, while meeting our targeted product mix.
Our Retirement business continues to show leadership in the pension risk transfer market, with participation in all of the larger funded transactions completed in 2015.
And Full-Service Retirement had solid net flows for the year with a meaningful large case win in the third quarter. And although the annuity business reported lower sales in 2015, we remain disciplined in our pricing and are achieving our diversification priorities.
We have also seen good underwriting margins across our domestic businesses, most notably our Retirement business had $80 million of positive case experience in pension risk transfer for the year. And our Group Insurance business produced solid underwriting results, particularly in disability, which is benefited from its multiyear repricing efforts.
As we turn to 2016, the outlook is clearly more challenging as we highlighted on our financial outlook call. Market headwinds have only intensified in early 2016. While these pressures are meaningful, we benefit from our unique mix of businesses that produce top-tier returns and diverse source of earnings and cash flow as well as our very strong capital position.
Our business mix combined with the strong execution and an opportunistic approach to markets has enabled us to grow adjusted operating earnings per share at a pace well above industry averages, about 12% annually over the last five years. This has contributed to our ability to deploy increasing amounts of capital to shareholders through dividends and buybacks, amounting to about $9 billion since the beginning of 2011 or roughly a quarter of our current book value.
Recall that we raised our dividend 21% in December and the board increased our share repurchase authorization to $1.5 billion for 2016, which reflects an increasing level of capital generation in our businesses. Additionally, one of our key strategic priorities as a company is to reduce the complexity and volatility in our business and increase transparency, issues that have distracted from our strong fundamental picture.
At our financial outlook call, we announced the planned recapture of our living benefit riders from our variable annuity captive, in order to house all of the product risk together in our statutory entities. We expect this important step to further simplify our operations and reduce a significant source of volatility.
We will provide more details through 2016 as the transaction is finalized, but I’d like to provide an update on our recapture and also provide perspective on our annuities business in the context of a broader retirement strategy.
We managed the annuity business conservatively and we hold strong reserves and capital to support the economic product risks, a practice that we will continue subsequent to the recapture. And we priced this into the product.
Even with the decline in interest rates in equity markets in early 2016, we expect the planned recapture to increase and not detract from our capital flexibility. And we expect it to reduce the overall volatility in our capital capacity.
We generate good risk adjusted returns on variable annuities, particularly as competitors have exited the market and the risk profile of the product has improved. We are targeting and achieving mid-teen returns. And expect the business to generate deployable capital consistent with the 60% of our earnings we target for Prudential overall.
So as we sit today, we view variable annuities of the core product with solid return and cash flow prospects. And it’s well managed in the context of a global platform of businesses that produce a diverse set of risks and sources of cash flow.
We also view the annuity business as part of a broader retirement theme, which is a compelling long-term growth opportunity, and one where we have invested heavily to build differentiated capabilities. We serve retail and institutional clients in multiple capacities, including through our defined contribution, stable value, pension risk transfer and annuity platforms. And we bring exceptional execution skills and asset management capabilities.
We believe the growth and margin opportunity through this longer-term theme puts us in a position to deliver significant value to our shareholders.
Now, let me touch briefly on the regulatory environment, before handing it over to Mark.
We continue to participate with the Federal Reserve and the IAIS, as they develop capital standards applicable to insurance entities. While we do not know what these standards will ultimately be, we continue to manage our business to very strong capital levels. And this gives us confidence that we are well-positioned to meet any reasonable standards without competitive disadvantages to our products.
It’s also unclear what the Department of Labor will issue as the final fiduciary standards. And we have participated actively with the industry groups in sharing our views of the unintended consequences of the draft regulations. But we also believe that our business mix and global platform puts us in a less exposed position than many of our peers.
Thus, as we think about 2016 and beyond, the combination of our differentiated business mix and strong capital position provides us confidence in our ability to produce solid results even as market conditions remain volatile. And also to take advantage of opportunities that will likely emerge.
With that, I’d like to hand it over to Mark.
Excuse me. Thank you, John. Good morning, good afternoon or good evening. Thank you for joining our year-end earnings call. I’ll take you through our results and then I’ll turn it over to Rob Falzon who will cover our capital and liquidity picture.
And I’ll start on Slide 2. After-tax adjusted operating income amounted to a $1.94 per share for the quarter, compared to $2.12 a year ago. After adjusting for market-driven and discrete items, EPS was down $0.26 from a year ago. While underlying performance across our businesses was solid, the decrease reflected a lower contribution from non-coupon investments and higher expenses in the current quarter.
Non-coupon investment returns and prepayment income were about $40 million below our average expectations in the quarter, in contrast to a year ago, when the contribution was about $90 million above expectations. And the higher expense level included nonlinear items such as business development costs, benefit plan true-ups and technology expenses.
We estimate that these two items together with less favorable currency exchange rates had a negative impact of roughly $0.40 per share on the comparison of results to a year ago. In thinking about our quarterly earnings pattern, I would also note that we estimate current quarter expenses for items such as technology and business development, annual policyholder communications and onboarding, and advertising and other variable costs were about $175 million above our quarterly average for the year; consistent with the historical pattern we mentioned when we discussed our third quarter results.
Considering the higher expenses in the quarter relative to the full-year average and other variances from average expectations, including non-coupon returns, the impact on earnings this quarter would be roughly $0.25 to $0.30 per share.
On a GAAP basis, including amounts categorized as realized investment gains or losses and results from divested businesses, we reported net income of $735 million for the current quarter. This compares to $1.2 billion net loss a year ago, which included a substantial negative impact from foreign currency exchange rate remeasurement, which we have taken steps to mitigate.
Slide 3, shows financial highlights for the year. Earnings per share for the year amounted to $9.86, after adjusting for market driven and discrete items, which implies an ROE of 14.2%. The full-year EPS comparison reflects lower non-coupon investment returns and less favorable currency exchange rates. Together, these items had a negative impact of roughly $0.75 per share on the comparison of results.
