Alan Mark Finkelstein - Senior Vice President & Head-Investor Relations John Robert Strangfeld - Chairman & Chief Executive Officer Mark B. Grier - Vice Chairman Robert F. Falzon - Chief Financial Officer & Executive Vice President Stephen P. Pelletier - Executive Vice President & COO-US Business Unit Charlie F.

Lowrey - Chief Operating Officer-International & EVP.

Jamminder Singh Bhullar - JPMorgan Securities LLC Jay H. Gelb - Barclays Capital, Inc. Nigel P. Dally - Morgan Stanley & Co. LLC Seth M. Weiss - Bank of America Merrill Lynch Erik J. Bass - Citigroup Global Markets, Inc. (Broker) Suneet L. Kamath - UBS Securities LLC Ryan Krueger - Keefe, Bruyette & Woods, Inc.

Thomas George Gallagher - Credit Suisse Securities (USA) LLC (Broker).

Ladies and gentlemen, thank you for standing by and welcome to the Third Quarter 2015 Earnings Teleconference. At this time, all lines are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given to you at that time. And as a reminder, today's conference call is being recorded.

I would now like to turn the conference over to Mr. Mark Finkelstein. Please go ahead..

Thank you, Cynthia. 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. Good morning, everyone, and thank you for joining us. Prudential reported solid third quarter results and we are well on track to achieve the financial objectives we set out for the year.

Operating EPS, excluding market driven and discrete items, is $2.52, in line with what we reported last year, which benefited from higher non-coupon investment income. Our annualized ROE for the quarter on that same basis is just over 14%, modestly above our long-term 13% to 14% objective.

Overall, we benefited from good core growth in many of our businesses and strong underwriting margins across our domestic and international insurance operations. This helped mitigate the impacts of weakening foreign currencies and some pressure on investment spreads.

Non-coupon investment income was modestly below our average expectations for the quarter and our U.S. businesses also continue to see some impacts on core spreads from persistent low rates. Mark and Rob will walk through the specifics of our key drivers, results and capital position. I'll provide some higher level observations on our businesses.

To start, our international businesses had very strong sales results, up 12% over the prior year on a constant currency basis. And the growth was broad-based. Our life planner business experienced double-digit sales growth, including 12% in Japan. And Gibraltar grew nicely in all three distribution channels.

And while it was a good quarter for sales, we are particularly encouraged by the core growth drivers underlying our sales figures. The life planner count grew 6% over the prior year in Japan and we exceeded 1,000 life planners in our Brazil operation in the quarter.

At Gibraltar, we continue to see stabilization in our life planner count and life consultant count at higher productivity levels, and have shown success expanding our bank channel footprint, all while emphasizing the death protection products where we are best able to achieve our targeted margins.

We are also pleased with the results we saw in our U.S. business. Our retirement business provided positive net flows of about $2 billion in the quarter, benefiting from a large-case sale in full service. We did not execute any large pension transfer transaction in the quarter.

As we have mentioned in the past, this is a business where transaction activity is inevitably lumpy. As a case in point, we look forward to completing two recently announced funded transactions in the fourth quarter, JCPenney and Philips U.S.

The pension risk transfer business continues to produce favorable underwriting results and we see good opportunities for long-term growth as we have highlighted in the past. Asset management also produced positive net flows at over $3 billion in the quarter.

Our investment performance remains strong and we continue to invest in capabilities, people, and distribution to take advantage of our opportunity to organically grow this business long term. Sales in our annuity business are down year over year and sequentially, reflecting mainly discipline around product features and pricing.

However, we continue to show success with our diversification efforts, which include the benefit from our reinsurance contract with Union Hamilton, which transfers about half of our living benefit rider exposure on our HDI product sales. Our U.S. individual life and group insurance businesses both performed well in the quarter.

We produced strong sales growth in individual life insurance, up 63% over the prior year, benefiting from recent product and pricing actions and some larger policy sales in the quarter.

Earnings also benefited from another quarter of favorable mortality experience, compared to our average expectations, as we have experienced in 10 out of the last 12 quarters.

And in group insurance, we remain pleased with the continued progress we are making in improving our disability underwriting margins, as we had a solid performance in both group life and disability. And finally, our capital position remains strong and continues to support a healthy capital return to our shareholders.

This includes deployment of approximately $500 million this quarter through our dividend and share repurchase program. Since the beginning of 2010, we have returned nearly $9 billion to shareholders in the form of dividends and buybacks, which is above and beyond the capital deployed to support organic growth and M&A.

Looking forward, we continue to feel very good about our prospects. Now, like others, we are clearly impacted by headwinds such as persistent low interest rates and the potential for ongoing market volatility, and we are also impacted over the near term by weakening foreign currencies, though we have longer term mitigants.

And additionally we are investing in technology and growth opportunities that have a payback over a multi-year timeframe. On the regulatory front, we continue to play a highly active and constructive role, working with domestic and international regulatory bodies, including as it relates to capital frameworks.

And while the progress is ongoing, we remain encouraged by the dialogue on several topics, such as our interactions with the Federal Reserve on group supervision, and the NAIC with respect to the early progress on the issue of variable annuity asset and liability statutory valuations.

Now, back to the quarter, for one final concluding comment before handing it over to Mark.

We saw this quarter, in a period of significant market volatility, the resilience of our businesses and earnings, benefiting from successful execution and innovation, over many years, that have resulted in a differentiated franchise that produces strong ROEs and significant excess capital over time. With that, I will now hand it over to Mark.

Mark?.

Thank you, John. Good morning, good afternoon, or good evening. I will take you through our results and then I will turn it over to Rob Falzon, who will cover our capital and liquidity pictures. On slide 2, I'll start with an overview of our financial results for the quarter.

