Ladies and gentlemen, thank you for standing by, and welcome to the Prudential First Quarter 2010 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Mr. Eric Durant. Please go ahead.

Thank you, Cynthia. Good morning, everyone. 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 first quarter of 2010, 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 are expected to ultimately accrue to contract holders and recorded changes in contract-holder liabilities resulting from changes in related asset values. The comparable GAAP presentation and the reconciliation between the two for the first 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. As is our practice, we'll begin with prepared comments from John Strangfeld, Rich Carbone and Mark Grier. And then we'll open to questions. John?

Thank you, Eric, and good morning, everyone. Thank you for joining us. I'll be fairly brief. Our earnings per share in the first quarter were up 45% from last year. Based on after-tax adjusted operating income of the Financial Services Businesses. We had a small number of items we consider discrete or market driven that added to our results. But overall, we view our earnings this quarter as relatively clean and straightforward. Each of our divisions contributed to our earnings growth in the first quarter. We earned an ROE of 11% for the quarter based on annualized after-tax adjusted operating income of the Financial Services Businesses. We're off to a strong start for reaching our goals for the year. Our all-in measures were also strong for the quarter. Namely, net income was $536 million or $1.15 per share. Our investment portfolio is performing well, as we are in a $2.4 billion net unrealized gain position at the end of the quarter. Our GAAP book value per share reached $54.63 at the end of the quarter, up almost $21 or more than 60% from a year ago. Excluding the impact of unrealized gains and losses on investments in pension and post-retirement benefits, book value increased by $5.6 billion or 28%. And Prudential Insurance reported an RBC of 577 as of year end 2009. Just as important, as these measures, our business momentum continues strong as is demonstrated by strong sales and flows nearly across the board. Sales in Individual Annuities remain exceptionally robust, and Full Service Retirement recorded its 10th consecutive quarter of positive net additions. Our Asset Management business continues to enjoy net positive inflows in both institutional and retail AUM. And finally, International Insurance sales reached a new high as measured by annualized new business premiums based on constant…

Thanks, John, and good morning, everyone. As you've seen from yesterday's release, we reported common stock earnings per share of $1.49 for the first quarter, based on adjusted operating income for the Financial Services Business. This represents a 45% increase from the $1.03 per share in the year ago. I view our business results this quarter as strong, giving us a good start towards our objectives for the year. ROE for the quarter was 11% based on after-tax adjusted operating income, and the underlying drivers of our business performance are also very strong. Account values in Asset Management and Annuities are more market-sensitive businesses that increased over the past year, leading to higher fees and lower costs on guaranteed benefits. Our enhanced competitive position has allowed us to write a substantial amount of profitable business, especially in Annuities. Our Asset Management business is benefiting from strong asset flows, and we are beginning to see commercial real estate valuations improve. And growth of our International Insurance business is benefiting from expanded distribution. The list of significant market driven or discrete items, affecting current quarter results is short, but significant at all within the Annuities business which I will go through now. We had benefited from about $0.08 per share from the release of a portion of our reserves for guaranteed minimum debt and income benefits. We have a benefit of about $0.03 per share from a positive unlocking, which reduced the amortization of deferred policy acquisition costs. Mark to market of hedging positions and embedded derivatives associated with our living benefits, together with the hedge we put on to help protect our capital from adverse swings in the equity markets had a favorable impact of about $0.03 per share. We closed out and completed a review of the accounting for a…

Excuse me. Thank you, Rich, and thank you, John. I'll start with some comments on the investment portfolio. Market conditions improved somewhat in the first quarter, with credit spreads tightening modestly for many asset classes during the quarter. As Rich mentioned, our general account credit losses and impairments this quarter were largely isolated to particular holdings within our Japanese insurance companies and impairments within our domestic general account were insignificant. We have a very high-quality, diversified investment portfolio, representing the risks that we want to take and feel that we are appropriately paid for. In our general account fixed maturity portfolio, continued narrowing of credit spreads, together with a modest decline in base interest rates has increased our net unrealized gain position to $2.4 billion at the end of the first quarter, up from $1 billion at year end. This compares to net unrealized losses of $7.5 billion a year earlier. Gross unrealized losses on fixed maturities in general accounts stood at $3.7 billion at the end of the quarter. This represents a recovery of more than $7 billion from the $11.2 billion level a year earlier. About 6.5% of our $137 billion general account fixed maturity portfolio ranks below high and the highest quality based on amortized costs and NAIC categories as of the end of the first quarter. This compares to roughly 7% as of year end. Our general account commercial and other loan holdings amounted to $21 billion as of the end of the quarter based on principal balances. At March 31, the average loan-to-value ratio for our commercial mortgage holdings is 65%, and the average debt service coverage ratio is 1.76. Delinquencies are still light, amounting to about 1% of the holding. Now I'll cover our business results for the quarter starting with the U.S. business.…

