Ladies and gentlemen, thank you for standing by, and welcome to the Prudential Quarterly Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions] As a reminder, today’s conference is being recorded. I would now like to turn the conference over to Mr. Darin Arita. Please go ahead.

Thank you, Cynthia. 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; Steve Pelletier, Head of Domestic 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 remarks 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 the 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. Also, in response to your request, we are changing the timing of our earnings release date starting next quarter. We will report our third quarter results on Monday, November 4, and host the conference call on Tuesday, November 5 at 11:00 AM. With that, I will hand it over to Charlie.

Thank you, Darin. Good morning, everyone, and thank you for joining us. As we outlined in our Investor Day in early June, we are accelerating our strategy to bring greater financial opportunity to more customers and to enhance the value we provide to our investors. Across each of our businesses, we are energized by our purpose of making lives better by solving the financial challenges of our changing world. As expectations of our customers rapidly evolve, it’s imperative that we’ll move quickly and with urgency to achieve our purpose. Despite what we would characterize as a mixed quarter, we remained confident about the financial goals we shared with you during our Investor Day. At that time, we increased our return on equity goal to a range of 12% to 14% from the prior range of 12% to 13%. We also articulated how we can achieve a high-single digit earnings per share growth rate over the intermediate term with potential for a low-double digit growth rate over the longer term. The strength of our distinct business model and ability to execute our strategy gives us confidence that we will achieve our financial results. Our U.S. Financial Wellness businesses, PGIM and our International business offers unique scale and growth opportunities that cannot be easily replicated. In the near-term however, we expect several factors to impact our level of earnings. First, as we discussed on Investor Day, there will be implementation costs from accelerating our strategy. Second, the significant decline in long-term interest rates over the past six months obviously affects our spread income and reinvestment rates of our general account. Third, this quarter’s assumption update in Individual Life reduced future earnings. And fourth, we expect lower earnings in Gibraltar. Now we have ways to mitigate some of these effects. We believe the…

Thanks, Charlie. I’ll provide more color on how we were growing our three differentiated businesses, U.S. Financial Wellness, PGIM and International. As shown on the Slide 4, U.S. Financial Wellness represents our Workplace and Individual Solutions businesses that produce a diversified source of earnings from fees, investment spread and underwriting income. A broad set of integrated capabilities including advice, retirement, investments and insurance solutions, continue to help people with their Financial Wellness needs. Our Financial Wellness proposition is resonating with Workplace customers, particularly from higher sales. And it is resonating with the employees of those customers, driving higher participation rates in the employer benefit programs and increased engagement with our advice platform. We believe the success has the potential to increase the intermediate term earnings growth rate of our underlying U.S. businesses into the mid- to high-single digits. There are three drivers of this earnings growth and Financial Wellness. First, we expect increased operating margins across our Workplace and Individual Solutions businesses. This will result from the comprehensive at scale solutions that our businesses provide and the investments that we’re making to enable our broad capabilities, while enhancing the customer experience. The current quarter, we incurred about $20 million of implementation costs to support programs that will accelerate our Financial Wellness strategy. We believe these actions along with the other programs over the next three years will lead to $500 million of margin improvement by 2020. Second, we expect increased revenues in our Workplace Solutions businesses due to the competitiveness of our Financial Wellness platform and increased utilization of the existing employer offered benefits by our clients and employees. Since the end of the first quarter of this year, the number of people who have activated our digital Financial Wellness platform has increased from $8.1 million to $8.6 million as…