Turning to Slide 4, for the current quarter, market-driven and discrete items resulted in a net charge of $0.13 per share. These items included estimated remediation costs in Corporate and Other related to administration of separate accounts, also included a reserve true-up in Individual Life related to conversion of a valuation system and also included our quarterly market and experience unlocking in the annuities business.
Moving to Slide 5, our GAAP net income of $735 million in the current quarter includes amounts characterized as net realized investment losses of $196 million, and divested business results and other items outside of adjusted operating income amounting to pre-tax losses of $141 million. Of note, the gain from general portfolio activities came mainly from rebalancing activities in our Japanese general account.
We haven’t seen signs of significant credit deterioration in our investment portfolio. The majority of the current quarter impairments relate to equity holdings and were taken based on the length of time with unrealized losses. Energy sector related realized losses were roughly $30 million in the quarter.
Product related embedded derivatives and hedging had a negative impact of $534 million, largely due to the impact of applying credit spreads to our gross GAAP liability balance for variable annuity living benefits, which decreased due to rising equities and interest rates in the quarter.
Moving to our business results, starting on Slide 6 with annuities, I’ll discuss the comparative results excluding the market-driven and discrete items that I’ve already mentioned.
Annuities earnings were $403 million for the quarter, up $13 million from a year ago. Return on Assets or ROA was 104 basis points for the fourth quarter, roughly in line with the earlier quarters of the year and up from a year ago. The earnings increase in ROA improvement came mainly from lower interest expense. A 3% decline in policy charges and fees driven by the decline in average account values was essentially offset by lower base amortization and distribution costs.
Slide 7, presents our annuity sales. You can see the impact of our product diversification strategy in the change in our sales mix. Notably, we have reinsured the living benefit guarantee related to our Highest Daily or HD product, representing about 18% of gross sales for 2015.
Recall that this contract started in April and extends through 2016. We’ve also grown sales of our fixed income based PDI product and investment-focused annuities. As a result, only about 40% of our sales for the year and about one-third for the current quarter come with retained exposure to equity market linked living benefit guarantees.
Turning to Slide 8, retirement earnings were $168 million for the quarter compared to $294 million a year ago. The decrease was mainly driven by a $105 million lower contribution from net investment results. Returns from non-coupon investments and mortgage prepayment income were about $20 million below our average expectations in the current quarter versus about $70 million above average expectations a year ago.
Bond portfolio yields were also lower in the current quarter. The remainder of the earnings decline came mainly from higher expenses including business development costs.
The sequential quarter decline in earnings was mainly driven by a lower contribution from investment results and higher expenses. The latter of which were about $15 million greater in the fourth quarter than our quarterly average for the year.
Turning to Slide 9, total retirement gross deposits and sales were $8.3 billion for the current quarter compared to $14.2 billion a year ago. Standalone institutional gross sales were $3.4 billion for the quarter, including $1.8 billion from three significant funded in PRT cases, compared to sales of $8.5 billion a year ago, which included about $7 billion of significant funded and unfunded PRT cases. Full-service sales were roughly in line with a year ago. Total retirement account values amounted to $369 billion at year-end, up by about $5 billion from a year earlier.
Net flows were about $4 billion for the year, driven largely by our full-service business. In our institutional standalone business, we more than offset our run off of funded PRT business with just under $4 billion of significant new cases that closed during the year.
Turning to Slide 10, Asset Management earnings were $198 million for the quarter compared to $192 million a year ago. While most of the segments results come from asset management fees, the increase from a year ago was driven by a greater contribution from incentive, transaction, strategic investing and commercial mortgage activities, reflecting a gain of about $10 million from an asset disposition in the current quarter.
Asset management fees are up 3% year-over-year tracking the increase in overall assets under management. Unaffiliated third party AUM grew about $25 billion from a year ago with $22 billion of net flows over the past year, including about $5 billion in the current quarter, mainly driven by new institutional fixed income mandates.
The earnings benefit from continued growth of asset management fees was more than offset by a lower contribution from the segments other operations, which included an earn-out gain of about $10 million a year ago and also included higher expenses, including to support growth initiatives.
Turning to Slide 11, Individual Life earnings were $119 million for the quarter compared to $135 million a year ago. The net contribution from claims experience was modestly below our average expectations for the current quarter and about $15 million less favorable than a year ago. For the full year, our mortality experience was roughly in line with our average expectations.
The current quarter contribution from investment results was also down from a year ago and included returns on non-coupon investments slightly below our average expectations. Considered together, these items had a negative impact of about $10 million on current quarter results.
I would highlight that expenses in the quarter were about $20 million greater than our quarterly average for the year.
Turning to Slide 12, Individual Life sales based on annualized new business premiums were up $49 million or 38% from a year ago. Guaranteed Universal life sales contributed $30 million of the increase, mainly from greater sales in selected age bands where we re-priced to bring our rates more in line with the market. The remainder of the increase came mainly from our other Universal Life products.
Turning to Slide 13, Group Insurance earnings were $27 million for the quarter compared to $44 million a year ago. The decrease in earnings was driven by a lower contribution from investment results with non-coupon returns slightly below our average expectations, and modestly less favorable underwriting results reflecting the impact of a smaller disability block driven by our re-pricing actions.
Slide 14 presents a timeline of our Group Insurance benefits ratios after adjustment for the impact of our actuarial reviews and other refinements. Our benefits ratio for 2015 is near the low-end of our targeted range of 87% to 91%, reflecting the substantial completion of underwriting and re-pricing actions we’ve taken over the last few years.
As we’ve commented, benefits ratios can fluctuate from one quarter to another. But we feel that we are now positioned for controlled growth with ongoing pricing and underwriting discipline.