[Operator Instructions] Our first question will come from the line of Andrew Kligerman from UBS.

First quick question around capital and thoughts about redeployment, share repurchase, timeframe?

That's a pretty broad question, Andrew. Let me start with what we think we've got. I think I mentioned in my opening remarks, we've got on balance sheet between $3.5 billion and $4 billion of capital capacity. We've said before that's first, for business growth and perhaps second, for acquisitions and third, to buffer us against bad things that happen to good people.

I mean let's say you don't do any acquisitions by the end of the year. Would that be the time to start seriously considering a share repurchase? Could you repurchase shares at that time?

Andrew, this is John. Let me respond to that concern as far as to how long would you give it, or how soon will you know type of question. Our thinking on this is more driven by a change in opportunity set than it is my driven by an arbitrary point in time. Meaning, if we think the prospect or a likelihood of putting the money to work has diminished because the opportunity set has contracted, we'll be considering giving it back in terms of the capital. But by opportunity set contracting, what I'm really referring to is things we would be interested in pursuing that are done away from us. At some point that hasn't happened, meaning the things that have been announced were now things we aspire to do. So to us, our opportunities set has not changed. In some respects, we've taken transaction capacity out of the market by virtue of other people committing themselves to other ideas. So in terms of thinking about this, it's hard to put it in a context of fixed number. I think, I'd think of it more in terms of fixed timeline. I think it more in terms of a significant change in the opportunity set. We like our prospects for investing in the business. And in terms of M&As, we've talked about it before as opportunistic. It's not a strategic necessity, and we want to be positioned to take advantage of these opportunities. But if those opportunities are not proving out, that's when we consider giving it back as we have thought about and as they've acted upon in the past. So more about the conceptual framework, less about a specific point in time.

And, John, in a nutshell, if you like, there are opportunities out there from an M&A standpoint right now?

We continue to think there are opportunities out there. And it's very hard to predict the certainty of whether they happen. But we think we're in a position, a desirable position in terms of our ability to pursue them. And whether that translates into outcomes or not, it's too early to call.

And just in terms of liquidity, you mentioned that you have -- where are you going with that capital and at what yields are you seeing right now, as you invest some of that liquidity?

Let me address the liquidity point. We've got about -- well, you saw we have $2 billion of cash. We've got $2 billion of cash at the holding company. A billion of that is our cash cushion, and then a billion of that is excess liquidity. We've also got proceeds from the Wachovia sale, the JV sale, that are still sitting inside a PICA. I want to just make one thing clear on this, right. The $2 billion of the net $3.7 billion in proceeds is really funding the investment that PICA had. So PICA is going to take that money, keep that money and invest it in long-term assets inside the general account. And it will be between 4.5%, 5% long term. The remainder of that is excess liquidity in PICA that will need to be deployed at some point. And it's probably a little better than $1.7 billion. As far as the rates go, let me let Mark make some comments about where the investment portfolio.

If we look at the core sort of fixed rate investment that we make, thinking of maturities in the let's say three- to seven-year neighborhood centered around five years. We're in the same market that everybody else is in. And the rates that we are able to earn would be in the neighborhood of 4.8% to 5%.

And then just lastly, real quickly on commercial real estate. Hearing that mortgage rates are coming down pretty sharply, does that change your view of what you're going to hold in terms of commercial real estates or whether you're going to make more loans? Just what are you seeing in the environment? Does it change your strategy given the improvement in values?