On a reported basis, common stock earnings per share amounted to $2.40 for the third quarter, based on after-tax adjusted operating income. This compares to EPS of $2.20 a year ago.

After adjusting for market-driven and discrete items in both the current quarter and the year-ago quarter, EPS was essentially flat compared to a year ago, as a few inherently variable items offset business growth and favorable underwriting results. I'll mention a few highlights of our business performance that affected the comparison to a year ago.

First, we continued to produce solid business growth in our international life planner business on a constant currency basis, and in our U.S. businesses, including Individual Life, where we have been growing profitable books of universal life and term insurance. And second, we produced solid underwriting results in our U.S.

and international insurance protection businesses, including improved experience in group insurance compared to a year ago and favorable case experience in our pension risk transfer business. These benefits were offset by three primary items.

One, a lower contribution from net investment results with returns on non-coupon investments below our average expectations in the current quarter. In contrast, in the year-ago quarter, the contribution was well above expectations.

Two, higher net expenses in several businesses, and three, less favorable currency exchange rates in international insurance. I would also note that both the current quarter and the year ago quarter benefited from true-ups of our effective tax rates to full year expectations. For the current quarter, the benefit to earnings per share is about $0.05.

On a GAAP basis, including amounts categorized as realized investment gains or losses and results from divested businesses, we reported net income of $1.5 billion for the current quarter.

This compares to $465 million a year ago, which included a non-AOI charge related to our annual actuarial review, which we completed last year in the third quarter, as well as the negative impact from foreign currency exchange rate re-measurement, which we have taken steps to mitigate.

Book value per share amounted to $73.19 at the end of the third quarter, up $8.44 from yearend after the payment of three quarterly dividends totaling $1.74 per share. This is excluding accumulated other comprehensive income, or AOCI, and after adjusting the numbers to remove the impact of foreign currency exchange rate re-measurement.

Annualized ROE for the first nine months of the year, based on after-tax adjusted operating income, excluding market-driven and discrete items, and book value excluding AOI and the impact of foreign currency re-measurement, was 15.2%.

This ROE reflects strong underlying business performance bolstered by a net benefit that we would estimate at about 80 basis points from net favorable variances in comparison to our average quarterly expectations that we've called out in a number of areas, mainly during the first half of the year.

These primarily include mortality and pension risk transfer case experience, the seasonal revenue pattern in our international insurance businesses and returns on non-coupon investments. I'll discuss the impact of notable run rate items on the current quarter in reviewing our business results.

In thinking about our earnings pattern, I would also note that historically, in each of the past three years, a number of our businesses have had higher than average expenses in the fourth quarter, including the impact of seasonal items such as annual policyholder mailings.

Turning to slide 3, we have a short list of market-driven and discrete items included in our results for the current quarter, with a net unfavorable impact of $0.12 per share.

In the annuities business, charges, mainly driven by adjustments in reserves for guaranteed minimum death and income benefits and DAC to reflect market performance, amounted to $0.15 per share. And in retirement, reserve refinements related to systems enhancements resulted in a net benefit of $0.03 per share.

During the year-ago quarter, market-driven and discrete items produced a net charge of $0.34 per share. This was mainly driven by our annual actuarial review, which we moved up to the second quarter commencing this year.

Moving to slide 4, on a GAAP basis, our net income of $1.5 billion in the current quarter includes amounts characterized as net realized investment gains of $438 million and divested business results and other items outside of adjusted operating income, amounting to pre-tax income of $146 million, comprised of the items you see on this slide.

Of the larger items, mark-to-market on derivatives mainly related to management of asset and liability durations and currency exposures, resulted in a $304 million pre-tax gain. General portfolio and related activities, mainly in our international operations, resulted in net pre-tax gains of $295 million.

And impairments and credit losses amounted to $166 million in the quarter. While impairments have increased in the current quarter from recent levels, we haven't seen significant signs of credit deterioration in our investment portfolio.

The majority of the current quarter impairments relate to equity holdings and were taken based on length of time with unrealized losses. The current quarter income from divested businesses of $116 million mainly represents results of the Closed Block.

Moving to our business results, and starting on 5, I'll discuss the comparative results excluding the market-driven and discrete items that I have mentioned. Slide 5 highlights individual annuities. Annuities results were $414 million for the quarter, up by $11 million from a year ago.

The earnings increase from a year ago came mainly from lower interest expense. Most of our operating earnings in the annuities business come from base contract charges linked to daily account values.

Policy charges and fees are down about 2% from a year ago, tracking the decline in average account values, which was largely driven by the equity market downturn in the current quarter. The decline in fees was largely offset by lower distribution costs and base amortization.

Slide 6 gives a view of our trend in earnings and return on assets in the annuity business. Return on assets for the quarter was 105 basis points, roughly in line with the first two quarters of this year.

The increase from 101 basis points in the year-ago quarter came mainly from lower interest expense and more favorable base amortization factors in the current quarter. Return on assets can vary within a range, depending on the quarterly pattern of expenses and other non-linear items. Slide 7 presents our annuity sales.

Our gross variable annuity sales for the quarter were $2.1 billion, compared to $2.6 billion in the year-ago quarter. The decline in sales mainly reflects measures we have taken to improve the risk profile of our products and maintain appropriate returns.

During the current quarter, we reinsured the living benefit rider risk on about $500 million of our $1.2 billion of total highest daily or HDI sales, under the agreement we entered with Union Hamilton, effective on April 1 of this year.

This agreement, which provides for reinsurance of about 50% of our HDI 3.0 optional living benefit risk, on most new business for 2015 and 2016, up to a maximum of $5 billion, will effectively convert about half of our sales with the HDI rider to new business that looks like it doesn't have optional living benefit exposure.