Moving to International Insurance and turning to Slide 15. Earnings for our Life Planner business were $367 million for the quarter, compared to $382 million a year ago. Excluding a $14 million negative impact of foreign currency exchange rates, earnings are essentially unchanged from a year ago. The benefit to earnings from continued business growth was offset by higher expenses and less favorable mortality experience in the current quarter.
The higher levels of expenses in the current quarter reflected benefit plan costs, including an unfavorable true-up and costs to update technology as part of an ongoing project.
Mortality experience in the current quarter was about $10 million more favorable than average expectations, but about $15 million less favorable than a year ago. The sequential quarter decline in earnings mainly reflects the concentration of expenses in the fourth quarter, which are about $40 million above the quarterly average for the year, including items such as benefit plan and technology costs.
Turning to Slide 16, Gibraltar Life earnings were $371 million for the quarter compared to $385 million a year ago. Excluding a negative impact of $13 million on the comparison from foreign currency exchange rates, earnings are essentially unchanged from a year-ago.
The contribution to quarterly results from policy benefits experience included mortality about $15 million more favorable than our average expectations. But mortality was about $10 million below the year ago quarter, which benefited from higher surrender gains.
The benefit of business growth was offset by a lower net contribution from investment results, including non-coupon returns about $10 million below our average expectations in the current quarter. Expenses in the fourth quarter were about $15 million above the quarterly average for the year.
Turning to Slide 17, International Insurance sales on a constant dollar basis was $692 million for the current quarter, up $43 million or 7% from a year ago. The increase was driven by our Life Planners in Japan and other key markets and by Gibraltar’s bank channel and life consultants. Life Planner sales in Japan were up 7% from a year ago, reflecting a 6% increase in agent-count and mainly driven by greater term insurance sales.
Life Planner sales outside of Japan were up 10%, mainly from an increase in Brazil where Life Planner count has grown about 20% from a year ago. Gibraltar sales were up by 5% from a year ago. Sales from the bank channel increased 12%, largely driven by a recurring premium U.S. dollar retirement income product that is popular among high net worth clients of a key distributor that we recently cultivated.
Turning to Slide 18, the corporate and other loss was $378 million for the current quarter, compared to $326 million loss a year ago. Corporate expenses can fluctuate. The increased loss came mainly from higher expenses, including items that are inherently variable such as strategic initiatives and hedging costs that we retain in corporate and other.
Now, I’ll turn it over to Rob.
Thanks, Mark. I will provide an update on some key items under the heading of financial strength and flexibility.
Starting on Slide 19. While statutory results are not yet final, we estimate that PICO will report RBC well above our 400% target as of year-end. In Japan, Prudential of Japan and Gibraltar Life reported strong solvency margins of 853% and 900% respectively, as of their most recent reporting date September 30, 2015.
Looking at our overall capital and liquidity position on Slide 20, a year-ago we estimated our available on-balance-sheet capital capacity at approximately $2 billion on a net basis. This represented about $4 billion a gross basis, less $2 billion earmarked to reduce capital debt, to arrive at our long-term targeted financial ratio of 25%.
During the year, we returned over $2 billion of capital to shareholders, including $1 billion of share repurchases and over $1 billion of common stock dividends, including a fourth quarter dividend representing a 21% increase. At the same time, we’ve increased our on-balance-sheet capital capacity to over $4 billion at year-end, and have brought our leverage ratios within our targets of 25% for financial leverage and 45% for total leverage.
The increase in capital capacity in the standalone fourth quarter was mainly driven by capital generated from our businesses and a favorable impact from estimated statutory AAT reserves; net of about $600 million of dividends and share repurchases in the quarter.
The fair value of the Japan equity hedge, which is not included in our capital capacity was about $1.7 billion at year-end. As John mentioned, we remain on schedule to recapture our VA living benefit rider and managed the risks in our statutory entities. We continue to believe this action will not have a negative impact on our available on-balance-sheet capital capacity, and expect it to contribute to our overall financial flexibility.
As we noted, we will continue to manage the risks to AA standards and CTE 97 levels. We will provide more details as the recapture occurs during 2016. To address the current topic, our direct and indirect exposure to the energy sector at year-end was about 4% of our general account portfolio excluding the Closed Block.
Our energy exposure is mainly through public and private corporate fixed maturities, of which roughly 90% are investment grade, and net of unrealized losses of about $200 million.
Turning to the cash position of the parent company, cash and short-term investments net of outstanding commercial paper amounted to about $5 billion as of year-end. The cash in excess of our targeted $1.3 billion of 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.
Thank you, Rob. Thank you, Mark. We’d like to open it up for questions.
[Operator Instructions] Our first question comes from the line of Ryan Krueger, KBW. Please go ahead.
Hey, thanks. Good morning. I was first hoping you could give us some perspective on how to think about your sensitivity to - excess capital sensitivity to lower interest rates that are currently in the kind of the 160 range. Anything you could provide there would be helpful.
Ryan, it’s Rob. Happy to do so. First let me caveat that, obviously, we can’t update guidance or initially update our year-end numbers. And actually, if you don’t mind, what I’m going to do is, I’m going to take the liberty of anticipating your follow-up question which is thinking about the same question in the context of what the impacts may be to our earnings. And so let me hit both of those in the same - at the same time if that’s okay. And actually I’ll just start with the earnings, because I think that’s relatively straightforward.
If you look at the performance in the fourth quarter, what we would note is that there have been no changes in the underlying business fundamentals from the point which we provided guidance. We knew and communicated about the level and timing of expenses. And we stated that we expected 2016 to be about $0.15 over these levels.
With regard to the sensitivity to the capital markets, specifically to the question you asked, I think we’ve given those - the guidance on that out before, about a 100 basis points plus or minus and interest rates is $0.20 a share, and equity markets plus or minus 10% is about $0.30 a share, excluding our alternatives portfolio.
On the capital piece, we actually don’t provide similar rules of thumb for capital. And it’s primarily because it’s not linear and it’s also subject to management actions. We actively obviously manage that capital position. But I have a couple of observations.
