Ladies and gentlemen, thank you for standing by. Welcome to the Second Quarter 2008 Results Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Eric Durant. Please go ahead.

Thank you very much. Good morning and thank you for joining our call. Before we go any further, I want to apologize for the late start today for some inexplicable reason. AT&T didn't think it was appropriate to let us join our call. But we're here now and we're looking forward to a good call with you for the next hour or so. Our participants today will be familiar to you. They are John Strangfeld, Rich Carbone, Mark Grier, Bernard Winograd, Ed Baird, and Peter Sayre. John, Rich and Mark have prepared comments, and after that, we will welcome your questions. In order to help you to understand Prudential Financial, we will make some forward-looking statements in the following presentation. It is possible that actual results may differ materially from the predictions we make today. Additional information regarding factors that could cause such a difference appears in the section titled forward-looking statements and non-GAAP measures of our earnings press release for the second quarter 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 asset values that will ultimately accrue to contract holders and recorded changes and contract holder liabilities resulting from changes in related asset values. The comparable GAAP presentation and the reconciliation between the two for the second quarter are set out in our earnings press release on our website. Additional historical information relating to the company's financial performance is also located on our website. John?

Thank you, Eric. Good morning, everyone, and welcome. The performance of our businesses was strong in the second quarter. Adjusted operating income was $2.02 versus $1.84 a year ago, an increase of 10%. Our annualized return on equity in the quarter was 15.8% based on an after-tax adjusted operating income. Financial market conditions remained challenging and had a negative effect on market values in our investment portfolio, contributing to a decline in net income. We recognized roughly $550 million in other-than-temporary fixed-income and equity impairments during the quarter. These were driven primarily by accounting rules rather than by credit-related loss of contractual cash flow. Rich Carbone will have more to say on this subject in a few moments. While market conditions bear-watching, we remain confident that we are on track to achieve earnings over time that are consistent with our long-term goals. This path is unlikely to be linear, but our earnings power in normal markets remains intact. Our investment portfolio is solid, our capital position is strong, and our businesses are well-positioned with attractive opportunities. Many of our businesses recorded strong sales or flows in the quarter, in particular, our individual life insurance, annuities, and retirement businesses in the U.S., as well as Gibraltar Life in Japan. Our Asset Management segment also registered healthy institutional and retail flows. We believe strong sales or flows demonstrate that we provide products and services that meet the needs of our clients, and secondly, our success demonstrates our reputation for quality in the markets we serve. I will now address our capital position and expectations for share repurchases over the balance of this year. At June 30, we estimate that excess capital amounted to approximately $4 billion, which is the sum of roughly $1 billion in excess common equity on the books and…

Thanks, John. I'm going to begin with an overview of the second quarter adjusted operating income. I'll try to go a little slower than the last time, so you can absorb what I'm about to say. All references and descriptions I'm about to make are for the Financial Services business. As you've seen from yesterday's release, we reported common stock earnings per share of $2.02 for the second quarter compared to $1.84 for the year-ago quarter based on adjusted operating income. While difficult financial market conditions had a negative impact on fees and other drivers in some of our businesses, I would consider this a strong quarter with annualized ROE of 15.8% based on an after-tax adjusted operating income. The current quarter and the comparable quarter of the prior year were relatively clean in terms of items that I would consider unusual or non-recurring. I only have two items in the current quarter that I would like to mention. In our Asset Management business, income from investment results and a proprietary fixed income fund contributed $0.07 per share, and going the other way, our Financial Advisory segment absorbed $0.08 per share of transition costs for the integration of Wachovia Securities... for the integration of A.G. Edwards, I should say, into Wachovia Securities. If I net out these two items, our earnings per share increased roughly 10% from a year ago, about the same as our reported EPS. Before Mark reviews our business results for the quarter, I would like to make some comments on net income and the investment portfolio. GAAP net income was $575 million or $1.35 per share for the second quarter as below the line items partially offset our operating results. This compares to net income of $835 million or $1.80 per share a year ago. Current…