Andrew, it's Bernard Winograd, let me try to take a stab at that. I think we see the real estate environment unfolding as we've been talking about it, which is valuations probably reached their bottom depending upon whether you're talking about the transaction market in the second half of last year or the appraisal series, which is probably in the first half of this year. And with the lag effect, that translates into an environment that will improve from mortgage investing, in the sense that the portfolio you have is better positioned, less likely to experience problems. And as I said on Investor Day, we feel like, by the end of the year, we got to the point where our reserves on that front are perfectly adequate. We are happy to be a real estate lender at this point in general because we feel good about the upside opportunity for valuations relative to the downside risk. But we have been in the enviable position of being able to be somewhat selective, in the sense of we're able to stick to our investment disciplines around what kind of credit we are typically interested in, which is and remains the very high end of the market, largely in income producing properties that are stabilizing.

Our next question comes from the line of Suneet Kamath from Sanford Bernstein. Suneet Kamath - Sanford C. Bernstein & Co., Inc.: My first question is on the Full Service accumulation business. And I think, John, you referenced as did your press release, 10 quarters of positive net flows in a row. My question is, what do you attribute that success to? If we think about, lets say, Principal, another big player in this business. They've had results that were a lot more choppy. They've also talked about, at certain points in time, some aggressive pricing by life companies in this business. So I guess my question is, why do you think your succeeding? And any comments on the pricing or competitive environment in the business?

I think, actually, there's probably two or three things that work here. Without commenting specifically on others, we are focused on the middle market, not the very largest plans and not the very smallest plans. And that part of the market has behaved somewhat differently than the small business market in this downturn. I think secondly and probably at least as important, there is a period of time there where we clearly benefited from the flight-to-quality phenomenon. And finally, we liked, and that's probably from my point of view, the most important, we like our positioning in this marketplace as the provider of solutions that are focused on getting good retirement results for beneficiaries. So that we're not focus on being necessarily the lowest cost provider. And we are therefore the beneficiaries of a macro economic trend, if you will, or macro trend in the industry of, as corporate America focuses more on the defined contribution vehicle as the way in which they provide retirement benefits. We picked up interest in there for market share from others who are more focused on being the lowest cost provider. Suneet Kamath - Sanford C. Bernstein & Co., Inc.: And my second question is on the Variable Annuity business. I think at Investor Day last year, you talked about the ROE on that business at around 6% for the first nine months of the year. So can you talk about where you are in terms of the ROE in that business today? And then if you keep adding new business at $2-plus billion in terms of flows per quarter, over a 12-month period, how much of a lift, assuming stable markets could that give to that consolidated ROE for the variable or for the Annuity business.

Suneet, let me -- it's Bernard Winograd again, let me try that one. The ROE has somewhat improved, obviously, relative to what we were talking about that you referred to. Just because markets have improved more rapidly than the assumption we had made of 2% a quarter improvement. So the ROE has been stronger than what you're referring to in roughly around the 10% level. The question is, how it affects the long-term trajectory is an interesting one. Because the short-term impact of adding the business is actually not necessarily positive in the year in which you're added. We do have a certain acquisition costs that are not capitalized, not subject to that. And therefore, there's kind of a lag effect to the benefit to return on equity to when you get to the second year. And I think you'll begin to see that over the medium-term horizon for us, which is as we add this business at higher and higher ROEs, the real benefit of it comes in the second, third and fourth years that those cohorts are in portfolio rather than in the first year.

Our next question comes from the line of Nigel Dally with Morgan Stanley.

Just a follow-up on the Variable Annuity business. So great sales employed again in the quarter. But at some point, as that momentum continues, do you get concerned that the annuity exposure could grow too large? Second with asset management, we still have a little drag from commercial mortgages this quarter? Based on your comments regarding the commercial real estate outlook, is it fair to expect that drag to diminish looking forward?

Nigel, this is John. Why don't I take the first question first. In terms of can the Variable Annuities become too large? I think our view on this is materially affected by our success with our product line. Meaning, that had we had our old book, that would be probably of a greater concern. But given the design of our new book of business and the increasing percentage of the total that, that represents, we're very comfortable with where we stand and we're very comfortable with the outlook. But we also expect to see that a number of these businesses, and our other businesses are growing around it as well, particularly those that are market sensitive in particular. And as they come back, that also helps achieve and maintain the balance. But also keep in mind that the capital intensity of the new business is not nearly as great as the old business as well. So there's a lot of very good forces going on there, which means that we'll clearly watch that factor closely. But we don't see a problem, particularly because of the product design and our balance of our overall mix of businesses. Bernard, do you want to take the second piece?