First, if you look historically, the two largest drivers to our capital volatility in response to markets has been in our annuities business and as a result of AAT updates. So let me turn to AAT first.
If you pro-formaed the decline in interest rates since year-end back on our calculation at the end of last year, it would not have a material impact on the year-end calculation. And the reason for that is there are three components for the AAT calculation in addition to assumptions, three market components. It’s underlying treasuries, but it also reflects credit spreads. So while treasuries have come down, credit spreads have expanded pretty dramatically. And it’s also the calculation is floored off the - it’s keyed off the five-year treasury and that has an impact as well.
So turning from AAT to the annuities business, as you know, we are in the process of recapturing the risks that we ceded out to our captive. There are number of motivations for undertaking to do this. One of which is to reduce the volatility in capital and leverage that has been associated with market movements historically in that business, and as a result of that captive.
It’s inappropriate for me to comment further. Given that we’re still on process. But I’d caution you to remember or encourage you to remember that it’s our expectation that we will be substantially less sensitive to rate movements going forward in the annuities business subsequent to the completion of that recapture.
And actually, let me add one last thought. And that is that while the market movements are certainly not welcome, they are not by any means unexpected or unanticipated. And what I mean by that is the degree of movement that we’ve seen so far this quarter is anticipated in our own cyclical stresses, that we consider before we make decisions about how we’re going to be deploying capital during the course of the year.
We run those stress scenarios in order to ensure that we can execute on our plans in the face of what we think of as moderate or cyclical levels of market volatility, and what we’ve seen to date would fit within that definition.
That’s very helpful, Rob. Thank you. And then a separate question, can you give us some sense of how much non-coupon investment income you would expect in either a normal quarter or a normal year?
I think I can answer that question. Yes, so if you look at the expected level of our earnings across the - if I look at first the U.S. portfolio, for the fourth quarter our expected level of earnings was about - total was 9.3 - hang on one second.
Do you want to go on another question and come back to that while you check it?
Yes. Yes. I am actually not finding that right up, but let me come back to that, Ryan, if it’s okay.
Okay. That will be great. Thanks.
Actually, I think I - actually, I think I have the numbers here. The total returns in the fourth quarter across both the U.S. and international businesses were about $48 million. The expected variance on that against what we would otherwise have anticipated was about negative 30. So if you add those two numbers together, that would get you to a total expected level. Does that make sense to you?
Yes, yes. Yes, that’s perfect. Thanks.
Our next question comes from the line of Erik Bass with Citigroup. Please go ahead.
Hi, thank you. Just first, can you just discuss the impact, if any, of the recent moves by the Bank of Japan on your Japan business?
Sure. I will take that probably in two parts, because there is a part that has to do with product and there’s a part that has to do with investment. So let me start with the products first, in terms of sort of rates and re-pricing. But if I can, let me step back and put the Japan business into perspective.
So if you look at the entire year within our Japan business, yen-based products are slightly more than half of sales and foreign currency is slightly under half. In terms of the entire international operation the yen-based products are about 45% of sales.
Now, it’s also important to note out or to point out that about 82% of what we do - what we sell is recurring pay products. And of the 18% that is single pay, 13% is fixed annuities, which we price every two weeks. So if you put all those numbers to the Cuisinart and you boil them down, you see that less than 5% of our international sales are single premium life or retirement products in Japan, and we monitor those really carefully.
And to put that into perspective, what that 5% means, we sold less than $20 million of single premium life or retirement products in the fourth quarter.
So the next point I’d like to make is we’ve been dealing with decreasing interest rate environment for a long time and maintaining profitability. For example, we sell no single premium A&H products. We only sell recurring premium products, so there is minimal spread risk associated with these.
In addition, we stopped selling any single premium endowment products last year. Having said that, of course, there will be some impact to low rates, but it’s a matter of degree. And the way we manage the risk is we continuously examine our product lineup and its profitability, adjusting pricing when necessary to reflect lower rate levels, which again we’ve been doing for years as rates have been coming down.
We also reduced commissions or discontinued sales of certain products that are more interest-rate sensitive, if they can’t meet our profit expectations. For example, Gibraltar Life stopped paying its - stopped selling its six year single premium endowment product in March of 2015. And in July, we discontinued selling the single premium whole life through the bank channel.
Gibraltar also discontinued selling its 10-year single premium endowment product, which again means that all sales of single premium endowment products in the Japan business have been discontinued. And we’ve also reduced crediting rates on certain products for BOJ and Gibraltar.
So we’ve taken and will continue to take action on all our product lines to maintain the appropriate level of profitability in the face of the current interest rate environments or changes to interest - valuation tables or mortality tables or other things.
The other thing to remember is that within Japan over 60% of our premiums enforce a new sales or from products where most of the profits come from mortality, morbidity or expense margins. So inherently, we’re less dependent upon spread even when you think about recurring premium product or low interest rates for a long period of time.
So in summary, there are three main reasons for our ability to maintain the profitability. One are the factors that - other factors other than just price which are important, i.e., our strategy to emphasize service to our customers, which gets the strength of our capital distribution which is critical. And the way they approach both their customers and the way that we approach third party distribution.
The second is the type of products we sell, most of which are recurring premium and much of which is less dependent upon spread, given the extraordinary emphasis we have on protection products.
And the third is the discipline we have around profitability, i.e., re-pricing products, reducing commissions or eliminating unprofitable product. So that’s the product side. The other part of your question really has to do with, I think, reinvestment which is how do we - how are we reinvesting the premiums and the rollover in this environment.
So first, let me talk about rollovers and size-band. In the existing portfolio our Japan portfolio is about $121 billion, of which about 45% of the portfolio is in JGBs. The portfolios have long duration. The LP portfolio is about 16 years and Gibraltar is about 10. So rollover is relatively light. And to put a number on that, rollover this year is less than $1 billion of the yen denominated investments at the portfolio level.