Thanks, Rich. Hello, everyone. I'll start with the Insurance division. Adjusted operating income for our Individual Life Insurance business was $103 million for the current quarter, compared to $141 million a year ago. More than half of the decline in earnings came from mortality experience, which was within our band of expectations, but less favorable than a year ago. In addition, amortization of deferred policy acquisition costs and related items was roughly $15 million higher than a year ago. The downturn in the equity markets compared to strong equity market performance a year ago was largely responsible for the unfavorable swing in amortization. Sales, excluding COLI amounted to $131 million in the current quarter, up $13 million or 11% from a year ago. Strong current quarter sales of large case variable and universal life business through third-party distribution drove this sales increase. Overall, third-party distribution sales were up 22% from a year ago and accounted for more than two thirds of our current quarter individual life sales. Life Insurance sales by our Prudential agents were $38 million for the quarter, down from $42 million a year ago, reflecting both a lower agent count and a change in mix, as agents met a growing demand among their clients for our variable annuity products. The Prudential agent count stood at about 2,450 at the end of the second quarter, compared to roughly 2,500 a year earlier. Our annuity business reported adjusted operating income of $154 million in the second quarter compared to $180 million a year ago. Lower asset based fees contributed to the decrease. Our fees on variable annuities are generally based on daily account values. Market related declines in these account values concentrated in the first quarter of this year when the S&P 500 was off 10%, more than offset…

[Operator Instructions]. Our first question comes from the line of Suneet Kamath with Sanford Bernstein. Please go ahead.

Great. Thank you. Just two questions. First on the Wachovia Securities joint venture, would there be any impact on the put options that you have with respect to that business if Wachovia was acquired and then sort of related to that if Wachovia decided to sell the Wachovia securities business would they need your approval before they sell it? And then second on the capital, I think, John you mentioned the slowing of the buyback program was due to a couple of things, sort of the environment business growth opportunities and the cost of capital securities. Would it be possible to sort of rank those in terms of how they're influencing your thinking about reducing the buyback program? I guess what I'm trying to figure out is what should we be looking at as sort of an indication of when you might be more aggressive with buybacks or go back to the level that you talked about in the past? Thanks.

Let me comment briefly on Wachovia, and then I'll turn it back to John. I don't want to get into speculation about hypothetical transactions or every deal would have its own unique characteristics, but in general our rights would survive the overall sale and we don't have to approve a transaction related to this.

Suneet, this is John. Then responding to your second question with regard to the buyback, our reduction reflects our decision to manage capital this way. We're doing what we think is appropriate in the environment in which we're operating. In terms of sources of capital we continue to have excess capital, parts on the books, part is debt, part is hybrid capacity. Having said that, the issuance conditions for hybrids are not that favorable. On the other hand, in terms of the uses of capital our first prosperity has been and continues to be our business, and we do expect... we may see more opportunities in the M&A space prospectively than we have in recent times, and we certainly want to have the opportunity to pursue them. So, it's hard to rank order those factors, but what I would say all those factors together caused us to conclude that we should take a more measured approach on buybacks in the near term. And then our thought was, as we've done historically, what we would then do is update you all on the outlook beyond this year at the December Investor Day.

Just one clarification. We don't have to sell our stake if there is a transaction involving Wachovia Securities. We make our own decision there.

Okay. Thanks.

And our next question comes from the line of Nigel Dally with Morgan Stanley. Please go ahead.

Great, thanks. Just following up on the buyback, you mentioned opportunities for acquisitions as one of the reasons. Should we be reading into that that you're now beginning to see a pipeline of potential acquisition candidates? And perhaps if you can also give us an update as to if you were to make some acquisitions, which areas would you be most interested in? Thanks.

Okay. Nigel, this is John again. Let me speak broadly to that and then come a little more specific to your question. As you know, we have had a strong acquisition track record both in the U.S. and abroad, and we obviously have the capital to pursue acquisitions. Our pattern has been to do more acquisitions in choppy markets and frothy markets. And so whether it is Gibraltar, American Skandia, CIGNA, they are all examples of that. So in theory, the pendulum is moving our way. And having said that, however, acquisitions for us are nice to do, not have to do, which is very different than where we were three or five years ago, where we are at time where in a number of our businesses we needed to either double up or get out. It is important to say though along those same lines that we do not need to do M&A to achieve our long-term targets for ROE and growth rates. So we have the capital. We have the track record. It's a more favorable environment, but it's not essential we do it to fulfill our targets. Now more specific to your comment about the environment, the businesses we are most interested in would be in the annuities, retirement and selectively in the international businesses. These are not businesses that are necessarily themselves in distress. In fact, in most cases they are not. So we're more relying on circumstance where someone who owns one of these businesses decides it is not core. And I think what we think is we may start to see more of an environment here where certain companies find dispositions a more attractive way of raising capital than through primary offerings. I can't say we have seen that many examples of that yet, and I think it in part depends upon how deep and protracted some of the effects of the market turmoil are. But we think there is certainly a reasonable prospect of seeing more activity prospectively than we have seen in the past, and it would be our desire to use adversity to our advantage.