Thanks, Rob. I will begin on Slide 7, with some enhanced disclosures that we’ve added this quarter to provide more insights about our earnings for the upcoming third quarter and beyond relative to our current second quarter earnings. First we begin with our second quarter of pretax adjusted operating income, which was $1.7 billion and resulted in earnings per shares of $3.14. Then when we adjust for these items, we get a baseline of $3 per share for the third quarter, before including the impact of future share purchases, business growth and market impacts. Now there are three categories to consider. First, the second quarter included a net unfavorable impact of $49 million from this year’s annual actuarial review, which will not occur in the third quarter. Second, we assume variable investment income. We’ll return to a normalized level, which is worth $90 million. And third, there are other considerations we expect will lower results by 30 million in the third quarter. Gibraltar earnings are expected to be $15 million lower due to lower sales and lower interest rates, and corporate and other is expected to have $15 million of higher expenses. Well, we have provided these items to consider, there may be inevitably be other factors that affect third quarter earnings per share. Also, as Rob mentioned, we incurred about $20 million of an implementation costs to accelerate our financial wellness strategy in the current quarter. We hope this slide provides enhanced visibility for future EPS considerations Also on Slide 18, we have provided information regarding seasonal item by business. One item to note is the end of the Wells Fargo fee arrangement in the first quarter of 2020, which has recently been approximately $15 million per quarter. Turning to Slide 8. I’ll provide an update on capital deployment,…

Thank you. [Operator Instructions] We’ll go to the line of Nigel Dally with Morgan Stanley. Your line is open.

Great. Thanks and good morning. So looking at Slide 7, you baseline the earnings at $3, would annualize to $12. That’s a quite significant reduction from the $12.75 midpoint guidance you provided at the outlook call. Now, in your prepared remarks, you highlighted a number of factors behind that, but hoping you can go run through each of those in some more detail.

Yes, sure. This is Ken. So we don’t want to update guidance, but what I thought I could do is highlight a few items to consider that we’re not in our guidance that we gave last December. Now, first, as we’ve articulated the Financial Wellness implementation costs, we announced that at Investor Day that’s going to trim EPS in the second half of the year. We also updated this quarter, our mortality assumptions in Individual Life and that will have an ongoing impact into the second quarter. And then interest rates that we assumed in our guidance where – now where we’ll find ourselves, we’re about over 100 basis points below that. Now that is partially offset by equity markets that are higher, but those to net to a negative. So if you added all of those together, that’s worth about $0.50 relative to our guidance for the second half of the year.

Okay. And just – also I think, it looked like Gibraltar earnings are going to be somewhat softer than expected. Just the details behind that one too.

Yes. And that’s also captured in the interest rate comment that I made. Maybe I’ll turn it over to Scott for a little bit more background on that.

Yes. So in terms of Gibraltar earnings, we’re impacted by several factors, some of which will persist through year-end. Net of the favorable assumptions in Gibraltar earnings were down about $35 million year-over-year. And the key contributors to this decline were really driven by two factors; underwriting which was still favorable to our pricing assumptions was less favorable than last year, and that represents about a third of that. And then the balance of the decline was largely driven by higher expenses related to certain technology and end of life system spends, process improvements in automation and investments that we’re making to support future growth. At Investor Day, I noted that PII is starting to leverage some of the capabilities that have been deployed in the U.S. as part of the customer office and Financial Wellness initiatives, and additionally given increased scrutiny on suitability and sales compliance. We’re also investing in process and systems that support our distribution including those that ensure appropriate oversight. So we’re accelerating some of these efforts and we expect this level of spend to persist through year-end and into early 2020. I think looking forward to the balance of the year, as Ken noted, the recent decline in rates and lower sales will also weigh on Gibraltar’s year-end results. Meanwhile, the total Japan operations continue to generate strong cash flow to PFI, we distributed $1.1 billion in the second quarter alone.

That’s very helpful. Thank you.

Thank you. Our next question will come from the line of Elyse Greenspan with Wells Fargo. Your line is open.

Hi, thanks. Good morning. My first question, so you guys updated, expanded your ROE range at your Investor Day, which obviously was pretty close to the end of the quarter, and now you reset your current forward earnings expectations for a couple of your main businesses. And so I guess, does this pushback, in your mind, you’re hitting kind of the topper end, top end of that ROE target that you just relate to The Street?

Yes. So, our ROE objective is 12% to 14%, and that is a range and for the first half of the year we’re at 12.9%. When we sent that objective, we did assume rates at the time would continue to increase consistent with the forward curve. We’ve given sensitivities that show the impact of rates, which is gradual over time. And so as we think about that, if rates were persist, you would see – that have some impact into our ROE, but our initiatives that we have to expand margins and to accelerate our strategy, we think will keep us within our 12% to 14% ROE objective in the intermediate term.