Sales of just under $600 million of our Prudential defined income product, which directs the clients' investment to a fixed income fund which we manage, and sales of about $300 million of products without living benefit guarantees also contributed to our mix diversification.

Overall, our efforts to diversify our variable annuity exposure are showing success as the majority of our current quarter sales didn't add to our net exposure to equity-market-linked HDI living benefit guarantees. Slide 8 highlights the retirement business.

Earnings for the retirement business amounted to $222 million for the current quarter, down $47 million from $269 million a year ago. The decrease was driven by a $48 million lower contribution from net investment results.

Current quarter returns from non-coupon investments were about $10 million below our average expectations, while the contribution to results for the year ago quarter was about $35 million above our average expectations.

Fixed income spread was essentially unchanged from a year ago, as the benefit of growth in our funded pension risk transfer business was largely offset by lower earned rates in our full service portfolio.

Lower fees on full service business, reflecting fee pressures over the past year, and higher expenses in the first quarter essentially offset a greater contribution from pension risk transfer case experience, driven by favorable underwriting results and by growth.

The current quarter contribution from case experience was about $10 million above our average expectations. Turning to slide 9, total retirement gross deposits and sales were $11.5 billion for the current quarter, compared to $36.2 billion a year ago, which included $29 billion for two significant longevity reinsurance transactions.

Net flows for the current quarter were $2.4 billion. Full service gross sales and deposits shown in the dark blue bars were $9.4 billion for the quarter, up from $5.2 billion a year ago. Current quarter sales included a major case win for $4.7 billion that we closed in July covering the state of Connecticut's employee retirement plan.

Standalone institutional gross sales were about $2 billion in the current quarter, largely unchanged from a year ago, excluding the longevity reinsurance transactions I mentioned earlier.

The contribution to sales from investment-only stable value wraps, shown in the light blue bar, was $1.2 billion in the current quarter, more than double the year ago level, with the increase mainly driven by participant add-ons in existing accounts.

As we have commented in the past, sales of both full service and institutional retirement products can fluctuate meaningfully on a quarterly basis.

Total retirement account values amounted to $366 billion at the end of the quarter, up by $10 billion or 3% from a year earlier, reflecting net flows of about $9 billion over the past year, with market performance essentially neutral. Slide 10 highlights the asset management business.

The asset management business reported adjusted operating income of $180 million for the current quarter, compared to $200 million a year ago.

While most of the segment's results come from asset management fees, the decrease from a year ago was mainly driven by a $14 million lower contribution from incentive, transaction, strategic investing and commercial mortgage activities. This contribution is inherently variable since it reflects changing valuations and the timing of transactions.

And it amounted to $22 million for the current quarter, about $10 million below the average of the preceding eight quarters. The benefit from continued growth of asset management fees was offset by higher expenses in the current quarter.

The higher level of expenses included start-up costs for new real estate funds, greater mutual fund distribution costs, reflecting sales mix, and continued investment in our teams and infrastructure.

Asset management fees were $536 million for the current quarter, up 5% from a year ago, tracking a 5% increase in unaffiliated third party institutional and retail assets under management, which totaled $465 billion at the end of the quarter.

Net inflows over the past quarter amounted to $17 billion, including $3 billion in the current quarter, which was driven by strong institutional fixed income flows. Slide 11 highlights our U.S. individual life business. Individual life earnings were $183 million for the current quarter, up $15 million from a year ago.

The increase in earnings was mainly driven by growth of our book of universal life and term insurance.

Over the past year, annualized new business premiums for these products totaled about $460 million, contributing to growth of our business in force and an increase of $23 million, or 3%, in individual life revenues from premiums, policy charges and fee income after adjusting for the impact of our annual actuarial review a year ago.

Claims experience, including mortality, reserve updates and related amortization was favorable in both the current quarter and the year-ago quarter, with the contribution of current quarter results about $25 million greater than our average expectations.

Slide 12 shows individual life sales based on annualized new business premiums, which amounted to $158 million for the current quarter, up $61 million from a year ago, with increases in each of our major product groups.

The increase of $39 million in universal life sales was mainly driven by greater sales in selected age bands where we made pricing changes earlier this year to bring our rates more in line with the market. Variable life sales in the green bars are up by $15 million from a year ago, reflecting several large cases in the current quarter.

Slide 13 highlights the group insurance business. Group insurance earnings amounted to $44 million in the current quarter, up by $10 million from a year ago. The increase came mainly from more favorable Group Life underwriting results. An improvement in group disability insurance was largely offset by lower earned premiums on that business.

Slide 14 presents a timeline of our group insurance benefits ratios after adjustment for the impact of our actuarial reviews and other refinements.

In comparing our benefits ratios for the current and year-ago quarters to the historical results shown on the left side of the slide, you can see the impact of actions we have taken in group disability to bring these ratios to an acceptable level while maintaining pricing discipline in group life.

Through the current quarter, we have repriced or allowed to lapse over 80% of our group disability business that was on the books three years ago. Generally implementing mid- to high-single-digit price increases and we have enhanced our claims management processes over that period.

The group life benefits ratio for the current quarter was near the favorable end of our expected range and improved about 1 percentage point from a year ago, with a smaller average claim size and lower new claim count. As I mentioned, the current quarter group disabilities benefits ratio also improved from a year ago.

While the benefit of the actions we have taken has now been evident over several quarters, we continue to expect that claims experience will fluctuate from one quarter to another.

Moving now to international insurance, highlighted on slide 15, earnings for our life planner business was $398 million for the quarter, essentially unchanged from a year ago.

Excluding a $14 million negative impact of foreign currency exchange rates, which reflect our hedging of yen income at 91 in 2015 versus 82 a year earlier, life planner earnings are up $15 million or 4%.