Very helpful, thanks.

And our next question comes from the line of Darin Arita from Deutsche Bank. Please go ahead.

Hi, thank you. I had one question and then our bank analyst, Mike Mayo had a question. In terms of the Japan Life Planner sales manager initiative, can you talk a little bit more about that and how you're measuring the success of it?

Sure, this is Ed Baird. The sales managers are key to attracting and developing life planners. That's true in all locations for us. It is essential to our business model. So one of the things we have been successful in doing recently is in focusing on developing life planners who have a specific interest in moving into management. And so with that in mind, we have during the second quarter promoted a number of life planners into that sales management role with the hope and expectation that in turn they will help us grow life planners in the quarters ahead.

Okay, it's Mike Mayo, John, how are you doing?

Greetings, Mike. How are you?

Doing great. Can you help me with my analysis of Wachovia? And what's the likelihood you put back your interest in the Wachovia brokerage business?

Mark, do you have a thought on that?

Mike, it's Mark. As you know, we have exercised the look back option, which allows us to wait about a year and a half more from now and make a decision about the lay of the land at that time with respect to a couple of different choices that we will have. We're very comfortable with having exercised the look back option, and we have said several times that we're anticipating favorable outcome with respect to where we go with this venture given the choices that we have and given their proven track record of executing, particularly in acquisitions. So right now we are on a track to play out the look back option and see where we are when the time comes to make that decision.

So we should be surprised if you made any announcement in the next year?

That would be inconsistent with what we have been saying about playing out the look back option and deciding where we will go from there.

Okay. So bottom-line takeaway? That last one I did not understand. That would be inconsistent... it was like a double negative I think.

It was. Bottom-line takeaway is that we have no change in what we said when we exercised the look back option, and we expect to continue on this path.

All right. Thanks a lot. Take care, John.

Thank you, Mike.

Our next question comes from the line of Jeff Schuman with KBW. Please go ahead.

Thanks. Good morning. John, I just wanted to come back to the capital issue one more time. Probably beating this to death, but I want to make sure I understand. There is no change in your views in terms of ultimate capital structure and ultimate leverage. The 70/20/10 is still the template. So we should understand your comments today as just suggesting that you're going to move towards that target maybe on a little different trajectory and consider the mix of share repurchase versus the acquisitions and other investments? Is that the right way to think about it?

That is a correct way to think about it.

Okay. Great. Thanks.

And our next question comes from Ed Spehar with Merrill Lynch. Please go ahead.

Thank you. Good morning, everyone. A couple of questions. First, could you, Mark, give us any thoughts on the likelihood of the international investments earnings rebounding from the current quarter level? I know they were at a low level, and you cited I think two factors, including one that was trading-related. So I'm just wondering was there any sort of unusually weak results there that you would think you might see some kind of a bounce back without any major change in the environment? And then secondly, I was wondering if you could help us at all on how we should think about real estate incentive fees in the third quarter? I think you said there was nothing in the second quarter, and I'm assuming that there... it is public information about the Chrysler building, and I am wondering if you can help us at all out even sort of general thoughts of how something would work when I think the stake was... I don't know if it was probably a triple in terms of what you paid for it versus what you sold it for.

Hi. I'm going to make a brief comment on international investments and then turn it over to Ed Baird, and then we will wind up with Bernard Winograd on the last question. Just the reference in my talking points using the word trading and international investments is a reference to our global commodities business. And the point of that was that it was more or less a non-event for the quarter. Not trading as you might think of it in other contexts. And I will let Ed comment on the business prospects for international investments.

Yes, the real action there is on the international investment side, and the core of that activity is in Korea. And, as you know, the Korean market has had the same drop comparable to what's going on in the states. So we had experienced a hit in terms of the front-end fees that we recollect on the brokerage side as well as the performance fees on the AUM, and that is in contrast to the opposite situation that transpired this time a year ago. So, any changes there will be driven by the externalities of that marketplace.