Okay. And then in terms of the Financial Wellness plan, you guys – the initiatives there, you guys called out some expenses in the quarter. When you guys laid that out at the Investor Day, you told us what the expenses were and then also the saves, obviously, takes a little longer for the saves to start rolling into the numbers. Can you just give us a sense of when we should start seeing some of the saves coming to the numbers, and then also in terms of sequentially how much higher those expenses could be as we think about them building up from the second to the third quarter?

Elyse, it’s Rob. Our view on the initiatives that we’re undertaking with respect to Financial Wellness and both the costs and benefits for that are still consistent with what we outlined on Investor Day. We think through the year we’ll have about $135 million in expenses, $20 million of which you saw in the current quarter. And then we would expect that those expenses will generate about $50 million of run rate earnings by the end of the year. You’ll see those fully in 2020 given that they sort of build into a run rate through the course of the year. The initiatives are all in flight, but are back ended in the context of sort of when we’ll be incurring costs on a quarter to quarter basis, so less than the second quarter, comparable to slightly more kind of a level in the third quarter that’s included in the slide that Ken walked you through in terms of expectations for costs related to corporate and other in the third quarter, and then the net more elevated level in the fourth quarter.

Okay, great. And one last quick question for corporate. In the past, you guys have guided to higher expenses in the fourth quarter. I know Slide 7 was setting the base for the third quarter, but are you still expecting that in this year Q4 corporate expenses would be higher than what we see during – the average of the first three quarters?

Yes. That’s been the pattern of our expenses and we would expect that to continue this fourth quarter and we’ll give you a little bit more specific guidance around that at the end of the third quarter.

Okay. Thank you for the color.

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

Hi, good morning. You mentioned that you still believe you can generate the high-single digit intermediate term EPS growth. Is that – does that contemplate some of the step down function in the near-term earnings power or is that – or should we think about that more as the growth rate off of the lower near-term EPS base?

Ryan, it’s Rob. The change in expectations with regard to this year vis-à-vis the guides we provided you, it’s not material in the context of what we would expect in terms of that intermediate term growth rate. So I don’t think we would view that as being a material input into our ability to achieve that more elevated level of growth.

Okay. And then as you mentioned, potential in-force actions as one of the possible offsets, can you expand some on – in terms of what you might be contemplating there?

Ryan, it’s Steve, I’ll take that part of your question. In Individual Life, we’re looking at three main drivers in an effort to improve returns in that business over the next few years. What you mentioned is one of them, I’d just – first I’d mentioned though, that we continue to generate strong sales of the business. The new business that we’ve been writing over the last few years, I should point out has been priced using much more current assumptions that are very different from the assumptions used to price the legacy products that have generated some of the recent charges we’ve taken. We remain quite disciplined in our pricing. And our new sales have a very well diversified mix and we think these newer sales will help significantly and profitably growing the business over the next several years. Second part of the plan is exploring different options for optimizing our in-force management as you referenced that largely refers, Ryan, to exploring a wider range of reinsurance options. And third, we continue to be focused on the cost effectiveness of the Individual Life business platform. That certainly includes ongoing and continuing efforts to enhance the cost effectiveness of the businesses operating platform, but we’re also exploring some innovative new ways of delivering our life insurance products to the marketplace in a cost effective way. All of this is intended to improve returns in a business that remains an important part of our overall business mix. It serves an important need in the marketplace and is a critical part of our Financial Wellness value proposition.

Thank you.

Thank you. Our next question comes from the line of Tom Gallagher with Evercore. Your line is open.

Good morning. First question I wanted to ask you is on Japan. Can you provide a little perspective on what’s going in that market more broadly? Gibraltar, I know you highlighted the weaker sales levels on the FX products, POJ looks like they held up better. Are you seeing significant increase in competitive pressures from the domestics? And also I think I heard a mention of some regulatory scrutiny, is that on the FX product, and maybe some elaboration there? Thanks.