The second issue is how should we invest new premiums and rollovers given the recent lower rates. But first, recognize that a significant portion of the investment portfolio supporting the yen product is invested in long-term bonds that have been acquired over time and it yields higher than the current Japanese government bond yields. So we’re starting out in a good place.
But we have adjusted our investment strategies to changing market conditions. And post the BOJ announcement on January 29 we did significantly reduce our purchase of JGB. However, strategically our long-term investment philosophy emphasizing discipline, asset and liability management hasn’t changed. And so for new investments given the long duration nature of our liabilities, we are purchasing JGBs further out on the curve in the 20- to 40-year range to the extent we’re investing in the shorter end of the curve, i.e., 10 years or less. That’s where we focus on non-yen investment hedged back to yen.
So our investment strategy for yen products will be to continue to invest in longer term JGBs and combining those purchases with a considerable allocation to more attractive yielding U.S. dollar assets hedged back the yen, including U.S. dollar private placements, commercial mortgage loans and corporate bonds. This enables us to earn yields that are higher than those available from just having JGBs. Thereby, somewhat mitigating the impact of low interest rates at the short-end of the curve. So hopefully that addresses both the product and the investment side.
Yes. Thank you very much. And then, I just had one bigger picture strategic question, I guess is in light of the recent announcements from Met and AIG. And I realize that your situation is different in some ways given the higher return profile of your current business mix. I guess, just curious, are you currently exploring a sort of plan B options in case final SIFI rules end up being more onerous than you expect, and the SIFI off-ramp is shown to exist.
Erik, one actually [ph], this is John. Let me tell you how we are thinking about that and other related questions, and do it more macro, do it more expansively, start with retirement annuities and then work it back into business mix evaluation. Because we know and anticipated there is likely to be questions about that. So let me give you a long form answer that hits that range I just talked about.
Firstly, retirement in general and the income phase in particular is one of the largest macro trends in financial services for the next 20 years. And these macro forces not only bode well for financial services industry in general, but they particularly are for insurance companies in particular.
We’re not interested in disinvesting in retirement. And one of the reasons - the reasons for this are both strategic and financial. Strategically, we’ve intentionally positioned ourselves to be in the thick of the retirement macro, PRT, annuities, DC, DB, stable valued Asset Management. And we’ve executed on the strategy I think exceptionally well. It’s reflected in our investment performance, our success in the marketplace and our fundamentals in terms of sales and flows.
And the motivation is not simply strategic, it’s also financial as well as, as you are acknowledging, our retirement businesses make a major contribution to our growth rate, which has averaged over 12% per year in the last five years. Our ROE, which has exceeded our 13% to 14% target for some time, both of which are considerably better than peers as you are commenting.
Turning more specifically to annuities just for a moment, helping clients accumulate retirement savings is something many financial players can do. Creating income streams for life is primarily the domain of insurance companies. So it’s very easy to foresee a landscape shift and the relative importance of players are purely asset gatherers, asset managers, to those who can also contribute to the lifetime income dimension.
And that’s where annuities can play a particularly important role, particularly in broader and simpler applications than we think are likely to evolve in the future.
Now, beyond on the strategic relevance, the financial aspect of our annuity business is a very positive as well as, as we talked about strong returns and a well-capitalized business, strong cash flows. And those are not aspirational. That’s a reality and 2015 is a good example.
The challenge for us in this area has been historically the earnings and capital volatility. And in the last two years we’ve taken very significant measures to moderate that volatility, whether it’s the reinsurance with Hamilton or the recapture of our annuities captive. And we expect these measures, as Rob was referencing, to substantially reduce the volatility going forward and to enhance our capital flexibility.
So when you combine the reduction in the volatility with already attractive returns and cash flow, it makes the businesses, the business all the more attractive. Now, once it go more to the - broadly to the business mix, one-time Prudential’s business mix had the attributes of a financial supermarket with healthcare, P&C, brokerage, investment banking and a whole lot of other things. And you could really challenge the wisdom of that and we certainly did.
And so we went through the challenging and difficulties of dramatically changing this and changing the cost structure that supported it. And what we have today is very conscious, very deliberate. It’s by design, it’s not by default. And we are just focused on three things: retirement, protection and asset management, taken together and even more powerfully in combination.
And that’s what enabled us to produce that earnings track record, the ROEs we talked about and the $9 billion of capital that we’ve returned to our shareholders. For us, our challenge isn’t delivering the results or the return on capital. It’s getting it better reflected with what we believe should be a premium valuation.
And the factors we think about, when we think about valuation and what’s influencing it, it really go into three buckets: the macro-environment including low rates and foreign currency fluctuations; the regulatory uncertainty; then the complexity and transparency challenges in our business. And I’ll just touch briefly on each and I’ll wrap.
So insofar as the macro environment, we provided the sensitivity disclosures on each key area and we’ll continue to provide more. But overall, our business mix and how we manage our operations mitigates earnings impacts of any one macro driver. And further, our balance sheet strength is able to absorb substantial strain from low rates, equity markets and credit shocks, and still maintain very competitive solvency ratios.
On the regulatory requirements, we don’t have an answer on future capital rules yet, but we are hopeful the picture will be clear over the next couple of years. We maintain a strong balance sheet. As we say, we have substantial capital resources, which we believe will be evident and adequate under any reasonable capital standards.
And in the meantime, we’ve returned capital to shareholders in a very substantial and very disciplined way.
And finally, a point of great emphasis that was been underway for nearly two years, it’s been our focus on reducing the complexity and volatility in our business, which we believe has distracted from the underlying fundamentals and return attributes in our business.
