Prudential Financial, Inc. (PRU)

PRU 
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Prudential Financial (PRU)

Q4 2012 Earnings Call

February 07, 2013 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

Erik James Bass - Citigroup Inc, Research Division

Nigel P. Dally - Morgan Stanley, Research Division

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

Jay Gelb - Barclays Capital, Research Division

Joanne A. Smith - Scotiabank Global Banking and Markets, Research Division

Randy Binner - FBR Capital Markets & Co., Research Division

Sean Dargan - Macquarie Research

Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter 2012 Earnings Teleconference. [Operator Instructions] And as a reminder, today's conference call is being recorded. 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 our call. Representing Prudential this morning are John Strangfeld, Chief Executive; Mark Grier, Vice Chairman; Rich Carbone, Chief Financial Officer; Ed Baird, Head of International Operations; Charlie Lowrey, Head of International -- Head of Domestic Operations; and Peter Sayre, Controller and Principal Accounting Officer.

Before we get started, 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 fourth 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.

John?

John Robert Strangfeld

Thank you, Eric. Good morning, everyone. Thank you for joining us. Now that we've closed the books on 2012, I'll kick things off with some high-level comments on the year as a whole.

First, earnings. Earnings per share, based on adjusted operating income of the Financial Services businesses, were $6.27 compared to $5.83 a year ago. This is an increase of about 8%. If you remove the market-driven and discrete items in business integration costs we've disclosed each quarter, which Rich and Mark will review with you for the fourth quarter, the EPS increase will still be about 8%. This is because these items reduced pretax adjusted operating income by roughly $200 million in 2011 and again in 2012.

Second, financial strengths. In capital positions of our U.S. and Japanese insurance companies continue to meet the high standards, we believe AA, we've managed them to, as you will hear from Rich shortly. We have capacity to remain strongly capitalized even in stressed environments. We've improved our ratio of capital debt to total capitalization, it is under 25% at year end, and the quality of our investment portfolio has never been better.

With this strong financial position, we're able to consider potential deals, but we will do so with great care and selectivity. We believe our acquisition of the Hartford's Individual Life business, which closed in January, offers attractive financial returns, strategic benefits, talent enhancements and manageable execution risk. We like our prospects with this, yet we know we need to prove it out.

We also remain in the market for opportunities to add outsized organic growth, particularly in the area of pension risk transfer. We closed our transactions with GM and Verizon in the fourth quarter, and we will consider additional transactions on a case-by-case basis. At the same time, we take a balanced approach to investing in businesses and returning capital to our shareholders. During 2012, we returned about $650 million of capital through our share repurchase program, and an additional $750 million through our common stock dividend. We intend to declare quarterly dividends starting with the first quarter of 2013.

Third, commercial momentum. We're a leader in the markets in which we've chosen to compete. Our retirement business achieved record account values last year, reflecting the major pension risk transfer transactions I mentioned, as well as continued strong sales of investment-only stable products. AUM has declined to a record high in Asset Management, as institutional and retail net flows over the past year amounted to $30 billion.

In annuities, the products we're offering reflect today's market environment. We believe they provide our clients an attractive value proposition and our shareholders, appropriate returns and risk. We believe the Hartford's Life acquisition will produce attractive returns, as well as enhanced distribution and excellent talent for our Individual Life business. And as for Group Insurance, we are confident we will resolve recent performance issues and we will fix this business, a business which remains a significant participant in these markets.

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