Hi, Tom, this is Scott. Let me start. I think I gave you a pretty good rundown on Gibraltar, let me start with POJ and then come back to your – more details in your question. So, in the case of POJ, our in-force block continues to grow and the in-force block was actually up almost 5% year-over-year. And additionally, our Life Planner account in Japan was also up about 5%, I think a little more than 5% year-over-year. And you may recall that’s comfortably ahead of the 2% – 2% to 3% Life Planner overall growth that we noted on Investor Day. So I would say the fundamentals of the POJ business remain quite strong and sort of most of the challenges that we’re facing have been on the Gibraltar side. I talked a little bit about the spends on accelerating some of the customer office and Financial Wellness. I also alluded to just enhancing the overall collection of data and automation that we have in light of the – I would say really global, not really restricted to Japan, focused on sales suitability. So we’re trying to get that in place and probably accelerating that. In the case of Gibraltar sales, I think that’s really where the market dynamics have been, more challenging for us. As you know, particularly in our third-party distribution channels, we try to be very focused and disciplined about the products that we sell and meeting our return hurdles. And with that in mind, we are experiencing sales declines. We try to focus on recurring premium death protection products. We find those to be much more persistent. And so in the long run, we view those as is really the most attractive products for us to sell, but we also think they’re the most beneficial to our customers. So therefore we’re focusing less on single premium products, which tend to be more variable and subject to more pricing, I’d say, other market factors like interest rates. The good news is that our recurring premium sales have in fact increased nicely within the Life Consultant channel. However, this is being more than offset with lower sales on single-pay U.S. dollar annuities that are impacted both by competition and by the change in rates. I’d say the other notable decline in sales was in the Bank channel, which primarily relates to trying to maintain the pricing discipline that I commented on earlier. And then lastly, we experienced a smaller decline related to the tax law change in the independent agency channel. And as you know, those new regs are out, but there’s a big backlog on developing new products at the FSA. I guess the point I would make there and on that is that despite these challenges, Gibraltar’s in-force block actually grew 2% year-over-year, which again goes back to reflecting the high persistency of the recurring premium products that we sell there.

That’s helpful, Scott. Just as a quick follow-up on Japan, POJ or Life Planner in total does have very good persistency as well. It’s still about 90, but that’s actually been declining and it’s declined 90 basis points sequentially. Is there anything going on, on persistency in that part of the business?

I don’t really think so. That was a really – that was a very small change. And if you look at it over – in the way we tend to is look it over longitudinally, over a long period of time, it still remains quite stable. So I don’t think we see anything at this point that we view as significant. We of course watch it every quarter.

And Tom, this is Charlie, let me just give a little sort of a history of the Bank channel, because it’s important to understand how we think about the Bank channel and that is the marginal sales aspect of it. So in a Bank channel sales can get away from you pretty quickly and we watched that like a hawk. And so what we’re really focused on, as Scott said, is the profitability of the business and the type of product that we sell and that the sales volume will vary as a function of that. So there is more competition, especially on the end based side. And that’s hurt our U.S. dollar sales and recurring premium sales. But in our minds, what we’re doing is protecting the level of profitability and the type of sale we have and letting sales volume vary as a result of that. And that’s the way we’ve approached the bank channel in the past. And it’s completely consistent with the way we’re doing it now.

Understood. Thanks.

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

Thanks. On the assumption review, are there going to be any impacts on your statutory results either in terms of stat earnings or year-end cash flow testing from these changes?

Yes. For life, the stat assumptions are prescribed so there wouldn’t be a stat impact for the life to update. And then there would be – and then the favorable impact on the retirement update would be – would flow through to stat. So that’s the extent of it.

Okay. And then on the life assumption review, I mean, we’ve been tracking this, I would say every year, it seems like over the past, call it four years, you’ve had maybe $900 million or so of these assumption changes, just in the life business alone. So maybe some color on why is it this business that’s getting so much of this impact and are you confident that kind of have this behind us now in terms of the current assumptions?