And these are very significant actions, including enhancing the visibility into our results through the raise, dividend and buyback authorization, which reflect the increased expectation of cash flow from over a year ago to 60% from 50%; the implementation of the divisional structure in Japan to mitigate the net income volatility from foreign currency remeasurement; the restructuring of the Closed Block business, which simplifies our operating structure; and preparing the recapture the VA risks, which will eliminate a substantial driver of volatility and simplify of our operations.
And we’ve also taken other steps like reinsuring a portion of living benefit rider on our newest Highest Daily VA business. And we will take more of those over time. Now, those actions sound technical to many, but they’re very meaningful.
And over time - some are kicking in right away, and others will kick in overtime - but overtime it will certainly reduce the noise in our results that distracted our broader story and create a much clear line of sight between operating results, net income, book value growth and the like. And we believe we will have a very positive effect on our view.
So we are going at it with a real effort of looking at better alignment between our operating results, our financial results and our evaluation. And these are the steps we think are most appropriate for us.
Great. Thanks, John. I appreciate the comments.
Our next question comes from the line of Nigel Dally. Please go ahead.
Great. Thanks and good morning. A couple of quick questions, first on capital, you mentioned that lower AAT was one of the factors helping capital this quarter. Just hoping you can mention how much that provided a boost in the fourth quarter. And then on non-coupon, just a follow-on from Ryan’s question, can you also discuss the total amount invested in non-coupon investments and the competition with those investments?
Nigel, it’s Rob. So let me hit the first question. I can’t actually give you the AAT number, because we have not yet filed our statutory numbers, our statutory blank, so the front-running are filing with the regulators. I would note it was a significant contributor to our increased capacity. There are a lot of inputs there. They’re not limited to just interest rates. It also includes assumption updates.
But if you look at where we are versus the end of last year, treasury rates are little higher and credit spreads have expanded as well. And those of both been positives for AAT release in addition to whatever assumptions that we’ve taken there, so it was a positive and significant contributor.
On the second piece, on the portfolio, so if you look at our - what we label as our non-coupon or alternatives portfolio, it’s about - it’s a little under $8.5 billion portfolio. The biggest pieces of that would be in private equity. It’s about a quarter of it, hedge funds figure that’s 15% or so of what’s in there, and then, real estate, which is about $1.5 billion of that number.
The residual would actually be in public equities, and so we have a fairly significant contribution in what we call as our non-coupon or our alternatives coming from public equities, largely held in our international business. A big piece of that would be in REITs.
That’s great. Thanks a lot.
The next question comes from the line of John Nadel, Piper Jaffray. Please go ahead.
Hi, good morning, everybody. I was hoping we could get a little bit more color on the retirement segments’ earnings and the trend line as you think about it there. If I think about the last couple of quarters before the fourth quarter, after making some adjustments for non-coupon and client activity and better underwriting results et cetera, I think the quarterly pre-tax earnings rate would have been somewhere in the $220 million, the $230 million range.
If I make those same adjustments this quarter, I think I am getting to around $205 million, so it’s about a 10% reduction give or take. What’s the better way of thinking about that as we think forward from here?
John, this is Steve Pelletier. I’ll answer that question. When you look at the retirement business, I’d speak to the following areas, first of pressure on the trend line in earnings. First is, as you say from non-coupon investments. That’s experienced across several of our U.S. businesses, but a lot of that impact is concentrated in the retirement business.
Second is from lower reinvestment rates, in particular in the full-service business. And again our pressure from lower reinvestment rates is something that works across the U.S. businesses, but shows up to a large extent in full-service.
Third has been some degree of record-keeping fee compression, that’s a trend we saw throughout 2015, although we do see it moderating in the latter part of the year. Now, the levers that work the other way, the levers that we manage in the face of those pressures, again it kind of really taking about the full-service business where a lot of this shows up.
First, it’s the overall size of the book. We’ve made significant investments in the business over the past couple of years. Those investments have really been around improving service levels and the client experience, the actual participant experience. Those investments have led directly to meaningfully increase sales in the past couple of years and higher persistency.
Second is crediting rate management. We’ve done some of that in each of the past couple of years and we have the latitude to take that further as appropriate and necessary. Third is management of unit costs. And a lot of our work around cost efficiency is focused across the board in our businesses, but in full-service as well.
For example, some of the references we made to higher expenses in the fourth quarter in the retirement business were actually efficiency charges that we took, charges that we took to prepare for - taking steps that will drive further cost efficiency in that regard. And then finally, our focus on the total economics of a full-service case, including investment management opportunities in a given case.
So that’s really where we’re - how we’re looking at the different types of pressures that show up in full-service. Having said that, like I say, the impact from non-coupon and the impact from spread compression shows up to a large degree in that business.
Other parts of the retirement business such as pension risk transfer for example, we had a very solid quarter and a very solid year. And we look for further growth and further expansion of our results in those lines.
Okay. Thank you for all of that. And I have more of a - maybe just a transactional question, if you will, something that I’m wondering if you might be considering particularly post the BOJ moves and the impact on the JGB curve. You’re in a unique position relative to a lot of your peers and then you have such a large operation in Japan. And a significant exposure to JGB is something order of magnitude $50 billion in U.S. dollars I think.
The unrealized gain there must be significant at this point. And I’m wondering if you’ve given any thought to monetizing some of those unrealized gains, reinvesting even after tax, reinvesting proceeds into U.S. dollar or other denominated securities hedging back to yen and taking the excess and buying your stock, I mean - or more of your stock. At six times earnings, John, you’re talking about an outlook that sounds so appealing over the long-term. Are there things that you can take advantage of today to reduce your share count?
So, John, it’s Rob. Let me just take a stab at responding to that. So a couple of thoughts. One, understand, we actually do very actively manage our portfolio. We manage that portfolio in the context of a very-disciplined ALM.
And so we would be - want to be careful about doing any kind of restructuring of that portfolio that would cause breakage between what is to be appropriate construct on the asset side particularly from a duration standpoint and an FX standpoint against the liability side. That’s one.
