Ladies and gentlemen, thank you for standing by and welcome to Prudential Quarterly Earnings 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 your host, Darin Arita. Please go ahead.

Thank you, Greg. Good morning, and thank you for joining our call. Representing Prudential on today’s call are Charlie Lowrey, Chairman and CEO; Rob Falzon, Vice Chairman; Andy Sullivan, Head of U.S. Businesses; Scott Sleyster, Head of International Businesses; Ken Tanji, Chief Financial Officer; and Rob Axel, Controller and Principal Accounting Officer. We will start with prepared comments by Charlie, Rob and Ken, and then we will take 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 slide titled Forward-Looking Statements and Non-GAAP Measures in the appendix to today’s presentation, which can be found on our website at investor.prudential.com. With that, I’ll hand it over to Charlie.

Thank you, Darin. Good morning, everyone, and thank you for joining us today. Yesterday, we reported fourth quarter earnings per share of $2.33. We also reported an adjusted operating return on equity of 12.1% for the full year. Looking back on 2019, we implemented a number of important actions to enhance our business and financial performance for the long-term. As a result, we have begun 2020 with a clear set of initiatives against which we will execute with a renewed confidence that our businesses can deliver increased earnings performance. I'll begin this morning by sharing a few accomplishments from 2019. First, we launched a process, talent and technology transformation initiative, which is on track to realize $500 million in run rate cost savings by 2022. As part of this program, we initiated a voluntary separation program for segments of our U.S. workforce during the fourth quarter, which is reducing our cost base over the course of 2020 and creating a more agile and competitive workforce. Second, we returned approximately $4 billion to shareholders via dividends and share repurchases. The 10% increase in our dividend represents the 12th consecutive year of dividend increases and produces a yield on book value in excess of 4%. Third, we completed our acquisition of Assurance IQ in October adding a leading direct-to-consumer financial wellness solutions platform. We're encouraged by the growth in customer demand, the interest from carriers wanting to put their products on the platform, and the level of talent we're attracting from well-known technology companies. Finally, we made progress in our ongoing efforts to reduce the variability of our quarterly earnings pattern and we added transparency to our quarterly financial performance. In 2019, our financial performance was impacted by a low interest rate environment, the annual assumption update in our individual life business…

Thank you, Charlie. I'll provide more color on how we are executing on our strategy within our U.S. PGIM and international businesses and in our near-term earnings growth outlook. Turning to Slide 5, our U.S. businesses consist of the workplace solutions, individual solutions, and Assurance IQ divisions that produce a diversified source of earnings from these investment spread and underwriting income. Our U.S. businesses have three key priorities for growth. First, we are investing in transforming our capabilities and the way we work to deliver a better customer experience while realizing efficiencies that will improve our margins. Second, we will continue to pursue targeted growth opportunities, including by way of example, the non-jumbo corporate segment of the full-service retirement market and the Premier segment of involuntary products offered by our group insurance business. And third, we remain committed to expanding our addressable market, including through workplace financial wellness and Assurance IQ. As a result of the continued thoughtful execution of these priorities, over time we expect higher earnings growth and improved returns. In the near-term we expect underlying earnings in the U.S. businesses to be relatively consistent with current levels, as underlying business growth in retirement, group insurance and Assurance IQ offset the impact from low interest rates and the net outflows in our individual annuities business as we maintain pricing discipline. We have included a slide in the appendix that provides our expected underlying earnings outlook by business. Now, turning to Slide 6, PGIM asset management business continues to leverage its diversified multi-manager model, global distribution in affiliated flows to grow in higher value-added strategies that serve investors globally. With a record $1.3 trillion of assets under management as of year-end, PGIM is a top 10 global asset manager. It is the fifth largest investor in fixed-income globally and…