Suneet, this is Steve. Let me make some kind of overall comments and then I’d invite Ken to expand further. You’re right about our experience over the past few years in the Individual Life business in the annual reviews. And most of that experience has been around adjustments on the mortality front including this year’s. As a reminder though, if you extend the look back over the past six or seven years, our mortality experience has been largely aligned with our expectations over that period. In addition, when you look at it from a Prudential total company standpoint, as we’ve seen, the negative mortality experience in Individual Life, that’s been offset to a quite meaningful degree with positive longevity experience in our retirement business, very much as designed and intended. With that said though, as I mentioned earlier, the ongoing impacts of the assumption updates that we’ve taken cumulatively over the past few years have brought us to a place where we want to bolster and improve the current levels of return in the business. And the three point plan that I mentioned earlier is really how we think about that going forward over the next few years.

Yes. The only thing I’d add is just a reminder that’s some of the updates that we took a few years ago were related to systems conversions and going through that process and that part is behind us. And then also in terms of assumptions and evaluating the experience where it’s credible, we call it like we see it and we stay current with that. So that’s our philosophy with assumptions.

Okay. Thanks.

Thank you. Our next question comes from the line of Andrew Kligerman with Credit Suisse. Your line is open.

Thank you. Just trying to digest the response to Suneet’s question, just simply because it’s happened so many times in the last four years, but I think Ken just said, you call it like you see it. But Steve, you mentioned that you’re exploring different options for the in-force management, including reinsurance. So if you’re doing that and the reinsurer is taking a look at your block, why wouldn’t we expect another charge to come, as they may be uncomfortable with the block?

As I mentioned Andrew, we’re looking at a range of reinsurance options, we already have, of course, an active reinsurance program. And that’s been one where our dealings with the reinsurers have been quite productive, even over the past few years. As we’ve had some of these updates and we will continue to explore different options including, as I mentioned an expanded range of them. So it’s part of the picture, but not by any means the totality of…

Could that conceivably end up in another charge?

Yes. We don’t want to go into specifics in the theoretical. So – but reinsurance can also be used to narrow volatility as we reinsure more business and trim some of the larger case exposure. So there’s a number of various way that we can think about the benefits associated with reinsurance and we’re looking at that.

Got it.

It’s rob, the only thing I’d add on is to repeat as to what Ken said is, the intent of the assumption update was to bring current valuation of the liability to our best estimate of what mortality experience we’re actually seeing in the underlying block. And so we would not expect a third-party to look at that and they’d come to some different conclusion than we did.

Got it. And then just in the earlier questions, I think your response was that there’s some backlog with the FSA and some regulatory considerations. Could you elaborate on that?

That was simply related to the change in the tax law that occurred in February and then was reiterated in July. So carriers like Prudential are designing some new products, but you have to file those products and go through the Q. So it’s kind of the usual thing. But since it was related to a single action by the FSA there’s just a Q.

Got it. And then just with the recent activity at the Japan Post, they had some misspelling, any higher degrees of scrutiny occurring with the regulators?

I guess what – I would say one, we’re not really, we don’t distribute through Japan Post on the one hand. But to the broader question, I think it was about two years ago, the, the FSA shifted to more of a principle based to kind of a framework kind of moving to global standards. And as they do that, I think they’re rolling out their exam process and focusing more. And I think people are – as they go through that process, they’re saying, gee, I want to make some modifications or change this or get in line. So I think that’s really, it’s a fairly – I would say a fairly orderly an expected process, but it is in fact the process that’s underway. It’s already a couple of years out. And my guess is it has a couple more years to go before it’s fully rolled out.

Thanks much.

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

Good morning and thank you for taking my question. I have a follow-up question related to Gibraltar’s earnings headwind. I think in Ken’s remarks, you talked about roughly 15 million lower earnings power from lower sales and also high investments. Like on, I just want to see if that is kind of your expectation for the foreseeable future. As you mentioned, the headwinds would be kind of through 2020?

I guess, what I would say was, we’re trying to, just based off some of the things are going on, and the benefits from putting some of these things in place, we’re trying to get that done more quickly. So I don’t think, I’d say on the expense side you’d expect a lot of that to run through all of 2020. But I guess, I would say I expect this over the next three to four quarters, not the next two.

