Q4 2016 Real-Time Call Brief

Highlights

Fourth quarter operating earnings of $2.43 per share, which excludes of $0.03 benefit from market driven in discrete items, exceeded the $2.07 we reported a year ago.

Recall that we typically experienced elevated expenses in the fourth quarter, which we estimate to be $0.21 per share in this year's quarter.

Net income was $0.65 per share in the quarter or about a $1.80 per share below core operating income.

Operating earnings excluding market driven and discrete items was $9.65 per share for the year or slightly below the $2 in 2016 guidance, which we established in December of 2015.

ROE for the full year was 12.7%.

Net income for the year was $9.71 per share, which is in line with adjusted operating income excluding market driven and discrete items.

Adjusted book value per share growth was a solid 7.3% for the year, which is after paying $2.80 in dividends.

Constant dollar sales grew 8% for the full year and 5% for the fourth quarter despite a challenging interest rate environment most notably in Japan our largest overseas market.

For the year, our U.S. dollar product sales in Japan increased 53%, which contrast with the 12% decline in Yen-based products.

Assets management has been a particular highlight generating positive net flows from unaffiliated third-parties of $5.7 billion from 2016, including $900 million in the fourth quarter.

We benefit from our diversified platform in scale with over $1 trillion of assets under management.

Retirement also had a strong year with net flows of $5.8 billion and 5% account value growth over the year end 2016.

We returned over $900 million of capital to shareholders in the fourth quarter through dividends and share repurchases, which brings our full year shareholder return to $3.2 billion.

This is on top of the roughly $530 million spend on our investment in AFP Habitat a Chilean retirement services provider.

For 2017, the Board has authorized $1.25 billion of share repurchases and yesterday we announced the 7% increase in our quarterly dividend.

Our annualized dividend has nearly doubled over the last five years growing at annual rate of 13%.

After-tax adjusted operating income amounted to $2.46 per share for the quarter compared to a $1.94 a year-ago.

After adjusting for a $0.03 per share discrete items, EPS amounted to $2.43 for the quarter up from $2.07 a year-ago.

Non-coupon investment returns and pre-payment income were about $65 million above our average expectations in the quarter.

We estimate that this tailwind along with the net impact of favorable underwriting results relative to expectations in our retirement and life insurance protection businesses and updates to reserves and related items in individual life benefited current quarter results by about $0.12 per share.

In the comparison of results to a year ago, the contribution of these variable items together with less favorable currency exchange rates, had a net favorable impact of about $0.08 per share.

Our earnings pattern I would also note that we estimate current quarter expenses for items, such as technology and business development, annual policy holder communications, advertising, and other variable cost were about $140 million or $0.21 per share above our quarterly average for the year.

On a GAAP basis, including amounts categorized as realized investment gains or losses and results from divested business, we reported net income of $284 million for the current quarter.

About $800 million below our after tax adjusted operation income, this was mainly driven by a negative impact from product derivatives EPS for the year amounted to $9.65 after adjusting for market driven and discrete items, which implies an ROE of 12.7%.

In December we moderated our ROE expectations to 12% to 13% range in the near to intermediate term.

Underwriting results plus the net impact of other variable items we called out, had a negative impact of about $0.55 per share on the comparison of results year-over-year.

Our GAAP net income of $284 million in the current quarter includes amounts characterized as pretax net realized investment losses of $824 million and divested business results in the other items outside of adjusted operating income amounting to net pretax losses of $313 million.

Product related embedded derivatives in hedging had a negative impact of $1.3 billion.

We did also some modest net hedge breakage of roughly $200 million in the quarter due to the volatility in the post-election period.

Our hedging program was 95% effective in the quarter.

Annuities earnings were $422 million for the quarter, up by $19 million from a year-ago The increase was mainly driven by more favorable net investment results including current quarter earnings from non-coupon investments and prepayment fees about $10 million above our average expectations.

The sequential quarter decline in earnings was mainly driven by seasonally higher expenses which were annuities were about $10 million greater in the fourth quarter than the quarterly average for the year.

The increase in return on assets or ROA from a year ago to 107 basis points reflects the benefit of our changes in risk management strategy.

Total sales in the quarter are down roughly $400 million from a year-ago mainly from HDI which represented about half of current quarter sales.

Retirement earnings were $298 million for the quarter, up $130 million from a year ago.

The contribution from net investment results was up $98 million from a year ago.

Current quarter earnings from non-coupon investments in prepayment fees were about $30 million above our average expectations, compared to a contribution about $20 million below expectations a year ago.