Nigel, the answer to the second question is, yes. That is, as the real estate markets improve, the adverse or drag on the Asset Management business that results from that should diminish.

Our next question comes from the line of Tom Gallagher with Crédit Suisse. Thomas Gallagher - Crédit Suisse First Boston, Inc.: The first one is also related to Variable Annuities. Can you talk about -- I guess, Mark, you've commented on prior calls about the macro hedge. Can you comment on both the macro hedge and your regular economic hedge for the Variable Annuities. How much of that expense is actually flowing through what you define as core earnings? And as the macro hedge also -- are you counting that against core earnings, or is that below the line?

The macro hedging in core earnings, and just to refresh your memory on that, it's an outright short. We're very comfortable with where we are but we continue to evaluate other alternatives. As of right now, we're sort of pursuing the course that we have. We'll let you know if that changes. But the answer is that's in core earning. Thomas Gallagher - Crédit Suisse First Boston, Inc.: And is that a hedge put out through year end 2010, or is it longer than that?

It's longer than 2010, but it also could be taken off any time. Thomas Gallagher - Crédit Suisse First Boston, Inc.: The other question is for Bernard. On PNCC, I guess related to Nigel's question. I think you had a $26 million loss this quarter that compared to $100 million last quarter. I believe the portfolio dynamics are $237 million reserve against $1.6 billion portfolio. Kind of wrapping all that up with your comment before, are we looking at this going to break even or even profitable up, potentially over the next several quarters or how should we think about the timing on that?

Tom, that's hard to answer definitively with regards to the timing. The trend is very clear, which is to the extent markets improve that the need to add reserves will ultimately diminish. We feel like we have the reserves at roughly the right level. We also have begun to have, in this most recent quarter the somewhat encouraging experience that we have sold some foreclosed properties for more than our marks, which leads us to believe that we had it adequately marked for that reason. But as to the exact timing of all that, and we ended stops adversely affecting the bottom line and win gains on sale are larger than incremental reserves, that's very hard to pin down. Thomas Gallagher - Crédit Suisse First Boston, Inc.: And then if I could sneak in one follow-up for Rich. I just didn't fully get all the comments you made about cash redeployment, with the Wells put and any other cash that you think is in PICA. Can you just tell me, just the sheer magnitude, total cash you think it's redeployed into longer-term investments?

It's about $3 billion. $1 billion is at the holding company today and $2 billion is sitting in PICA. And that today is earning money market rates. Thomas Gallagher - Crédit Suisse First Boston, Inc.: And over what period of time do you think that gets redeployed?

I think we're going to look at that opportunistically.

Our next question comes from the line of John Nadel from Sterne Agee. John Nadel - Sterne Agee & Leach Inc.: One, I guess we're sort of all getting around this issue of VA, but let me think about it a little bit broader on your Retirement segment. The attributed equity there grew about 8% quarter-over-quarter, if I think first quarter versus year end. So if I think about this business continuing to grow at about a similar pace, good strong net flows in VA, continuing positive net flows in FSA, Asset Management improving but not really a capital-intensive business. Should we expect a similar level of incremental capital allocated to this segment over the next few quarters? Or is there anything underlying change in allocated equity or something else formulaic?

I just want to clarify the question. When you say the Retirement segment, are you including Annuities? John Nadel - Sterne Agee & Leach Inc.: I'm sorry. I'm thinking Retirement, Annuities and Asset Management together.

Okay, all of those together. There was a few things that happened in the first quarter that were outside of business growth. We converted some short-term debt into long-term debt in the Asset Management business, particularly around PNCC and that got reclassified as capital as opposed to operating. We set up some additional statutory reserves at year end due to the interest rate environment. They call them AAT reserves. And that drew in a bunch of capital in the quarter because we didn't calculate that until we file the blank. And the rest of it is sort of made up of cats and dogs. John Nadel - Sterne Agee & Leach Inc.: So is it fair to sort of characterize it as, I don't know, half business growth, half other stuff or is that a reasonable estimate or is it something different?

I'm hesitant to throw a ratio out there. I can tell you though, that more than half in this quarter came from other stuff other than the business growth. John Nadel - Sterne Agee & Leach Inc.: The second question I have for you is just on the tax rate. This quarter higher than I believe what you guys had laid out as an expectation at your Investor Day for 2010. Is there something, sort of from a regulatory or legislative perspective there, is that just a function of higher pretax earnings?