We have substantially completed the hedging of our expected yen earnings for 2016 and our hedging rate for next year is expected to be 106 yen per U.S. dollar.

Current quarter Life Planner results benefited from continued business growth, with insurance revenues including premiums, policy charges, and fees growing by 11% from a year ago on a constant dollar basis.

The benefit to results from continued business growth was partially offset by higher expenses, including costs to enhance our agency distribution infrastructure in Japan and costs for technology, as part of an ongoing process.

Mortality experience was favorable in relation to our average expectations in both the current quarter and the year-ago quarter. Slide 16 highlights Gibraltar Life and other operations. Earnings for Gibraltar Life were $414 million for the current quarter, compared to $446 million a year ago.

Excluding a negative impact of $19 million on the comparison from foreign currency exchange rates, results were down by $13 million from a year ago.

This decrease was driven by a lower net contribution (27:19 – 27:22) benefit to current quarter results from non-coupon investments and mortgage prepayment income was roughly in line with our average expectations, but below the level of a year ago.

The lower contribution from these variable items was partly offset by higher fixed income returns, reflecting changes in portfolio mix. Turning to slide 17, international insurance sales on a constant-dollar basis were $798 million for the current quarter, up by $88 million or 12% from a year ago.

Each of our distribution channels, life planners, Gibraltar life consultants, banks and independent agencies contributed to the increase, and we benefited from sales growth in Japan, as well as other key markets.

Sales by our life planners in Japan, shown in the dark blue bars, were $199 million in the current quarter, up $21 million or 12% from a year ago. The increase reflected a 6% greater life planner count, partly driven by an increase in our number of sales managers.

At a product level, the increase came mainly from greater sales of term insurance, and to a lesser extent whole life, which included a modest amount of accelerated purchases in anticipation of an announced price increase for single premium products.

Life planner sales outside of Japan were up by $15 million from a year ago, mainly driven by an increase in Brazil where we have also grown life planner count meaningfully and we surpassed the milestone of 1,000 agents in Brazil in the third quarter.

Gibraltar's life consultant sales, shown in the light blue bars, amounted to $199 million in the current quarter, up by $13 million, or 7%, from a year ago, reflecting higher agent productivity as measured by number of policies sold per agent per month. At the product level, the increase was mainly driven by greater sales of whole life products.

Sales through the bank channel, shown in the gray bars, amounted to $208 million for the current quarter, up by $35 million or 20% from a year ago.

The increase was mainly driven by greater sales of recurring premium death protection products, most significantly 10-pay [29:48] and longer, reflecting broadening distribution among our Japanese bank relationships and the attractiveness of these products in the estate planning or inheritance market.

Sales through independent agents, shown in the green bars, amounted to $72 million in the current quarter. The $4 million increase from a year ago was driven by greater term insurance sales. Slide 18 shows the results of corporate and other operations.

Corporate and other operations reported a loss of $308 million for the current quarter, compared to a $320 million loss a year ago. The corporate and other loss includes a number of items that are inherently variable and the reduction in loss compared to a year ago reflects some favorability in the current quarter.

For example, we benefited about $20 million from a reinsurance settlement in the current quarter. Now I'll turn it over to Rob..

Thank you, Mark. I'm going to give you an update on some key items under the heading of financial strength and flexibility. Starting on slide 19. We continue to manage our insurance companies to levels of capital that we believe are consistent with AA standards. For Prudential Insurance, we manage to a 400% RBC ratio.

At the end of last year, Prudential Insurance reported an RBC ratio of 498% with total adjusted capital, or TAC, of $15 billion.

While we don't perform a quarterly bottoms-up RBC calculation, we estimate that our September 30 RBC ratio remains well above our 400% target, after giving effect to the results for the first nine months of the year, including a $2 billion dividend to the parent company in May following the completion of our closed block restructuring.

In Japan, Prudential of Japan and Gibraltar Life reported strong solvency margins of 853% and 927%, respectively, as of June 30. We're managing these companies to solvency margins of 600% to 700%, which we believe is consistent with AA balance sheet strength and we are comfortably above our targets.

Looking at our overall capital position on slide 20, we calculate our on-balance sheet capital capacity by comparing the statutory capital position of Prudential Insurance to our 400% RBC ratio target, and then add capital capacity held in Japan and other operations and at the parent company.

As of the end of last year, we estimated our available on-balance sheet capital capacity at approximately $2 billion on a net basis. This represented about $4 billion on a gross basis, less $2 billion earmarked to reduce capital debt, to arrive at our long-term targeted financial leverage ratio of 25%.

During the first nine months of this year, we returned about $1.5 billion to shareholders. These returns included three quarterly common stock dividends totaling about $800 million and the repurchase of $750 million of our common stock.

Our financial leverage ratio, which is based on capital debt, decreased from 29.3% at yearend to 25.5% at the end of the third quarter.

The reduction of financial leverage reflected our receipt of the $2 billion dividend from Prudential Insurance that I mentioned, together with capital generated from other sources, which reduced the need to support capital requirements in our businesses with debt.

At the end of the third quarter, we've made a minor adjustment to earmark a portion of our capital capacity for a reduction of capital debt to arrive at our target level of 25%. After giving effect to that adjustment, our capital capacity stood at over $3 billion.

This compares to about $2 billion at yearend and is consistent with the greater than $3 billion that we disclosed at June 30. Our financial leverage ratio increased from 23.9% at June 30 to 25.5% at September 30.

This reflects an increase in our level of capital debt of about $600 million, as the fallen interest rates and just over $200 million in net hedging costs, reflecting market volatility, resulted in a funding need at our variable annuity captive reinsurer.

Our total leverage ratio, which includes all borrowings, also came down from 45.1% at year end to 42.8% at September 30, below our targeted level of 45%, as we applied cash held at the parent company to repay external debt maturing during the third quarter.