Thanks, Rob. I'll begin on Slide 8 which provides insight into the earnings for first quarter 2020 relative to our fourth quarter 2019 results. We begin with pretax adjusted operating income in the fourth quarter which was $1.2 billion and resulted in earnings per share of $2.33 on an after-tax basis. Then we adjust for the following items. First, in the fourth quarter we had favorable variable investment income driven by equity market performance and prepayment income which was a benefit of $135 million. Second, the first quarter is expected to have lower seasonal expenses and implementation costs, which will result in a net benefit of $435 million or $0.85 per share and is comprised of two items. The fourth quarter included $160 million of seasonally higher expenses and $365 million of implementation costs including the impact from the voluntary separation program. As indicated in the 8-K filing on December 17, we expect implementation costs of $175 million in 2020 with about 20 million of these costs in the first quarter. And long-term compensation expense for retiree eligible employees is recognized when awards are granted, which is typically in the first quarter of each year. In the first quarter of 2020 we expect this expense to be about $70 million split between PGIM and corporate and other. These items net to $0.85 per share. Third, there are other considerations that we expect will have a $20 million more favorable impact in the first quarter relative to the fourth quarter. And fourth, we anticipate net investment income will be reduced by $10 million assuming reinvestment rates are held flat with the fourth-quarter. Combined, this gets us to a baseline of $2.95 per share for the first quarter of 2020 before including the impact of share repurchases, business growth, and market impacts…

Thank you. [Operator Instructions] Your first question comes from the line of Nigel Dally from Morgan Stanley. Please go ahead.

Great, thanks, and good morning. I had a question on annuities, is one of the areas that you do expect a decline in earnings in 2020, so I just wanted to check, is that just because of a modest decline in AUM because the anticipated outflows of evolving [indiscernible] depreciation or is there also an underlying element of some deterioration in the return on assets, and if it is the latter what's driving that/

So Nigel, thanks for your question. This is Andy. There's really two major impacts that we're seeing in the annuities business. one, as you pointed out is the outflow. That really is coming from we're being very disciplined in our pricing of product and in our return on new sales. And if you look back where we had some pretty sizable blocks back in the 2010 to 2012 range, so that's creating that outflow. The other thing I would point to though is, as that business is rolling across it surrender period, we are seeing business go to lower fee tiers and getting fee pressure from that effect.

Yes Nigel, this is Ken. I'll just add, you know I know there has been some questions about the ROA. You know, our primary objective with the profitability of our annuity business is to achieve a high ROE and our variable annuity business is very profitable and that is evident by the higher ROE that is in the high teens and that high ROE reflects your unique product design, our robust risk management, and disciplined pricing. And our hedging program is highly effective and it results in very stable earnings capital and cash flow even with significant market moves. So as a result, our earnings capital and cash flow will be less sensitive to markets than the account values and ROA may move as market moves, but our - again our earnings capital and cash flow will be stable and ROA is simply an outcome. Though the decline in rates and the increase in equity markets, while it had an increase in account values, had a less meaningful impact on our earnings, again due to our robust risk management.

Okay, I got it. Second question which is on dividends, good to see the incremental dividends again this quarter and I think that brings the payout ratio to around 35%. So the limit to how high you'd like to go or is there incremental upside there?

Yes, sur. So maybe just a little bit of reflection of our capital management and shareholder distribution philosophy that's been very consistent over time and it starts with our free cash flow, which is about 65% of after-tax earnings, this year a little bit better than that. And this we then distribute in both the forms of dividends and share repurchases. Our dividends have increased actually 12 years in a row now and if you looked at the average increased over the last five years, it's been 11%. And now that dividend represents as I mentioned in my opening comments of 4.4% yield on book value. Our board has also authorized 2 billion of share repurchases for 2020. So generally a very consistent approach to our shareholder distributions which balances both dividends and returns of excess capital through share repurchases.

Very helpful, thank you.

Your next question comes from the line of Andrew Kligerman from Credit Suisse. Please go ahead.

Hey, good morning. So maybe a question on interest rates, on last quarter's call you increased your guided interest rate sensitivity to $0.30 of EPS impacts for 50 basis point drop in rates and now we've seen in 2020, well maybe not today, but I would just maybe 30 basis points so far in 2020. So I just want to make sure there are no changes. Should we expect $0.15 to $0.20 negative impact on 2020 EPS based on that or are there some other factors there and with that maybe you could tell us what your new money yields are [indiscernible] portfolio?

Yes, sure. So the sensitivity that we gave to interest rates of 50 basis points at $0.30 that's still good. So that rough rule of thumb and do you apply it I think that still is appropriate. Our new money yields in the second half of the year were about 3.65% and you can think of that relative to our – and that's in the U.S. relative to our U.S. portfolio yield of about 4.2%.

Hey, thank you. And then just shifting over to the Individual Life segment I'm trying to thinking back second quarter you had that $200 million plus charge, the third quarter that was about $30 million of underwriting income below expectations and the 4Q is about $15 million now below expectations. So I'm wondering as we look forward, are you comfortable with underwriting assumptions into the year and your sales were really robust at $209 million you cited and is a record since 2013. So what are you selling that you are excited about?