Okay. And then in terms of county, the lower sales and expense impacts, how should we think about that? Because I recall from your Japan Investor Day that you highlighted for both your POJ and Gibraltar business with sales doesn’t really affect your in-force earnings. So I tell a little surprised to see earnings drop as a result of lower sales. So just wondering if is just more of expenses as opposed to sales?

Well, I think I gave you a proportion that it was a skewed a little heavier to expenses. But when you’re looking at multiyear sales, we’ve come down and it appears that we’re bottoming out at these new levels. And by the way, we are taking actions whether it be in products or incentives, in some new designs to help offset. So we’re not, if you will, standing still while we’re experiencing that. But the cumulative effect of the sales levels being off, where they are and kind of plateauing at this level is also part of the equation.

Okay. And then shifting gears to Retirement. Looking at the earnings run rate and outlook seems to be a little bit weaker than where it has been granted low interest rate definitely was the pressure, but I was just wondering if there’s any other things that may have affected the earnings outlook for retirement in general.

Humphrey, Its Steve, I’ll address that part of your questions. The impact on retirement run rate earning is largely in the net interest income area. Part of it is what you just spoke about some spread compression as a result of the current rate environment. But another aspect of it is that at the end of last year, we released a significant amount of the AAT reserves in the Retirement business and transfer the assets backing them back to the parent company. And that also contributes to lower investment income for the business in 2019.

So in terms, I guess, when you mentioned, the kind of the impact of the AAT reserve releases on the investment income, like how should we think about that?

Yes. So when we updated our assumptions in our Retirement business for AAT that led to a release of those reserves, but also if you recall, we last year we did strengthen our long term care reserves. And so that led to essentially a net – no net impact overall for the company. So although you’ll see lower earnings in the retirement segment related to that, those reserves went to long term care, which is not included in NOI.

Got It. Thanks.

Thank you. Next we’ll go to the line of John Nadel with UBS. Your line is open.

Hey, thank you. Good morning. I have a couple of quick ones. Rob, it sounded like, with your commentary about PGIM, and an expectation that institutional net flows, we’ll continue this string on an annual basis to positive. I assume that’s within eye towards your pipeline for the back half of the year. Can you just maybe expand on that?

John, this is Steve. I’ll address that part of your question. Yes. I think the circumstances around this particular outflow this quarter were mentioned by Charlie. I just mentioned a little bit more about it. It really was a matter of a client looking to consolidate the number of managers they work with. We’re quite familiar with that dynamic. We have very frequently been the beneficiary of it. This was one particular time when the dynamic worked against us. But we still have a great deal of confidence in the ability of the business to continue to demonstrate strong fundamentals and strong net flows continuing the 16 years string on the institutional front. I would say that’s born out of a number of things. Number one, we do see an attractive near term pipeline in the marketplace. And we like our prospects for competing for that opportunity set given strong investment performance, deep expertise across a range of asset classes and investment strategies, and investments that we’ve made in our distribution platform. All of those things taken together have been the contributors and the drivers of solid net flows and we expect they’ll continue to be.

Thank you. And then maybe for Ken or Rob, looking at Slide 18 of the deck, I wanted to make sure that I understand how to interpret this, because I think the seasonal portion of this is tremendously helpful and thank you for that. I’m looking at the column that provides the baseline range. And I just want to understand the width of the range by segments. Are we to take that to mean that the – driven by seasonal and other factors in some quarters, the earnings can be at the low end of the range and then some, the high end of that range? Is that the way to interpret that?

Let me maybe explain what that is. This is really just factual. So it is just – if you look at the last four quarters and you adjust for assumption updates, market experience updates, variable investment incomes, the things that are noted in the footnotes. That’s the actual range that has occurred over the last four quarters.

Into to the last four. Got it.

Just, there to give you a sense of what the highs and the lows have been.

Got you. Okay. So this isn’t sort of a guide thing – this is just actual, it doesn’t include any growth expectations?

No assumptions. It’s just the facts of the last four quarters.