The fair value of the Japan equity hedge, which is not included in our capital capacity, was about $2 billion at September 30. Turning to the cash position at the parent company, cash and short-term investments net of outstanding commercial paper amounted to about $4.2 billion as of September 30.

The cash in excess of our targeted $1.3 billion liquidity cushion is available to repay maturing operating debt, to fund operating needs and to deploy over time for strategic and capital management purposes. Now, I'll turn it back over to John..

Thank you, Rob. So, let's open it up for Q&A..

Certainly. Our first question will come from the line of Jimmy Bhullar with JPMorgan. Your line is open..

Hi, first a question for Rob on capital. Could you discuss the impact that the drop in interest rates had on your capital position? And then you've talked about – talked in the past about reducing your sensitivity – the sensitivity of capital to interest rates.

Maybe go into a little bit of detail on what are some of the things you are doing to do that?.

Okay, Jimmy, so referring back to the – to my introductory remarks, if you think about the capital debt going up by around $600 million, that had two principal components to it. First was the breakage on our hedging within the VA captive. And the second piece of that was largely driven by the interest rate movements during the course of the quarter.

If you looked at our capital capacity at the end of the quarter, and you did not adjust for it – you didn't increase our leverage ratio – we would still have had capital capacity above the $3 billion, consistent with the – with what I articulated.

So interest rates clearly had an impact during the course of the quarter, but we would characterize it as relatively modest in terms of the overall impact on our capital capacity.

I think as we've talked about before, with regard to the sensitivity to interest rates, we think about management of our capital as a – sorry, we think of management of interest rate risk in what you would consider to be normal levels of volatility as something that we would hold capital against.

So, you would see some movement in our capital capacity as a result of normal volatility, quarter to quarter, in interest rates.

However, what we do is outside of that range of normal volatility, we look to hedge out the risk and think of it as in the tails at (37:29) outcomes for interest rates, such that our capital capacity would be preserved in more extreme outcomes.

And on the $600 million that you mentioned, I think the VA hedge breakage was around $200 million, which would imply that the rate impact was less than $0.5 billion, in that neighborhood, right?.

I'm not sure I'm following your numbers, Jimmy.

When you say the VA hedge breakage, you're talking about the hedge target breakage?.

Yeah, yeah..

Yeah, so – well, that was in the – from the $600 million, that hedge breakage was the $200ish million that I deducted from that $600 million. So, the residual $400 million would have been net everything else, interest rates included in there..

Okay. And then just one last question on pension closeout deals, your experience on the deals has been better than what you have, I guess, priced for, and – but there has been a lot of talk about pricing and margins on deals that are being done in Europe and the press and the sort of – some of the articles implied that pricing has gotten aggressive.

What's your view on the return potential of the business that you've done in Europe versus what you're doing in the US?.

Jimmy, this is Steve. I'll speak to that. We remain very confident about our pricing of these transactions, both in terms of what we've already written and also the experience we are having as we pursue additional transactions. In regard to some of the recent press commentary, I'd give our perspective as follows.

We participate as a reinsurer working with primary UK insurers in the longevity business. We see that global market structure as having a couple of key benefits.

We think that that market structure provides additional capacity to UK plan sponsors looking to manage longevity risk and we also think that global structure provides additional protection to UK plan participants in terms of the pension promises that have been made to them.

So we view this market structure as having a lot of benefits for all parties involved. In terms of the business that we write and how we price it, we apply a very robust economic capital framework that drives our pricing and supports the business with prudent capital standards.

We put this framework through significant and continuous stress testing and it's the same model we use for domestic deals.

And then finally, I'd just mention something that you've heard from us before, just a reminder that our PRT pricing, both funded and unfunded, does not take into account any enterprise-level benefits around risk diversification or longevity mortality netting. So, like I say, we remain quite confident in our pricing..

Okay, thank you..

Thank you. Our next question comes from the line of Jay Gelb with Barclays. Your line is open..

Thank you. My first question was on pension risk transfer. What are the deposit amounts we should expect for Prudential from JCPenney and Philips U.S.

in 4Q?.

Jay, this is Steve again. I'll cover that. The deposit amounts that will emerge from JCPenney have yet to be determined. That deal is operating on a variable structure. We expect it will be between $0.5 billion and $1.5 billion. Regarding Philips U.S., the total transaction is $1.1 billion. Our share of that will be $450 million.

I will also point out that on Philips U.S., we are the account administrator for all retirees and will be receiving additional consideration for providing that service on the entire retiree block..

That's $450 million, not euros, right?.

Oh, yes, correct. This is the Philips U.S. business..

Okay.

Can you talk about the pipeline for pension risk transfer looking out?.

We feel the pipeline remains, and is, quite solid. I think what we've been seeing over the past year and continue to see, Jay, is that the pipeline is really being driven by secular trends.

We are looking at, for example, the updated mortality tables are really having an impact in terms of accentuating awareness of longevity risk and desire to manage it. Also, continuous increasing of PBGC premiums also has an effect. So all of these factors contribute to what we see as a very healthy pipeline going forward..

It's been several years since we've seen a significant jumbo deal come to market for Prudential.

Is the pipeline strong for those types of deals as well?.

Those obviously are – while PRT inherently is lumpy, those real jumbo deals are even lumpier. So discussions continue, but we'll see what unfolds. In regard to several years, Jay, I would just point out that on the longevity side, at least, we did have a deal that is jumbo by any standard in mid-2014..

Of course. Thank you..

Thank you..

Thank you. Our next question comes from the line of Nigel Dally with Morgan Stanley. Your line is open..