Two, we’re also sensitive to not wanting to do mechanical transactions, which on the substance of it would - on the surface of it would appear to have good accounting outcomes, but not change the economic outcome in any way. So we really don’t undertake to play those sorts of games with our portfolio.
And then third, I think as we think about stock buybacks, I think I have delivered this message before. And it’s consistent with how we think about it, which is that we are - we think ourselves as very good stewards of our capital capacity. Stock buybacks are an important component of that stewardship.
But we think about that in the context of delivering current returns back to our shareholders as a complement to our dividends as opposed to using an opportunistically to speculate on the valuation of our stock vis-à-vis what’s fair value for that.
The next question is from Tom Gallagher with Credit Suisse. Please go ahead.
Hey, just had a question on the variable annuity business. If I look at current market levels and I think about your Highest Daily value product, I think we’re now at the point where you have a lot of the auto rebalance kick in, which I believe starts between 10%, 15% market down levels.
Can you can you dimension a little bit what sort of happens mechanically from an accounting standpoint? I realize a big asset reallocation from equities into fixed income, limits the tail risk, but is there - is there like an interim degradation of margins or returns, DAC charges that we should expect if in fact there’s a pretty meaningful movement of the auto rebalance that occurs?
Tom, this is Steve, I’ll address that question. The algorithm and the auto rebalancing mechanism has been active in the face of this kind of market volatility, as you would expect. But it is really designed to manage the risk profile of an individual contract, and thereby, when you add up all those individual contracts, overall risk profile of the product line.
It’s not designed to produce any type of change in short-term financial results and current financial results. It’s designed to effectively manage the long-term risk profile of the contract, especially as we’ve communicated in the past, especially tail risk.
Got you. But maybe this one is better for, Rob. Just in terms of the way that you would think about the accounting implications, if there was a big kicking in of the auto rebalance in a given quarter, would that necessitate anything real meaningful or is there still an ability to use reversion to mean when you consider normal assume market recovery and money coming back out of those contracts? Can you help frame that a little bit?
Yes. So I think, Tom, what you’re talking about are EGPs, Estimate Gross Profits, and how that’s going to be affected by the auto rebalance. And in fact as a result of that you get unlock and you get a change in the K factor and the amortization of DAC. Is that sort of the line of thinking you’re chasing?
So the answer would be, no. That does not affect it. Remember that under GAAP, the valuation of our reserves is actually gone in a risk neutral construct. And obviously what we eliminate of the margin piece of that that’s in the GAAP reserve. It’s coming up with our hedge target. That in fact is not affected by the mix in the account values between equities and fixed income because there is a presumption that actually the account values are going to grow at the swap curve rate effectively, a little bit of a premium on the equity side.
So while there’s always some level of differentiation associated with that between the equities and the fixed income, it’s not material and we would not expect as a result of changing of the portfolio from the auto rebalance to have a material outcome with regard to an unlock and/or impact on our K factor.
That’s helpful. And then just one last follow-up, if I could, if - I don’t know, if you guys have quantified it, the $1 billion gain that you had in deployable capital at year-end. And then, is there a way to at least give a rough estimate of if the quarter closed around current levels would there be a meaningful change in deployable capital, because I think some things have changed in terms of the way you guys have managed particularly the variable annuity business.
And I think the volatility should be lower, but I just wanted to get a sense for if you could give some indication on that.
Well, I would, Tom, reflect back on some of the comments I made in answering Ryan’s initial question, which is, how we think about capital volatility sort of post year-end. And so, as I mentioned, the two biggest drivers of that being AAT and the annuities business. I think I walked through the AAT calculation, which is pro forma, put it back to the end of last year. There’s not a material difference in terms of that outcome. And so therefore, would not have changed capital capacity.
The second piece of it on the annuities, as I mentioned there, the - our expectation as a result of the recapture of the risks that we ceded out to our captives is that we will be significantly less sensitive from a capital and leverage standpoint going forward to movements in the market. And so I can’t really comment on where we are in that process and what the exact sensitivity will be, because it’s not completed.
But that is in fact the objective of that - or one of the objectives of that undertaking. And therefore, we would expect a level of reduced volatility all around relative to kind of market movements that we see.
Got it. And, Rob, when is that expected to be done?
Well, we haven’t given a specific date, Tom. But it is during the course of 2016 we expect that the recapture would occur and be completed by call it the middle of the year.
The next question is from the line of Suneet Kamath with UBS. Please go ahead.
Thanks. Good morning. So I just want to start with the annuity business. I guess, John, you made a pretty strong argument for the sustainability of the variable annuity business industry-wide. But as we think about this vis-à-vis the DOL, some of your competitors have talked about pretty significant shifts in that business away from upfront commissions to trailing compensation.
Just wanted to get your thoughts on how you’re positioned if we move down that road. And if you think we might see a slowdown near-term in terms of sales for the industry as we make that transition.
Yes. Steve Pelletier will speak to that.
Yes, Suneet. I’ll speak to that. And I’ll speak kind of give another level of detail on how we’re preparing for the DOL to fiduciary standard. We’ve been conducting extensive planning for it. And we expect it to be released in late March, early April. We don’t yet know the details of the final rules, but we are preparing for a full range of contingencies and degrees of potential impact on our businesses. A lot of our planning is focused on annuities, retirement and Prudential Advisors.
In annuities, to address your specific questions, we said we’re taking measures to prepare first for increased service requirements on our part in support of our distribution partners; and second, taking steps on the product front. Now, in regard to - in regard to compensation structures and product, I note that we already have had for some time of fee-based options in place in a lot of our existing products.
Those structures, those options have had limited uptake as of yet. But as the regulation takes hold, we may see further migration towards those structures. More broadly though and looking forward, we’re going to continue to evolve our product line and our product mix. We have already proven very successful in that sort of diversification over the past couple of years.