Yes, so Andrew it's Andy, thanks for your question. So we would consider our actions are expected in the fourth quarter as in line with our expectations, the results was 103% and I would encourage you to think of – there was a quarter around that 100 plus or minus a couple of percent. So that – we really that's in line. As far as you referenced the assumption of dates, we're seeing that our business performance has been consistent with the updates that we made in the second quarter. Shifting over to the new business sales, we are very, very, pleased with the performance of sales in the Individual Life business as you cited it. Best quarter in five years. We're probably even more pleased that reverses the absolute level in the mix of sales. The mix has shifted pretty meaningfully away from guaranteed Universal Life which obviously is highly interest rate sensitive and over to where almost half of the sales are variable life which has much, much less sensitivity changes rates. So, I'm pleased with what we're seeing. The success is really coming from, we have a very, very strong brand name. We believe our product portfolio is very strong and our distribution system is top notch.

And then in term Life is at the balance of the sales margin?

Yes, awesome.

Thanks so much.

Your next question comes from the line of Thomas Gallagher from Evercore ISI. Please go ahead.

Good morning. Just a first question on the Assurance IQ deal in terms of how were you thinking about the results so far. It looks to me based on the disclosure that the revenues are coming bin below what was projected initially I think it was €500 million was the 2019 guide and looks closer to maybe €300 million on a full year basis. I guess, the first question is, is that right? And secondly, does that cause you to rethink revenue and earnings projections 2020, 2021?

So maybe, Tom, this is Andy. I'll start and then I'll had it off to ken. So as you would imagine these are early days to just closed the acquisition in October, but I'll tell you there is a lot of things that we're excited about. We are – as we sit here today even more excited about the strategic growth potential of this business? You know, in the fourth quarter we saw very, very strong consumer demand flow across the platform. We saw 6.5 million shoppers and just to define that for you. We define a shopper as an individual that has an absolute to buy a financial service product and that is willing to share their contact information with us. So we saw 6.5 million shoppers across the platform in 4Q. That is compared against 3.5 million in the year ago quarter, so we're very pleased with the level of consumer flow and consumer demand. A very positive for us on that is we have product providers literally lining of every shape and size that want to go ahead and get on the platform. So, from a revenue potential perspective, we - are strong as we were. We are in – kind of where we're focused right now is getting those additional products on to the platform. As far as your number is around revenue, yes, our revenue for the year came in just North of $300 million, and really what I would tell you there is, we had a lot more consumer demand than we had appointed agents, call it capacity on the platform and we learned some lessons in the quarter around the effort and energy and time line it takes to get the Medicare Advantage and under 65 healthcare agents on to the platform. I will tell you that we are already well underway in getting those agents appointed for 4Q of 2020. Now that's a completely rectifiable situation and we are well out in front of it.

The only thing I'd add there is, as you heard from Andy describe, this business is in a very high growth phase and we were not expecting meaningful earnings in the near term or in 2020 as a result. And so, it is early days and we will report this information to you each quarter and just as Andy indicated, just a reminder that is a seasonal business primarily fourth quarter loaded.

Got it and Ken would you say you are sticking to the $700 million revenue projection for 2020 still or is that sort of TB [ph] day? A – Ken Tanji: Yes well, okay now, given the high growth nature of this business, we don't want to get into the practice of updating each and every quarter. So again, you are going to see the results as they occur in a separate segment.

Okay, thanks. And then just my follow up is, is PRU planning on early adopting variable annuity reform at year-end 2019, and if not - is the plan to do full implementation in 2020 or three year phase and… A – Andy Sullivan: We're going to adopt on the effective date, which is January 01, 2020. But it reminds you that, we made big structural changes that were very much aligned with the new reform many years ago. So we're well positioned and expect to be very well capitalized before the reform and after the reform.

Okay, and Ken, no three year phase and you'd fully adopt in 2020. A – Ken Tanji: Only adopt January 1st.

Okay, thanks.

[Operator Instructions] Next, we'll go to the line of Erik Bass from Autonomous Research. Please go ahead.

Hi, thank you. So you've clearly taken two big steps to accelerate the timing of realizing the expense savings you've talked about. Can you just help us think about when we'll start to see these end results and where they'll come through, it’s whether in terms of the business segments or through in corporate? A – Andy Sullivan: Yes, sure, our 8-K that we filed, we gave some information of our belief of the progression of the saves. They were modest in 2019. And we provided an estimate for 2020. That $140 million would be realized in the P&L in the year. Those results you can expect to build as we go through the year. And you can expect to see them emerge with primarily in the U.S. businesses and in corporate, but throughout those businesses, but again, because it's a company, it's a U.S. business wide program.