Great. Thanks. First, on variable annuities, I would be interested in your views as to how the recent NAIC proposals as it relates to captors may impact you. And then second, in your comments you made the comment that expenses tend to be seasonally higher in the fourth quarter.

Any reason to believe the impact this year will be any different, and is it possible to quantify that seasonal impact? Thanks..

It's Rob, Nigel. Let me handle the first question. The – with respect to the variable annuities work, first let me step back and go through with you some of the things that we said at Investor Day. We went through the reasons during the course of our presentation as to why we reinsured our VA rider to a captive.

Those reasons related to the disconnect between stat accounting and the risk management tools that we use in order – or to manage the rider.

Also recall that we hold capital to CTE 97 and that we have reserves in our captives that are almost two times the reserves that would be required – that we would otherwise be required to hold at the seeding company.

We're constantly evaluating that construct, making sure that we're managing risk on an economic basis, and in addition to that, we're looking at the implications of that on capital and liquidity, on accounting, both from a statutory and a GAAP standpoint and also on hedging efficiency.

So consistent with that objective, we've been, as you can imagine, highly engaged in the conversation with the NAIC with Oliver Wyman and with others in the industry. And what I would say is that – what we would say is that all of the right issues are on the table and are being discussed. We're encouraged by the dialogue.

It could produce both a good outcome for companies and regulators, but I would also say that these are still early days in what is likely to be a fairly long process.

And Nigel, I'll take your question regarding seasonality of expenses. The annuities business is definitely one of those businesses that Mark mentioned where we see quarterly seasonality.

And while I'm not going to offer a quantification of what we'll see in the fourth quarter, if you take a look at last year's fourth quarter, you saw that impact and I see no reason to believe that we won't be seeing that same seasonality in this year's 4Q..

And Nigel, on the international side, I would say the same thing. Obviously, expenses vary quarter to quarter depending upon a variety of factors, one of which is, of course, seasonality.

And we see that in international in the fourth quarter every year, because in the fourth quarter you have additional administrative costs including annual mailings to customers. And that doesn't sound like a lot, except in Japan, for instance, we have 10 million policies and over 3 million mailings that we do.

In addition, there are in international discretionary costs that we incur later in the year, depending upon budgets, and often systems initiatives are concentrated to finish by the end of the year. So there's additional spending in the fourth quarter and we'd expect that pattern to continue this year..

So – it's Rob, and let me pull those two pieces together.

If you looked at our historical pattern of sort of fourth quarter total overhead expenses as contrasted to the prior three quarters, what you would find is that somewhere between 5% and 10% is sort of the level of increase that you will find in the fourth quarter, vis-à-vis the prior three, and that would amount to something that's averaged historically between $150 million and $200 million of increased costs in the fourth quarter, vis-à-vis the average for the nine months that would have preceded that, Nigel..

Okay. Very helpful. Thank you..

Thank you. Our next question comes from the line of Seth Weiss with Bank of America. Your line is open..

Hi, thank you. If I could just tag along the question of seasonality.

Thinking about the asset management and seasonality that tends to benefit fees in the fourth quarter, how should we think about that in the upcoming quarter, given more volatile equity markets over the course of this year?.

Seth, this is Steve. While, again, I wouldn't offer any kind of quantification, we do see incentive fees, for example, being something that is – where there is a seasonal lift in the fourth quarter. Again, that pattern may very well persist.

There could be some impact from market volatility, but the nature of that business is such that a fair amount of those fees are realized in the fourth quarter..

Okay.

So some of those fees are independent of what happens with market performance or is it purely market performance-based, if we think about how that will eventually come in?.

Some will be impacted either directly or indirectly by market volatility, some are largely uncorrelated with equity market volatility at least..

Great. Thank you..

Thank you. Our next question will come from the line of Eric Bass with Citigroup, your line is open..

Hi, thank you. For individual life, you've consistently had mortality that's been favorable to your expectations the past couple of years, which is in contrast to what we've seen for much of the industry. Can you give any color on where you've seen positive trends? And I think Pru historically was less active in the older age markets.

So do you think this could be a factor?.

Erik, this is Steve. I think that we are seeing our positive mortality trends in – pretty much across our book of business, both in terms of legacy Prudential and legacy Hartford business and in different age bands. So, it's been a fairly comprehensive experience and it's also been contributed to both in terms of severity and incidents.

So I wouldn't attribute it to any particular pockets. I would just also point out that we do continuously adjust our expectations. So, the variances that we are speaking about above our expectations are variations above a bar that we do continue to raise on a very gradual basis.

So, we are pleased with the performance of the book and having said that, inherently this can be something that is variable. And we don't take that into our run rate, and we do regularly call it out for your modeling purposes..

Got it. Thank you for the color. And then, just quickly on Habitat.

Do you have any update on that transaction and potential timing for closing?.

Yeah, the acquisition is pending with regulators. And we and our prospective partners continue to work through the process with regulators and look forward to closing the transaction obviously as quickly as possible, which we estimate to be either later this year or in the first quarter of next year..

Okay. Thank you..

Thank you. Our next question comes from the line of Suneet Kamath with UBS. Your line is open..

Thanks, good morning. A question about Japan. I guess, at some point in mid-September, there were some news about the standard mortality table in Japan changing and what that could have – that that could have a negative impact, excuse me, on some of the mortality margins that are built into the life insurance products in that country.

Can you, Charlie, give us your thoughts on that?.

Yeah. I think we look at underwriting very carefully as we do pricing and we take all of that into account as obviously as best we can and put that into what we think of as a differentiated distribution model, and work with our clients in order to come up with the best products that we can on their behalf.

So, if I can, let me take a little bit of a step back and tell you about the process and hopefully that gets a little bit to your question. We think we have very much of a differentiated distribution model, as well as – and this gets a little bit to what you are talking about as well, product selection and product mix.

