Prudential Financial Q3 2010 Earnings Call Transcript

Prudential Financial (PRU)

Q3 2010 Earnings Call

November 04, 2010 11:00 am ET

Executives

Edward Baird - Chief Operating Officer and Executive Vice President of International Businesses

Eric Durant - Head of Investor

Peter Sayre - Principal Accounting Officer and Senior Vice President

Richard Carbone - Chief Financial Officer, Executive Vice President and Chief Financial Officer of Prudential Insurance

Compare to:
Previous Statements by PRU
» Prudential Financial Q2 2010 Earnings Call Transcript
» Prudential Financial Q1 2010 Earnings Call Transcript
» Prudential Financial, Inc. Q4 2009 Earnings Call Transcript

Bernard Winograd - Chief Operating Officer of U S, Executive Vice President and Executive Vice President of Prudential Financial & Prudential Insurance

Mark Grier - Executive Vice President of Financial Management

John Strangfeld - Chairman, Chief Executive Officer and President

Analysts

Thomas Gallagher - Crédit Suisse AG

Andrew Kligerman - UBS Investment Bank

Darin Arita - Deutsche Bank AG

Eric Berg - Barclays Capital

John Nadel - Sterne Agee & Leach Inc.

Randy Binner - FBR Capital Markets & Co.

Nigel Dally - Morgan Stanley

A. Mark Finkelstein - Macquarie Research

Christopher Giovanni - Goldman Sachs Group Inc.

Colin Devine - Citigroup Inc

Presentation

Operator

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

Eric Durant

Thank you, Cynthia. Good morning. Thank you for joining us. On today's call, John Strangfeld, Rich Carbone and Mark Grier had prepared comments to share with you. Rich will be speaking through a deck that's been filed on our Form 8-K that you can get from our Investor Relations website at www.investor.prudential.com. For the Q&A, John, Rich and Mark will be joined by Bernard Winograd, Ed Baird, Ken Tanji and Peter Sayre.

In order to help you 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 display slides in the section titled Forward-Looking Statements and Non-GAAP Measures of our earnings press release for the third 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 accrues to contract holders and recorded changes in contract holder liabilities resulting from changes in related asset values.

The display slides in our earnings press release contain information about our definition of adjusted operating income. The comparable GAAP presentation and the reconciliation between the two for the quarter and nine months ended September 30 are set out in our earnings press release on our website. Additional information related to the company's financial performance is also located on our website. John?

John Strangfeld

Thank you, Eric. Good morning, everyone. Thank you for joining us. I'll speak briefly at the outset and then close it out after Rich and Mark had finished.

Our performance in the third quarter was very solid and continued to reflect our attention to capital deployment, business mix and effective execution of our individual business strategies. Consistent contributions to earnings and growth from our International Insurance businesses, strong results from businesses that are driven by net flows and market conditions and the stability of our core insurance franchises in U.S. are the drivers of performance that we expect and that what we have promised investors over the years. Our high-quality investment portfolio, high level of liquidity and strong capitalization provide financial strength that will support significant growth opportunities overseas and in the U.S., giving us upside opportunities, and we believe, limited downside risk. In short, our financial performance is progressing well, and our business momentum continues to build as is demonstrated by strong sales inflows in many of our businesses.

About a month ago, we announced our agreement to acquire the Star and Edison insurance companies in Japan. This acquisition is expected to close in the first quarter. Given the importance of this transaction, we decided to give you input today on our earnings outlook for 2011 as well as our longer-term goals for ROE, including the impact of Star/Edison just as we would on Investor Day. Accordingly, we canceled next month's Investor Day event. We hope to find today's discussion helpful, and we look forward to answering your questions.

Now I'd like to turn it over to Rich. Rich?

Richard Carbone

Thanks, John, and good morning, everyone. At the beginning here, I will cover the third quarter results. And then, I'll come back later on and cover our capital and liquidity position, our earnings guidance for 2011 and how we look at our ROE potentials.