And we’re going to continue to evolve that product line and mix to extend the franchise and address a larger portfolio of opportunities with, as John mentioned streamlined and simpler solutions.
If I could, I’d just touch on retirement and Prudential Advisors as well, because I think it’s important to kind of give the perspective on how we’re seeing the break. In retirement, we will be adapting the communications that we have, that educate plan participants who are retiring or changing jobs on the options that they have for their retirement plan savings. And Pru Advisors, there will be on day one of the regulations effectiveness, there will be an immediate impact on our customer-facing activities.
For example, we will - or already adapting our systems for the data collection and compliance that will be part of those customer-facing activities. And part of that, that systems move really entails accelerating the deployment of some technology platforms that we had already long since planned.
I will just frame out the point that Prudential Advisors is a very important part of our retail distribution strategy. However, given the way we’ve reshaped our distribution platforms over the past decade or so, it today accounts for only about 20% of our retail life insurance, annuity and mutual fund sales.
And so, as I say, I wanted to give you that flavor for the granular preparation we’re taking for the regulation. We do see coming back to your specific question, the potential for some disruption. But we feel that we have the strength of distribution relationships and the skills around distribution support and around product design and development that will enable us to make those necessary adaptations.
Okay. And then, just a separate one on expenses, if I did my math right, if I start with your consolidated G&A, so I’m talking about the company level, and I back out your $175 million of overage, it still looks like your G&A is running maybe 4% or 5% above the nine month average.
So I guess I just want to make sure as we think about 2016, if there’s anything in terms of the expenses that we should be thinking about that was elevated in 4Q that might persist in the balance of - in remaining quarters of 2016?
So, Suneet, it’s Rob. I think what we’ve said in the past I think still holds true, which is - actually if we look at our expenses for the entire year, they’re about consistent with what we were expecting, reflecting a number of the initiatives that we have, which are requiring near-term spending.
But with that expectation or hope that those things that are outside of enhanced supervision, of which most of it is occurring outside of that, are going to have longer term payoffs in terms of positioning of our businesses and expanding our addressable market.
That initiative spending, as I said, is consistent with what we expected for the year on a total-year basis. And when we gave our guidance, I think we mentioned that expectation would be about $0.15 above that level - or the level for 2015 going into 2016.
Got it. So just to come back on the guidance and the outlook that you gave, and I know you don’t revisit it, but I think, Rob, what you were saying at the beginning was that sort of everything that happened in the fourth quarter was largely contemplated when you gave that, what it was, 975 to 1025 range. And that other than kind of the macro sensitivities of the equity markets and interest rates, there’s nothing that’s really changed in that line of thinking.
Yes. Again, not updating, but I would say from a business fundamental standpoint nothing has changed with our regard to our view to that. Obviously, market forces are outside of being able to actually predict that. And then, the usual things that we walk you through from a run rate standpoint around mortality and returns from alternatives, those are variables in the course of the quarter as well. But from a business fundamental standpoint the picture that emerged was consistent with the picture that we were seeing when we established guidance.
All right. Thanks.
Alan Mark Finkelstein
Roxanne, we’ll take one more question.
That question comes from the line of Michael Kovac, Goldman Sachs. Please go ahead.
Great. Thanks for taking the question. Maybe a high level question here on bank SIFI and we don’t know the rules yet obviously. And the insurance rules are likely going to be different than the bank’s rules. But if you look at some of the macro scenarios that regulators are considering, they’re kind of looking at sort of the recent bank CCAR rules that came out. And they consider equity markets down 50% and the 10-year down below 2% among some of the other things.
I imagine that Pru’s running sort of similar analysis today. I’d be curious to know your thoughts and how that does compare to your own stress-test set Prudential runs on its businesses.
So, Michael, it’s Rob again. The level of stress testing that we see in the CCAR analysis and the sorts of things that we’re talking about internally, there is a high level of consistency there. In fact, I would suggest that actually across the spectrum of risks that we measure, the sort of things that we look at in our tail scenarios are actually more extreme than the sort of things that the banks are being asked to look at in the course of their CCAR test.
Some of them are consistent, the equity one that you mentioned. Our assumption when we do our tail scenario is a 50% to 60% decline in equities by way of example to make it comparable. So there is not anything surprising in the way of the regulatory scenarios vis-à-vis the scenarios that we look at internally.
That’s helpful. And then maybe a product-specific one, thinking about pension risk transfer market in 2016, how do you think that some of the current macro volatility maybe changes demand on the one front, and then second, potentially the appetite?
I will address that. This is Steve. Our appetite continues to be strong for this business. We have built a position of market leadership based on our capabilities, especially in the large case market. And we look to continue to earn that leadership by advancing a strong value proposition into the market.
In terms of market volatility and its impact on plan sponsor, propensity to transact, I would say certainly funding levels have a - the funding levels matter. So impact of market volatility on those levels would matter.
But on the other hand, I think that the really expectation now of prolonged low interest rates would also in and of itself make a plan sponsor think about transacting in the sense that the plan sponsor isn’t going to be able to inflate their way out of the issue at all. The rising interest rates and rising discount rates for the liability won’t relieve the matter.
I would say that, when we think about the growth in the pipeline over the past couple of years, growth in the industry, and what we see in our pipeline, it’s been driven and will continue to be driven much more by factors that don’t really relate directly to capital markets. And those factors would be: number one, increased awareness and sensitivity to longevity risk and desire to transfer it; and number two, pretty much relentlessly increasing PBGC premiums.
That’s what’s been the driver over the past year or two and we would consider those factors to remain drivers in the future.
And I’ll just add on from a risk - from an appetite standpoint, when we look at the risks associated with that business, particularly the longevity risk, we continue to have plenty of appetite to take on longevity risk, given the size of our mortality book. And with respect to the capital availability, given the numbers that we shared with you as to where we stood at year-end, we have more than adequate capital capacity to continue to pursue the business.
Alan Mark Finkelstein
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