And we apply disciplined execution to that. So, let me go through each of these just a little bit, and hopefully help answer your question. But, we operate a proprietary distribution, or tied agency system, based on the quality of both of the life planners and the life plan consultants.

This has been the base of our business since it was formed and for over a quarter of a century, we have been doing business in this way, providing the highest quality service to our customers over the lifetime, over their lifetime. And this isn't an inexpensive model to operate.

We take two or three out of every 100 people we interview to become life planners and they can't have been in the life insurance business before. So, we spend a great deal of time, effort, and money training them. And hence we have the extraordinary retention, persistency, and productivity metrics that we enjoy.

And if you look at POJ or Gibraltar's retention ratios of 88% or POG's – POJ's persistency level of 95% or Gib's of 93%, you really see the kind of business we write. And that represents a majority of our business, because you can't take an existing agency system and retrain people. It just doesn't work.

So, this is one of the fundamental differences between us and others, many of whom either have tens of thousands of part-time agents or who rely completely on third parties for distribution.

And to the extent that we do use third parties, which we do, with our bank and IA partners, we also have a differentiated strategy as well, in that we second life planners into banks to provide exceptional service and expertise into selling of death protection products into the banks.

And we do the same with a select number of IAs who appreciate and want the level of service that we provide. So, our model really is based on service, which we believe provides us with a differentiated and sustainable strategy. So, that's the first point.

The second point gets to your question a little more, which is the product selection and product mix, because with this kind of distribution and the quality of distribution, we are able to sell products that aren't easy to sell. Right? And this is the second point of distinction.

We sell life insurance or death protection, which is the hardest product to sell and we have been doing it for our entire existence, and that is the basis of the model of this business because we don't let LPs or LCs sell savings products or A&H products when they first come in.

Why? Because the demand for these – because these are demand products that are easy to sell and we want them to be able to sell death protection, which remains at the core of our business, in terms of how we underwrite, who we underwrite, and the pricing of those products.

Yeah, we sell A&H and some savings products as well, but we mostly sell death protection and require our field force to do so. You've seen that in every channel, especially this quarter. And we price all products appropriately to make sure we get our required level of profitability, which is where the discipline comes in.

Because we can do that, because of the level of the service that we provide to our customers and our distribution partners. And that finally gets to the execution, which, again, I think deals a little bit with your questions. We can have this great strategy but it's all about execution and we think that we continue to execute.

When we first started the Life Planner model 25 years ago, we hired two out of every 100 applicants to become life planners. Today, we still hire two out of every 100 applicants. In fact, in Brazil, where we are seeing significant growth, the number is slightly less than two.

However, the execution of the business doesn't just relate to people, but it relates to products as well. And we have a long history of rigorous pricing and underwriting and canceling products if we can't reach the targeted level of profitability.

So, we either reduce commissions or increase pricing or, in fact, discontinue sales of certain products that are more interest-rate sensitive, if they can't meet our profit expectations.

As an example, both POJ and Gibraltar reduced crediting rates on the un-denominated single-premium whole life from 1% to 75 basis points in the beginning of July, or Gibraltar discontinued its single premium endowment product at the same time.

So, when you think about the mortality tables, when you think about the way in which we approach this business, we approach it from the perspective of focusing very strongly on death protection, very high quality service, and an extraordinarily good underwriting process that takes those variables into account.

So, I just wanted to go through and give you a little bit of that background because hopefully that helps address the question from both a little bit of a granular perspective, but more importantly, from taking a step back and telling you really how we think about the business and the history of the business over time and, in fact, the way we're going to run the business going forward..

Okay.

So just to paraphrase, I guess, you are saying that your model is adaptable if we get some new mortality tables, or frankly, anything that comes down the pike, that you will make the necessary adjustments to maintain your profitability target?.

Oh, you bet. We absolutely do that. I mean, we reprice our fixed annuities every other week. And you've seen us, I think, make the changes necessary, in terms of either lowering commissions or increasing products, either increasing pricing or in fact, just discontinuing sales if we can't make it work.

So, we're going to protect our margins and you can see that in the ROEs we generate over time and the low level of volatility that this business is – has displayed for well over a decade..

Got it. And then just the last one for, I guess, either Mark or Rob. So, I'm looking at this page 11 in your supplement and you have this roughly $8 billion of operating debt which I think you kind of reclassify as needed, based on your capital requirements changing.

Is there a limitation in terms of how much of this $8 billion number could get reclassified as operating debt? Because it's tied to some assets or something like that; it's already being – it's already funding some asset?.

I think you mean get reclassified from operating to capital debt? Is that what you're asking, Suneet?.

Yeah. I might have said it the other way around, but I think you get my drift..

Yeah, so it's currently classified as operating. Yeah, the amount of that, of borrowings that we have, that is – that's backing – operating debt that's backing cash is close to $2.5 billion, so that amount could be sitting in cash and could be used for capital purposes should we need it..

Okay.

But anything above that, that's sitting in this operating debt, is already funding something and so it could not be reclassified?.

Yeah. And most of that is for purposes of our captive financing AXXX financing in our life captives..

Okay. Thanks, guys..

Thank you. Our next question comes from the line of Ryan Krueger with KBW. Your line is open..

Hi, thanks. Good morning. The life planner count in Japan has been picking up a lot this year.

Can you give us some underlying color on the dynamics there?.

Sure, I'm happy to. It's up 6%. This is a new record in Japan, and it really pertains to a couple of things. On the face of it, it's a higher number of sales managers. But let me just go through the three ins and outs, because I think this will give some clarification.

First of all, the three ins and outs that can take place, the first ones are recruits versus terminations. And we had a stronger – we had strong recruits and lower terminations this quarter. So, that was a good factor. Secondly is the process of turning life planners into sales managers. And over the past two years, we have added 54 new sales managers.