Got it. And when you're giving sort of your walkthrough in the slides of kind of future earnings trajectory, am I right that there's nothing really explicitly contemplated there from savings in the businesses? A – Andy Sullivan: Only what was accomplished through 2019 or the first or the fourth quarter, and then any future improvement, whether it's from business growth or share repurchases or additional expenses, incremental expenses would not be included in that baseline. That's all in the future.

Got it. And then you mentioned in the remarks, potential actions to continue streamlining your business portfolio. And realized it's premature to say much specific, but how would you think of redeploying any proceeds, you potentially generate. Would you look to reinvest these in the businesses or potentially would they be available to return to shareholders?

The answer is yes. So what we mean is what we'll cross that bridge when we come to it. But let me take a step back for a moment and make a more general comment on how we think about capital in particular, the optimization of our capital, which I think we've been doing for years. So we always look across our businesses both domestically and internationally to ensure that we're optimizing capital deployment. And when we see attractive opportunities, you've seen us invest in growth and make acquisitions. And you've also seen us scale back our liquid divestitures over the years when they are better uses of capital. And then put that capital to use either in growing the franchise or if there aren't opportunities, returning it to shareholders. So we'll continue to look for ways to optimize capital deployment and to maximize outcomes for our shareholders, whether that be in investing in new business opportunities which again, you've seen us do or return capital to shareholders.

Thank you.

Your next question comes from the line of Ryan Krueger from KBW. Please go ahead.

Hi, good morning. I guess first have you completed the yearend cash flow testing analysis and if so, can you give us any indication of the impact?

Yes, the statutory filings will come out at the end of the month. And so yes, that will include our updated cash flow testing or acid adequacy testing. You'll see those results when we report them. What I offer you now is, given lower rates, we would expect some strengthening in our ATT reserves or cash flow testing. But we have derivative games or interest rate hedges that offset that and we expect to have RBC ratios that are above our AA financial strength objectives.

Got it, thanks. And then when you did the second quarter assumption review, and had some impacts to the individual life business, at the time, you talked about reinsurance as being a potential option to improve returns in that business. That's something that you're still contemplating and can you give us any update there?

Yes, Ryan this is Andy. So I would broaden your question and say we're taking a number of actions to strengthen the performance of our life business. First and foremost, we are working diligently on expense efficiencies. And you can think about that in the context of the broader work going on at the company and the €500 million in outcomes we expect over the next couple years. We already talked about the sales, which we think is a meaningful – will be a meaningful contributor to giving earnings left over time in the business. And then yes, you are correct. We have been looking at options and we'll continue to look at options from a reinsurance perspective – with the block. And what we're looking for there, obviously is the right partner, and the right terms that make economic sense for us. There's nothing currently that we want to report, but we'll keep you posted as we go forward.

All right, thank you.

Your next question comes from the line of Suneet Kamath from Citi. Please go ahead.

Thanks. Just focusing on Slide 20 of your deck in the international businesses, it looks like at least over the next 12 months Life Planner and Gibraltar are expected to be flat, which is, lower than that intermediate earnings growth guidance, you gave at Investor Day of mid single digits. So just want to get a sense of if we stay in this interest rate environment, what kind of gets us from flat back up to the mid single digits and sort of over what timeframe?

Hi Suneet, this is Scott. Let me take that. So as we pointed out, the underlying business fundamentals for our international businesses actually look quite strong. As Rob pointed out, our reinforced block is growing at about 4%, four to five in LP and about 1% in Gibraltar. Unfortunately, given the low rate environment, for the most part, we're giving back a lot of the earnings growth associated in the block and we're continuing to make some portfolio in investments on technology and the like. So right now, I would say over the, certainly looking out to this year, we think we're going to be closer to flat. We hope over time as we make adjustments that will start to build. But I would say even right now, looking at the intermediate term, we'd say we're looking at low single digit growth.

Okay, thanks. And then a follow up is just on Assurance IQ. I think it was mentioned that there are about 6.5 million shoppers in the fourth quarter, what should we expect to be the conversion rate of that balance? In other words of the 6.5 million how many would you expect to actually buy a product?