It's just higher pretax earnings. That rate will persist for the year. In your models, you need to use the first quarter's rate. John Nadel - Sterne Agee & Leach Inc.: But driven by an expectation that pretax earnings are higher.

Right.

This is Eric Durant. Sometimes we're divided by that kind of language, so I want to go back to Gallagher's question. I think PRU is unusual in that we included what we call adjusted operating income for the Annuities business. All of that unlocking, all unlocking of GMDB and GMIB reserves, and all of hedge breakage including the impact of the capital hedge. So the $90 million number, which is the sum of all these things includes a mark-to-market loss in the first quarter of $54 million on the capital hedge. When we talk about the underlying earnings of the $145 million, that net gain, if you will, of $19 million is reduced from the reported number to get you to that $145 million. I just wanted to be sure that, that was clear.

Next we'll go to the line of Ed Spehar with Bank of America Merrill Lynch.

First, I think if we adjust out the noise in the Annuity line, the pretax ROA was around 67 basis points, which I think if you do the same analysis in the fourth quarter it was 58 basis points. So I just was wondering if you could give us some sense of how sustainable you think that type of ROA is here in the near term? And then also, if we look out a few years, considering the margins on the new business you're writing, what do we think the margin on that business can get to?

It's Bernard Winograd. ROA, I have to say from a management point of view, not a measure that we focus a great deal on. I don't want to contradict your calculation, but I'm focused on it enough to know whether it's right or it's wrong. From our perspective, we are looking at the returns on equity here. And finding the returns on equity to be on the business were writing, in the high teens at this point. And we believe that the portfolios ROE, therefore, in a rising stock market will trend up towards that number.

Can you give us some sense of the relative capital levels? I'm assuming the new business is less capital intensive than what we would look at as your in-force.

Yes, it's considerably less. I don't know if our ratio is easy to state, but you can get at that by simply looking at the amount of capital that we're deploying to the business relative to the increase in sales, you'll see it's relatively modest. Compared to what it would've been under the old regime, if you will, pre-HD products.

And then the final question is on statutory earnings. I think if you look at your last five years, you've had pretty volatile stat operating earnings at PICA. But I'm thinking that maybe last year was more indicative of a normal year. But I'm wondering if you can help me out here, is the $400 million to $600 million after-tax statutory operating gain sort of a normal quarter for PICA?

It's Rich. I'm hesitant to say what normal earnings are on a statutory basis, with the way assumptions whack around and the way realized gains and losses come in and out. And you got the AVR and the IRR, there's too many moving parts.

No, but I'm not talking about -- I'm talking just about net operating gain. I'm not talking about realized gains, losses, so?

I'm still hesitant because of the reserve movements.

The $2.4 billion you reported for 2009 of PICA stat operating earnings. How much of a benefit was there in that number from any sort of reserve releases related to the improvement in the equity market?

I don't have that off the top of my head.

We have time for one final question and that will be from the line of Darin Arita with Deutsche Bank.

One was on the Variable Annuity business. Can you talk about how often do you review the product to test the pricing and the risk in the product?

Well, Darin, it's Bernard Winograd. I could say daily. And I wouldn't be terribly misleading in the sense that there is a continuous process of evaluating how we're doing against the market, and against the various costs that go into the product. And we are looking at it literally daily because we're always thinking about whether the hedging needs to be adjusted in light of the market environment and the pricing.

And client behavior, I'd add to that. There's a lot of work that's done on this. As Bernard said, every day and every week.

Looking at your sales, the take-up rate on the living benefits are very high. I was wondering if we look at your Retirement business, the IncomeFlex product, how much traction are we getting there?

The IncomeFlex product continues to grow. We're over a $250 million now and it grows each quarter. There is positive momentum there. It's fair to say that it hasn't exploded yet. And part of the reason for that is that to this point, all the sales that we have made have been to clients where we are the record keeper. And for that, that has somewhat limited the marketplace. But we are at the point where we have agreements with third-party record keepers to allow us to sell IncomeFlex to people other than our own platform, whose records are kept by others. And we continue to feel good about the upward trajectory that we're looking at in that product.

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