Current quarter case experience was about $10 million more favorable than our average expectation.

Our pension risk transfer business, continues to perform well and we benefited from over $100 million of favorable case experience over the past two years.

The sequential quarter increase in earnings included to contribution from about $3 billion of new funded pension risk transfer business that closed late in the third quarter.

Total retirement gross deposits and sales were $8.9 billion for the quarter compared to $8.3 billion a year-ago.

Gross sales of institutional investment products in the current quarter amounted to about $4 billion including roughly $2 billion of mainly funded new pension risk transfer cases and $1 billion of stable value ramps.

Net flows for the year were about $6 billion including about $4 billion for standalone institutional products and $2 billion in full service.

The institutional net flows included about $5 billion of new funded pension risk transfer cases which more than offset our run off of the in force business.

Asset management earnings were $224 million for the quarter compared to $198 million a year-ago.

The increase was driven by higher asset management fees partly offset by a $15 million lower contribution from other related revenues which included $10 million gain in the year-ago quarter from a legacy portfolio disposition.

The asset management business reported about $900 million of net positive unaffiliated third-party flows in the quarter, excluding money market activity.

Net institutional flows of $2.5 billion, driven by fixed income strategies, were partly offset by retail outflows driven by equities.

For the year we reported $5.7 billion of positive unaffiliated third-party net flows.

Individual life earnings were $138 million for the quarter compared to $119 million a year ago.

The increase in earnings was driven by a greater contribution from net investment results and more favorable claims experience which together had a favorable impact of about $50 million on the comparison of results.

Earnings for the current quarter included income from non-coupon investments in prepayment fees about $15 million above our average expectation, and a contribution from claims experience, also about $15 million more favorable than average expectations.

Current quarter results included a negative impact of about $25 million from updated reserves and related item including an unusually large impact from periodic trueup such as actual to expected in force business.

Individual life sales based on annualized new business premiums were essentially unchanged from a year ago but up by $40 million from the third quarter.

Group insurance earnings were $43 million for the quarter, up by $16 million from a year-ago.

The total benefits ratio remained at the favorable end of our targeted range of 87% to 91%.

International Insurance: Earnings for our life planner business were $395 million for the quarter compared to compared to $367 million a year ago.

Excluding a $22 million negative impact of foreign exchange rates, earnings increased by $50 million from a year-ago.

Current quarter results benefited from continued business growth with constant dollar insurance revenues up 6% from a year-ago.

lower expenses and more favorable policy benefits experience, with mortality about $15 million more favorable than our average expectations.

Gibraltar Life earnings were $360 million for the quarter compared to $371 million a year-ago.

Excluding a negative impact of $26 million on the comparison from foreign currency exchange rates, earnings are up by $15 million from a year-ago.

Mortality in the quarter was roughly consistent with our average expectations versus about $15 million more favorable than expected a year-ago.

International insurance sales on a constant dollar basis were $727 million for the current quarter, up $35 million or 5% from a year-ago.

This sales growth was driven by a 41% in our sales of US dollar products in Japan which more than offset lower yen based sales.

US dollar products comprised more than half of our sales in Japan for each of the past three quarters and the year compared to just over one-third of our sales in 2015.

Life planner sales in Japan were up 15% from a year-ago, reflecting an 8% increase in agent count driven mainly by recent sales manager appointments together with higher average premium size.

Gibraltar sales were essentially unchanged from a year ago.

An 8% sales increase from our life consultants driven mainly by higher average premium size was offset by lower bank channel sales.

Sales outside Japan are up 3% from a year-ago driven by continued growth in Brazil.

The corporate and other loss was $441 million for the current quarter compare to a $378 million loss a year-ago.

Of the company's $140 million overall excess of fourth quarter expenses in relation to the quarterly average for the year that I mentioned earlier, about $80 million resides in corporate and other.

While statutory results are not yet final, we estimate that our composite RBC for our US insurance subsidiaries on a comprehensive basis will be well above our 400% target as of year-end.

In Japan, Prudential Japan and Gibraltar Life reported strong solid margins of 858% and 975% respectively as of September 30.

Cash and liquid assets at the parent company amounted to $4.5 billion at the end of the quarter, an increase of about $1 billion from September 30.

This reflects cash inflows during the quarter net of the impact of about $900 million returned to shareholders including dividends and $625 million of share repurchases.

We returned $3.2 billion to shareholders during the year through dividends and share repurchases and announced 7% increase in our quarterly dividends.