Now, initially when you do that, as you saw last year in the spring, that lowers the LP count. But then theoretically adds to the LP count later, because a sales manager's job is obviously to recruit, develop, and retain LPs. And the new sales managers tend to recruit more than existing sales managers, who already manage a group of LPs.

So, we expected the increase in sales managers to help LP recruiting in the future. And that's exactly what happened. We said – there's always a lag effect, right? So, it usually takes about a year for the new sales managers to begin to really recruit and gear up.

And when we recruited a large number of sales managers, or changed them from life planners to sales managers last year, we expected that to have an effect this year and it really has. The third in and out is taking LPs and seconding them into the bank.

So what we do is we take the lower performing LPs and give them the opportunity to become secondees in the bank channel. Because we train the LPs to perform three tasks – to prospect, to present, and to close. And if an LP fails, it's usually because he or she can't prospect. But in the banks, the beautiful part of it is they don't need to prospect.

So, as secondees they can perform very well and advocate selling recurring premium death protection products, which is exactly what they are doing and you see the increased sales in banks because of it. So having said all of this, let me sort of talk about growth rates.

Because the growth rate for LPs in Japan over the long term is unlikely to materially accelerate, given the large number of LPs we have in Japan. So, if you consolidate all the ins and outs, the long term average growth of POJ for LPs is about 2% or 3%. Last year, we had a couple of quarters of either zero or maybe a little negative.

This quarter was 6%. So, you will see some fluctuation over time, but if you looked at a long-term average, it's probably 2% or 3%..

Okay, great. Thanks. And then just last year on the outlook call you talked about investing in technology systems and infrastructure.

Can you just give an update in terms of how far along you are on that and if you'd expect similar costs related to those initiatives next year?.

So, is that – are you referring to international or are you referring to....

Oh, no, that was an overall company question..

Okay..

Yeah, so, Ryan, it's Rob. Perhaps I'll take that. I would say the spending is consistent with what we've – the guidance that we provided last year.

The net spending may be, from a pace – surely from a pace standpoint, a little under the guidance that we otherwise provided, but we think the numbers that we provided last year are still sort of relevant and there may be slippage between any given year, but that level of investment has not expanded.

It has gotten drawn out a little bit, but by and large is in place or intact, and we would expect to continue to make that order of magnitude of investments into the businesses..

Great. Thank you..

Cynthia, I think we will take one more question, please..

And that will be from the line of Tom Gallagher with Credit Suisse. Your line is open..

Thanks. The question I had is on – if I look at the yen hedge guidance you just gave us for 2016, 106, that's about a 15%, 16% depreciation versus prior year, so a fairly sizable headwind.

And if I recall correctly, the discussion about the yen capital hedge, which currently, I think you said is a $2 billion gain, was put in place to preserve some of that earnings power that you may otherwise lose.

So can we assume that you're going to look to monetize and utilize some of that $2 billion to offset some of this headwind or is that just a much longer term structure that we should be thinking about and not something that's going to offset the 2016 impact?.

So Tom, it's Rob. Let me take two pieces of that. First, with regard to earnings impact, remember, when you take those percentages that you have to apply that just to the yen component of our earnings.

And so just by way of example, if it's kind of helpful to (64:11) that if we applied the 106 to this year – this quarter's results, it would have resulted in about a 2% dilution or about $0.06 a share. So just to kind of give you a benchmark for the impact of that change in the plan rate.

The second question with regard to the yen equity hedge, what you stated is absolutely correct. That hedge is both designed and calibrated so that over time the gains from the hedge can be used to offset any dilution in earnings that are resulting from depreciation in the yen.

And with respect to sort of how and when that may be done, I would simply observe that we understand the mechanic that we put in place and to how the mechanic needs to work in order to be effectuated..

Got you. Okay.

So – and just a follow-up on that, is that – so in what way should we be thinking about the monetization of that and a potential offset to the earnings drag? Could it span the gamut of extra buybacks, M&A, like how should we be thinking about that?.

So the way that it's calibrated is such that it generates cash, capital that can be redeployed either in buybacks or in acquisitions, acquisitions would be at our target return of 13% to 14%, yielding those kind of returns, such that if we did either the buybacks or we did the acquisitions with that capital, we would restore the earnings that were lost as a result of the depreciation in the yen over sort of a period-to-period basis.

Okay. And then my last question is, Rob, just going back to the comments you made about the NAIC proposal on VA captives, is it – could it be something as positive for you as releasing that, I think it was a $4 billion reserve redundancy that you guys had been maintaining in the captive.

I mean, is there a – and maybe that's the Super Bowl case in terms of what the outcome here might be for you. But is there any way to – and I realize there's probably more work to be done here, but I believe what you said previously is you guys hold $8 billion of reserves and on an economic basis you probably only need half of that.

But so anyway, any help you can give on that would be appreciated..

Yeah, Tom, so a couple of things. First, let me clarify. What we stated is that the amount of reserves we're holding are a little less than two times that which would be required at the seeding company.

We didn't put that in terms of the economic capital in reserves that we would be holding, but rather that which is required from a statutory standpoint. I would say, as I mentioned, when I responded to the earlier question, we're very encouraged by the dialogue and think that it could have a good outcome.

But having said that, I also mentioned it's a long process, and therefore I think it's inappropriate to speculate on the outcome of the discussion at this point or how it may influence our plans.

I would say that based on the level of capital in reserves that we hold, we believe that we have adequate capacity to accommodate a range of outcomes that could be coming out of the NAIC process.

But regardless of what comes out of that process, we're going to continue a very disciplined approach around the managing our VA risks and holding a prudent level of capital and reserves against those risks..

Okay, thanks..

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