Got you. Perfect. And then our last one is I wanted to try to differentiate between run rate and actual dollar contribution thinking about the wellness initiative. You’ve talked about a $50 million run rate contribution to earnings by the end of this year, but my sense is that the actual dollar contribution of earning in 2019 will be negligible. And first, I wanted to make sure I understand that correctly. And then second, if we fast forward and think about 2020, how should we differentiate between run rate and actual contribution?

John, its Rob, let me try to address that. With regard to 2019 specifically recall that the expenses are largely backend weighted as well, and so…

Yes, I’m separating the expense item.

Yes. So the idea is in 2019, we’ll incur those expenses and get to that run rate, level of savings. But by the time we’ve incurred all those expenses, but because it happened so late in the year, to your point, there will be a relatively modest contribution in 2019 from an earning standpoint simply because both the expenses and the earnings are going to be concentrated in the latter part of the year. As you get into 2020 and beyond, what you see then is, from a pure earning standpoint, you’ll see a combination of the benefit of the run rate from the prior year and then some portion of the building run rate during the course of that year contributing into the current year. What we intend to do is, and we’ll begin at the end of this year, we’ll provide better visibility into both the sources of the expenses so you understand what initiatives they’re linked to. And then importantly, how much and where we should expect to see the earnings of benefits associated with those initiatives. Right now it’s just not material enough to provide that kind of detail. As we get further into this year, when we have more materiality, we’ll provide that kind of insight and I think that will provide you a better basis then for being able to assess not just the run rate impact but how much of that run rate would be in the current year as opposed to for the succeeding year.

That’s helpful. If I can squeeze one more follow-up on that. So if you achieve $500 million, what’s the calendar year where we should see the full contribution of that $500 million?

That would be – we would achieve that by the end of 2022, and so you would see in 2023 the full year benefit of that.

Perfect. Thank you.

We’ll go to the line of Alex Scott with Goldman Sachs. Your line is open.

Hi. I just wanted to touch on individual annuities. I guess the ROA seems to continue to trend down there, and I know the long-term ROA target was a bit lower than where you have been running but I guess equity margins been strong. A little of bit of a surprise to me, that we’d see that kind of accelerating down to the long-term ROA trend as it has with that the economic backdrop? Appreciating the rates had gone down too, but can you help us think through that? Should we just assume we’re at that long-term ROA now? Any color it would be appreciated.

Yes, sure. It’s Ken. So first, our ROA evidences the high profitability of our variable annuity business and the strong ROE. And as we’ve mentioned in the past, we expected the ROA would trend down over time as our business persists and moves into lower fee tiers, but also as a result of our strategy to diversify our product mix. Now, it should also probably useful to know that our earnings are less sensitive to markets than our account values and that’s due to our hedging program. And so in the second quarter you saw, as you mentioned, the combination of two things; equity markets rising and interest rates falling and both those lead to increases in account values. And so it was really a denominator that led to the trimming of the ROA. And the point is here is our hedging program makes our earnings more stable than our account values.

Got it. Okay. And then maybe a follow-up, just thinking more high level, you guys up to the high end of the ROE guide for the intermediate term that the outlook, has anything changed since that time or – just thinking through how much lower the earnings power is today from what I had thought at the time you were making those comments? It seems a bit more aspirational sitting here today than it did at that time. So can you help me think through, is there anything other than the Financial Wellness program I should be thinking about that would get you closer to the midpoint of that intermediate range?