So, Suneet it’s Andy, I'll take your question. Conversion rate is a very complex topic. So it very much depends on the product mix that's on the platform. And as we talked about, we are in a phase of rapidly looking out – looking to roll new products onto the platform. So the conversion rates that we're currently experiencing are going to change quite a bit with that product mix shift, as well as, as you can imagine, with the shopper demand we had, but the mismatch with our agent capacity, our conversion was lower than we would expect going forward. At this point, we're not going to put out explicit numbers, but hopefully that gives you a way to think about it.

And have you put any PRU products on that platform yet? I know that was one of your objectives when you announced the deal.

Yes, so it absolutely is one of our primary objectives. We have been working diligently to get our simply Term Life product onto the platform. We are ahead of schedule on those plans and we will get that product on the platform in the second quarter of this year. And we're very encouraged with our brand name and the quality of our products that that will give both Assurance and obviously, Mother Prudential some lift.

Okay, thanks.

[Operator Instructions] Next, we'll go to the line of John Barnidge from Sandler O’Neill. Please go ahead.

Thank you. Have you seen any meaningful acceleration in PGIM’s UK business post election or demand for products from that market in continental Europe?

So, John, this is Andy, I'll take that question. So what I would tell you is in the short term, with all the flux that's been going on, we haven't seen any meaningful change or lift. I would kind of frame it as, in many ways the marketplace is a bit hunkered down. So as an example, on the real estate side, we haven't seen a whole lot of capital fundraising and deployment. We are absolutely ready. No matter how that plays out we have licenses in all the right places and people in all the right places to continue not only serving our current clients, but to capitalize on potential opportunities if and when the dust settles.

Okay, and then my followup, as we look back to SARS over 15 years ago in light of the coronavirus, do you see any increased demand for your products on the benefit side to note?

Hi, this is Scott again. On the specific question, I would say history would show that any time there is a widespread illness, it creates a greater sensitivity among the customer base about the kinds of products that we sell. In particular, as you know on the international side, especially, we're very focused on death protection products. And so, anytime you have something like this that goes on, you're very concerned about your employees and your customers and you're taking lots of actions there. But I do think there is a follow on effect of greater sensitivity to the products that we offer.

Great, thank you.

Your next question comes from the line of Humphrey Lee from Dowling & Partners. Please go ahead.

Good morning. Thank you for taking my questions. A question related to PGIM, so looking at your retail flows it looks very strong from an inflows perspective. I think it maybe even a record number. But then at the same time it seems like you have record withdrawals as well. I was just wondering if you can provide some color in terms of where you see the inflows and what happened in the outflows and how do you think about in 2020?

So yes, this is Andy, Humphrey. So, we are very pleased and proud of the retail flows that we saw as I think Rob mentioned in his opening. We moved up to number seven in the quarter. The retail flows are really coming from an expansion of our product portfolio on that platform, as well as the work that we've done around usage. From an outflow perspective, what I would say is that will tend to be episodic. And I think over the long term, we feel very, very good that due to our investment performance and our range of strategies that we will see a continued upward trend over time.

And I'm pretty, I would just add on the institutional side that, those flows can be a little bit lumpy. And we saw a couple of clients who wanted to consolidate this year, and sometimes we're the beneficiary of consolidation, sometimes we're not and a couple of dominoes, tilted against us this year. But that doesn't affect how we think about our institutional capability or the quality of flows that we can have going forward.

That makes sense. And then just a clarification regarding Assurance IQ. So I think Ken was talking about the - given the growth that you’re expecting and then you're not necessarily expecting any earnings from Assurance IQ in 2020. I just want to make sure that I heard that correctly because I think originally at the time of the announcement, you were expecting maybe $0.10 EPS accretion for 2020. So I just wanted to kind of bridge the indifferences.

Yes, no, I didn't mean to say no earnings. I said not meaningful earnings, again, because of the high growth nature of the phase that they're going through.

So the $0.10 is still kind of, I understand you're not going to update guidance or anything like that, but is the $0.10 still a reasonable expectation?

Again, we don't want to get in the practice of having to update this every quarter.

Okay. All right, fair enough. Thank you.

And I'd now like to turn the call back to Charlie Lowrey for any closing comments.

Okay, thank you very much. So in closing, I hope you all walk away from this call with a clear picture of our progress and priorities, our continued sense of conviction and urgency and our path forward to deliver meaningful outcomes for all of our stakeholders including investors. So thanks again for joining us today and have a nice day.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T teleconferencing. You may now disconnect.