As you've seen from yesterday's release, we reported common stock earnings per share of $2.12 for the third quarter based on adjusted operating income for the Financial Services Businesses, or the FSB. This compares to a $1.78 per share in the year-ago quarter. I will start with some high-level comments on the current quarter and then discuss the impact of some discrete items.

In our Annuity Retirement businesses, results are benefiting from continued growth and account values, driven by strong sales and net flows as well as cumulative market value increases over the past year. In the Asset Management business, we are benefiting from higher Asset Management fees, driven by growth in assets under management as well as the absence of credit-related charges in the current quarter.

Low earnings from our U.S. Protection businesses resulted from an increase in Individual Life claims in comparison to better-than-expected experience a year ago and less favorable underwriting in Group insurance. Our domestic results are also benefited from net favorable unlockings in the quarter, reflecting updated estimates of profitability based on our annual actuarial reviews as well as market increases in the quarter. Our International businesses are continuing to perform well with record earnings for the quarter and strong sales driven by our competitive position and expanding distribution in Japan.

As you saw in our earnings release, we changed our definition of adjusted operating income, or AOI. To exclude hedging differences from our variable annuity living benefits, mark-to-market on our capital hedge and the nonperformance risk that we've referred to as NPR. As a result, these items will no longer be reflected in our business segment results, although they will continue to be included of course in GAAP net income. We revised the definition in connection with changes of our hedging program, which Mark will discuss. We believe this presentation will provide a more meaningful measure of adjusted operating income and while they will be more comparable or compatible with our peers.

Operating results for the quarter reflected several discrete items, including the impact of our annual actuarial reviews of experienced and actuarial assumptions that we typically complete for our Insurance and Retirement businesses in the third quarter of each year. And I'll go through them now. In the Annuity business, we had a benefit of $0.38 per share from unlocking that reduced amortization of deferred policy acquisition and other costs and a further benefit of $0.26 per share from the release of a portion of our reserves to guaranteed minimum death and income benefits.

Our Individual Life business benefited $0.08 per share from the reduction of net amortization of DAC and related cost as a result of the completion of their annual review. Group Insurance results, better than in $0.04 per share from reserve refinements, driven largely by their annual assumption review. Going the other way, an unlocking in the Retirement business resulted in net charges of about $0.02 per share. In total, the items I just mentioned had a net favorable impact of about $0.74 on our earnings per share for the third quarter.

Our results in the year-ago quarter also benefited from favorable unlockings, largely driven by a 15% increase in the S&P 500 and other discrete items that we identified then. With an estimated contribution of $0.57 per share. Taking these items out of both the current and prior-year quarters, or year-ago quarter, will produce an EPS increase of about 14%.

Now moving on to the GAAP results of the FSB. We reported net income of $1.2 billion or $2.46 per share for the third quarter, compared to $1.1 billion or $2.35 per share a year ago. GAAP pretax results for this quarter include amounts characterized as net realized investment gains of $278 million. These gains reflect $89 million from the hedging differences and related items, including NPR, that were previously reported within adjusted operating income. The remainder of the net gains was largely driven by general portfolio and activities and foreign exchange rate fluctuations. Impairments and credit losses were $91 million in the quarter, book value per share on a GAAP basis amounted to $67.81 at the end of the third quarter. This compares to $49.71 a year ago. Excluding unrealized investment gains and losses and pension and postretirement benefits, book value per share increased $9.24 from a year ago, reaching $6.40 at the end of the quarter.

I will discuss, as mentioned earlier, I'll discuss our capital liquidity later on after Mark discusses the business results. And now on to Mark.

Mark Grier

Thanks, John and Rich, and good morning, good afternoon or good evening. Thanks for joining us on the call today.

In the discussion of the businesses, I'll begin with our U.S. businesses. Our Annuity business reported adjusted operating income of $588 million for the third quarter, compared to $315 million a year ago. Results for the current quarter reflect the favorable unlocking and reserve adjustments that Rich mentioned.

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