And it's Bernard Winograd. In general, the real estate... U.S. commercial real estate market remains subdued. Very few transactions and very little trend of the kind that would trigger incentive fees. Most of the incentive fees that we have recognized in the real estate business so far this year, in fact, have come from overseas. And there were none in the second quarter. I can't comment specifically on the Chrysler building, but I do want to underline the fact that we had... we were acting on behalf of clients there. And while that closed early in the quarter and the clients certainly had a good result, I don't think you are going to read into that that will give rise to a big fee for us necessarily. The terms of the fees on any individual fund or transaction are very specific to the individual fund, and we would talk about any that became material in the quarter after they had occurred.

Okay, thank you.

Our next question comes from the line of Colin Devine with Citigroup. Please go ahead.

Good morning. Couple of questions. First, on the capital management, just so we are clear here, in the company's stated goal, John, was three years to 2010 at $3.5 billion per for the buybacks. Is the reduction today solely for '08 and the previous guidance is unchanged, or are you reducing that? Secondly, for Rich, you didn't talk about the effective tax rate, which I believe was at its lowest for, well, in at least the last four years on a quarterly basis. What was going on there? Because as we're starting to look at pre-tax operating earnings, it seems to us that with 11% drop through the first half, this may be the first time in seven years proves earnings on a pre-tax basis actually go down for the year.

Let me comment on the tax rate first, John?

Sure. Go ahead, Rich.

Okay. Colin, if you noticed, in the first quarter, our effective tax rate was 26.5%. We expect our full-year effective tax rate to be 26%. GAAP requires that at each quarter you true up your expected full-year average so that effective tax rate in the second quarter was 25.5%, got up to a full-year average of 26% year-to-date, which is our expected effective tax rate for the full year.

Should I be drawing any conclusions from the decline in pre-tax earnings? Is there underlying growth rate then really starting here to slow? Because that certainly will be a record low effective tax rate for Prudential at least in the last seven years?

Sure. But the growth rate in earnings is really not connected to our effective tax rate.

That is my point, Rich, and on pre-tax earnings versus the tax rate.

Let me just finish what I was saying there, Colin. You might have another thought. But the effective tax rate is not impacted by the growth in earnings. It is impacted by the absolute amount of earnings as the proportion of tax-advantaged income looms larger in the effective tax rate calculation. Now, let me... Colin, just one other thing. During the year, it's opportunistic. There were certain tax-advantage deals that came about in the first and second quarter that we entered into relating to energy, and they are also dampening the tax rate. But I think what's important here as you think about our full-year effective tax rate is going to come in at 26%.

I guess, Rich, the point itself, why is this... our pretax operating earnings slowing? And well, it could, in fact, be down for the first time in seven years.

Well, pretax operating income is down for all the reasons we've suggested. It's mainly driven by the lower equity levels and the lower fees that we get of those equity levels.

Thank you.

Yes, hi Colin, this is John. On the buyback question and the like, as we have phrased before, our view on where we're going from an optimal capital structure is it remains the same. We will make our recommendations to the Board of the Directors in the fall regarding '09. And after their approval, we will let you know, which would be at... our intention would be at Investor Day.

John, am I mistaken that do you have a publicly stated goal of $3.5 billion for the next... each of the next three years? That's what you stated.

Colin, this is Rich. I think those have been in slides at Investor Day, and they are not goals. I think they were scenarios that if we were to buy back at those levels for the next three years, our equity would remain about the same over that period. I don't think they were quite targets or goals. They were scenarios. And in each year in the past couple of years, we've taken the amount that we were at, it was $3 billion in '96 and $3.5 billion… it's [ph] '96, in 2006 and $3.5 billion in 2007 at Investor Day, and we used those numbers to project three years out under scenarios as opposed to a target.

I will go back and check the slides, Rich, but I think it is lowered at $2.5 billion for... through 2010. Thanks.

Sure. This is Mark. Just one set of comments. With respect to our goals, our goals are the ROE and growth targets and efficient and effective capital management, building high-return businesses that have good growth prospects. And that's what we're trying to do here and everything that we're doing is in that context and directed at achieving those goals. Next question, please.

Our next question comes from the line of Eric Berg with Lehman Brothers. Please go ahead.

Thanks very much and good afternoon to everyone. Two questions. First for Mark, you mentioned that the flows in the 401(k) business, in your defined contribution business, were affected by the transition associated with the acquisition of the California Bank's DC business. Can you give us a sense... I think you already have, and I'm hoping you could either repeat it or build on what you said... of what the net flows in the quarter would have been if results hadn't been disrupted by the Union Bank acquisition, what the net flows would have been?

