Prudential Financial Management Discusses Q2 2012 Results - Earnings Call Transcript

Prudential Financial (PRU)

Q2 2012 Earnings Call

August 02, 2012 11:00 am ET

Executives

Eric Durant

John Robert Strangfeld - Chairman, Chief Executive Officer, President and Member of Executive Committee

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

Mark B. Grier - Vice Chairman

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

Charles Frederick Lowrey - Head of Asset Management Business, Executive Vice President, Chief Operating Officer of Us Businesses, Chief Executive Officer of Prudential Investment Management, President of of Prudential Investment Management and Executive Vice President of Prudential Financial & Prudential Insurance

Analysts

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

A. Mark Finkelstein - Evercore Partners Inc., Research Division

Nigel P. Dally - Morgan Stanley, Research Division

Steven D. Schwartz - Raymond James & Associates, Inc., Research Division

Edward A. Spehar - BofA Merrill Lynch, Research Division

John M. Nadel - Sterne Agee & Leach Inc., Research Division

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the second quarter 2012 earnings teleconference. [Operator Instructions] As a reminder, today's conference call is being recorded.

And I'd now like to turn the conference over to the Senior Vice President of Investor Relations, Mr. Eric Durant. Please go ahead.

Eric Durant

Thank you, Lea. Good morning. On behalf of my production colleagues, John Strangfeld, CEO; Mark Grier, Vice Chairman; Rich Carbone, Chief Financial Officer; Charlie Lowrey, Head of U.S. Businesses; Ed Baird, Head of International Businesses; and Peter Sayre, Controller and Principal Accounting Officer, we thank you for joining our call.

We'll start today with prepared comments from John, Rich, and Mark, and then we'll hat out [ph] your questions. Before we begin, 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 second quarter of 2012, 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.

Our earnings press release contains information about our definition of adjusted operating income. The comparable GAAP presentation and the reconciliation between the 2 for the 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.

Now let's get started. Here is John Strangfeld, CEO.

John Robert Strangfeld

Good morning, everyone, and thank you for joining us. I'll begin by headlining what Rich and Mark will be describing to you more specifically regarding our second quarter.

Our drivers continued strong, and in fact, in some cases, very strong, and our underlying financial performance improved from the first quarter. Rich will take you through the market driven and discrete items included in this quarter's earnings. Stripping these items from each second quarter, our earnings per share amount to $1.67 this year versus $1.64 in the second quarter of 2011. This quarter's results includes the effect of significant improvement in the benefit ratios of our group life business. Confirming, we believe, that last quarter's elevated ratio was an aberration.

On the other hand, this quarter's result also includes a drag of significantly worse-than-expected mortality in Individual Life, stemming from several large claims on seasoned policies. This unfavorable result, the largest in relation to our expectations since the fourth quarter of 2003, is also in our judgment, a random event.

ROE this quarter amounts to an annualized return over 11%, again, based on adjusted operating income, excluding the small number of market driven and discrete items that Rich will describe in a moment. Keep in mind that this 11% return -- 11-plus percent return, reflects the earnings drag from significant capital capacity, and that we intend to deploy approximately $3 billion of this capacity in the next 4 quarters. A portion of that deployment is slated for the GM pension buyout transaction we expect to close by year end. And in addition our board is authorized $1 billion in share repurchases in the 12 months ending June 30, 2013.

Through business expansion, synergy realization and capital deployment, we expect our ROE to improve. And we continue to believe our stated ROE objectives for 2013 of 13% to 14% is achievable. And achievable in a variety of economic and market environments.

We have focused on execution and realization of this ROE objective. Additional expense synergies related to Star and Edison and the broader financial impact of the strong momentum in international will continue to be important drivers of performance. The successful deployment of capital with an accretive impact in ROE is critical as is the improvement of our operating performance in our U.S. businesses.

Fundamentals are exceptional in international and strong in most of our U.S. businesses. This is what gives us the confidence in our ability to distinguish ourselves with distinctive returns and high-quality businesses. Our strong drivers demonstrate our commercial momentum and support our ability to improve our earnings and returns. In annuities, sales for the quarter amounted to just over $5 billion, roughly in line with their levels since early last year. Our new living benefit product will be launched later this month.

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