So Alex, it’s Rob. I think Ken did a good job of walking through sort of the impacts of – just sort of think about the guidance that we gave and then the change in that guidance being reflected in sort of a handful of items that we’ve articulated. When we think about what we’ve articulated on Investor Day, I think what’s important to understand is that when we’re at Investor Day what we’re talking about direction and we’re talking about strategy, and then the associated financial outcomes that result from that direction and strategy. And as we think about those, we measure those in years, not in quarters. Obviously, in guidance and in calls like this, we talk about sort of the more near term results. On Investor Day, I think what I can reflect on is, first, Charlie had in his remarks indicated that we – that march towards, what we continue to believe is an achievable level of higher earnings and higher ROE would be non-linear. And I think you’re seeing some of that non-linearity in the current quarter. Ken talked about both the potential for the life assumption update he told – I think you mentioned that we were taking a hard look at those assumptions during the Investor Day. And then also we’ve provided then and previously market sensitivity. So none of that I would consider to be particularly new information. And Scott, even when he talked about the international business, as you mentioned earlier, spoke to the fact that we would be adopting many of the initiatives that we have begun in the U.S. into Japan and we would expect to be making similar type investments there. So I think that per Charlie’s opening remarks that we remain very confident in the messages that we delivered on Investor Day, regarding both the intermediate and long-term prospects for our businesses. And nothing that’s occurred in the current period, it causes us to feel any differently about what we messaged on Investor Day.

Got it. Thanks for the responses.

Thank you. We will go to the line of Erik Bass with Autonomous Research. Your line is open.

Hi. Thank you. I just wanted to come back to the mortality topic. And I was curious, is the deterioration related to any specific vintages or types of policies, are you really reflecting a broader trend?

Eric, it’s Steve. I’ll address your question. Main point is that the updates really related to longer dated vintages, earlier vintages in our book of business. In regard to looking at specific product categories that the onetime impact is largely experienced in the universal life block. The ongoing impact is primarily in universal life, but with some impact in other parts of the business as well, including term.

Got it. And then you’re having not quite a complete offsetting adjustment, but obviously the retirement business is benefiting on the longevity side, but you have differences in business mix there. So what is it? I guess it’s driving the positive adjustment on that side of the business?

Yes. The way we look at that, Eric, is that when we perform our annual review of assumptions and other refinements, the nature of the updates we make just as you’re commenting, they vary from business to business and will naturally lead to differences in the extent and magnitude of onetime impacts versus ongoing impacts. The nature of the updates we made in our retirement business led us to record the more meaningful onetime adjustment that we mentioned and expected benefit payments. And while there were some ongoing benefits from our review when the retirement business, they’re not of the same magnitude of the negative ongoing impact that we see in Individual Life, so that’s why we emphasize that point about Individual Life.

Got it. And just to be – make sure we have it correct, what would you size that ongoing impact for Individual Life? And is it something that should persist into perpetuity?

Yes, it’s about $25 million a quarter. And it would be recurring for the foreseeable future.

Got it.

But I want to mention, the things that Steve has in mind and the business has in mind too, to help offset some of that that we talked about earlier.

Thank you, that’s helpful.

Thank you. And due to the elapsed time, I’d like to turn the conference back over to Mr. Charlie Lowrey for any closing comments.

Thanks. I’d like to summarize our thinking and the actions we’re taking because we’ve talked about a lot of different things on this call and I’ll divide into a couple of categories; one is the clarity of earnings; and two are some of the operational actions that we’ve highlighted. So in terms of clarity of earnings, we are in the process of simplifying our earnings and clarifying the visibility of our drivers and financial outcomes. And we’re taking efforts to help you understand our earnings trend and has taken some material steps this quarter to do so, and we will continue to do so. In terms of actual operations, we positioned 2019 and our guidance in 2019 in terms of a year of transition, and making investments that would enable us to grow in subsequent years and we’re taking actions accordingly. So we talked about the investment in future work, which should produce $500 million of margin improvement over the next three years. Now, there are costs associated with that, as Rob indicated, and these initiatives are beginning to come through this year. And so these costs are upfront, which means there’s a lag in terms of payback. So that’s the first point. The second is we aren’t happy with the performance of our life business. And consistent with Steve comments, we are seeking to increase the performance of the business as well as looking at ways to optimize the in-force book. And finally there have been higher expenses in certain businesses like Scott called out with Gibraltar. And as we think about changing the way in which operate, we have to spend money on new ways of becoming more efficient, investing in technology and platforms, et cetera. And some of these costs will be ongoing. It’s really a cost…

Thank you. And ladies and gentlemen, that does conclude your conference call for today. Thank you for your participation and for using the AT&T Executive TeleConference service. You may now disconnect.