Eric, this is John. I think the specifics on that should come from Bernard, but let me just add a little context as we've talked about retirement on many of these calls in recent times. Where we began with this was with negative flows in '05 when we started the integration with CIGNA and we then transitioned to basically break even in '06, and then modestly positive in '07, progress that we expected or frankly we wanted to see a little more progress than we realized in '07. What we're now seeing in the first half of '08 is greater progress and the type of progress that we've been confident in achieving in this business, and you're right that you need to fuel back the impact of the [inaudible] collapses to get the true picture on that. Bernard?

Yes, in rough order of magnitude, Eric, is in the absence of the UBAC [ph] shock laps and I'll talk more about just what that is, we did had, roughly speaking, $1 billion of net flows in the third quarter. The shock lapse is essentially what has happened at the end of the period during which the acquired business with clients had to make a decision whether to convert to our platform and system, or not. And so essentially, we have finished the... we have finished the process of giving everybody the decision and we now know what the lapses are. So on the transaction as a whole, we now know that the lapses were less than modestly less than what we anticipated in the absence of other lapse in this quarter, would have been roughly $1 billion of client flows. Eric, does that answer your question?

It doesn't. Can I presume from your comments that because they were less than what you had anticipated, Bernard, that lapses have since receded?

Well, since there's only three weeks or four weeks since the end of June, but persistency ignoring this as we said it was 95%.

Okay. My second and final question relates to Japan and this is actually a follow up to Darin Arita's question. Am I right when I say that the promotion of agents into the manager ranks is really an initiative that has been underway for some time at Prudential of Japan. Is that right and relatively in the end, when can we expect to start seeing what you would consider to be, however you define it, strong agent growth out of POJ? Thank you.

Go ahead, Ed.

Eric, you right in that we have always had an emphasis on encouraging life planners to consider a career in management. What has been different more recently is we have been recruiting some life planners specifically with the intention of moving them more rapidly into a management career. So rather than it simply being a future alternative for a successful life planner, it becomes a primary career at the time of hire and consequently, we expect to, say, play a pivotal role recruiting future life planners that this will help us strengthen in the growth. Now if you look at life planner growth in POJ and you put in the credit for the transfer that have taken place to Gibraltar and to the life infusing to the bank channel, you see that actually the growth is running around 5%. And while that's not as high as we would like it to be, it's not inconsistent with the kind of growth we'd like. But we believe that by strengthening the sales management track we can move that into a higher single-digit, which is what we'd like to see in a large mature organization like POJ.

Our next question comes from the line of Tom Sonati [ph] with Goldman Sachs. Please go ahead.

Hi, good morning. Clearly I don't have quite the history what you guys... others do in line. But I just want to go back to tax rate question, at 26%, I think 26% for the year, you are running a good 250 basis points lower than you did in '06 and'07 and what I'm just trying to gauge, I understanding you can get there through more tax advantage investments and perhaps some of the tax benefits you may have had elsewhere. But is this, should we think about this as a run rate going forward as we think about '09 '10, or this more of a temporary phenomenon based on the mix of your business and investments?

It's a 2008 phenomena, and come Investor Day, we'll update you on our tax rate in the future.

Okay, so your ability to manage that tax rate, it's kind of the stars came together this year, is that kind of way to think about it?

The stars came together and the relative mix or tax advantage income versus total income.

Okay, great. And then my only other question was, as you mentioned the impact obviously on your business, where the way you mentioned that you're looking at 2% stand in the equity market and then just clarify when you do that are you facing that of a daily averaging or just quarter-end to quarter-end?

Daily averaging.

Okay, great. Thank you.

We have a question from [inaudible]. Please go ahead.

My questions have been asked and answered, thanks.

Thank you. This is all the time we have for questions. I would now like to turn this conference back to our presenters.

Thank you very much. We would just simply like to conclude by saying that we are pleased with our results, we are gratified by the visibility, the performance of our underlying businesses. We are cautiously optimistic about the near-term and remain confident about our long-term prospects. We thank you very much for joining us on this call and look forward to future calls. Have a good day.

Thank you. Ladies and gentlemen, this conference will be available for replay after one 'o clock p.m. today to midnight August 7, 2008. You may access the replay service by dialing 1-800-475-6701 and entering the access code 904643, international participants dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844, access code 904643. This concludes our conference for today and thank you for using AT&T Executive Teleconference. You may now disconnect.