Prudential Financial, Inc. (PRU)

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Prudential Financial (PRU)

Q3 2012 Earnings Call

November 08, 2012 11:00 am ET


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


Ryan Krueger - Dowling & Partners Securities, LLC

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

Eric N. Berg - RBC Capital Markets, LLC, Research Division

Suneet L. Kamath - UBS Investment Bank, Research Division

Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division

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

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

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

Thomas G. Gallagher - Crédit Suisse AG, Research Division

Sean Dargan - Macquarie Research



Ladies and gentlemen, thank you for standing by, and welcome to the third quarter 2012 earnings teleconference. [Operator Instructions] Later, we will conduct a question-and-answer session. [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. Welcome to Prudential's expanded third quarter call, covering the third quarter results and our financial outlook for 2013. Slides supporting the financial outlook presentation are available at our Investor Relations website,

Representing Prudential today are the usual suspects, John Strangfeld, CEO; Mark Grier, Vice Chairman; Rich Carbone, Chief Financial Officer; Charlie Lowrey, Head of Domestic Businesses; Ed Baird, Head of International Businesses; and Peter Sayre, Controller and Principal Accounting Officer.

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 third quarter of 2012, which can be found on our website at

In addition, in managing our businesses, we use a non-GAAP measurement 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, and good morning, everyone, and thank you for joining us. We appreciate your interest in Prudential. I'll be reasonably brief to leave more time for Rich and Mark's expanded comments, as well as for your questions. So let me begin.

In the third quarter of last year, EPS, based on operating income, increased for the third quarter of this year 82%, reflecting -- compared to last year, which is a reflection of weak equity market performance last year and favorable equity markets this year. Excluding the effect of market-driven and discrete items, such as DAC unlockings, from the results of each period, earnings per share increased by 17% from $1.49 in the third quarter of 2011 to $1.75 in the third quarter of 2012. On the same basis, our annualized return on equity for the third quarter reached 11.8%.

Core earnings for each of our businesses improved in the last year. In short, our underlying operating performance for this quarter was very solid. We've expanded our call today to give you our outlook for 2013 earnings and ROE. I don't want to front-run much of what Rich and Mark will be telling you, but I will provide a few comments to provide context for their remarks.

Last week, we completed our pension buyout transfer with General Motors. Prudential has received approximately $25 billion in premium from General Motors for the purchase of a group annuity contract, and we have assumed responsibility for approximately 110,000 salaried GM retirees. We're certainly proud to have completed this unprecedented pension transfer agreement with GM. And since we last met, Prudential announced a second large pension transfer agreement, this time, with Verizon. This transaction, which is expected to close next month, covers the transfer of approximately $7.5 billion of pension obligations to Prudential. These transactions speak to our capabilities, our culture of multi-disciplinary collaboration, as well as our -- to our financial strength.

On Investor Day last May, we spoke of opportunities for outsized organic growth, that is growth over and above business growth in a normal course. These pension risk transfers transactions exemplify what we had in mind. They represent innovation and scale. They also nicely complement our organic growth in M&A.

Speaking of M&A, late in September, we reached an agreement with the Hartford to acquire its Individual Life business through a reinsurance transaction. We view this acquisition as similar to outsized organic growth because we are accelerating growth that would have taken years to achieve organically. Our financial evaluation of this investment was driven by the value of the in-force block and expense synergies. That said, we believe the acquisition will lead to significant additional financial benefits in terms of new business.

First, we're gaining distribution strength in the bank and wirehouse channels. Second, we're gaining increased scale. Third, we're adding talented people, who make our company stronger, most notably, in product development and sales.

Now we all know that success is not in the announcement but in making it work and proving it out. But as we've shown in the past, most recently with Star/Edison, we're pretty good at that. As these large transactions demonstrate, capital deployment remains an integral part of managing Prudential to achieve our financial goals, and we recognize the importance of balancing investments in our business with cash dividends and share repurchases to ensure appropriate capital structure and attractive returns. The Hartford transaction is scheduled to close early next year. And as I mentioned, GM pension transfer closed on November 1 and the Verizon pension transfer is expected to close next month.

Now we also declared a cash dividend yesterday of $1.60 per share, a 10% increase from last year, as well as our intention to pay quarterly dividend starting next year. And finally, we repurchased $150 million in common stock last quarter. In combination, these actions will deploy capital between July 2012 and June 2013 as well in excess of the $3 billion we have told you we expected to deploy in that period.

Our strong capital position, liquidity and sound asset quality continue to serve us well. We view them as supportive of our ability to achieve our return on equity objectives. And as Rich will show you in a few minutes, we continue to believe we have a strong prospect of achieving an ROE next year within the range of our stated ROE objective for 2013, which we first announced 3 years ago, of 13% to 14%.

And frankly, for us, it's not just obsession with a mathematical number. To us, the achievement of this is a manifestation and validation of the uniqueness of our business mix, the quality of the businesses that make up that mix and the talent of our people. We take this goal very seriously, and we are intensely focused on both making it happen and making it sustainable. And yet, I'll hasten to add that we'll get there in the right way or we won't get there at all.

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