This summary is based on the second quarter fiscal 2007 earnings call conducted by Prudential Financial Inc (PRU) on August 2, 2007.
Chairman, President and Chief Executive Officer: Arthur F. Ryan
Senior VP and Chief Financial Officer: Richard J. Carbone
Vice Chairman: John R. Strangfeld
Vice Chairman: Mark B. Grier
Senior VP of Investor Relations: Eric Durant
Key Investors Issues
- The earnings per share increased from 89 cents in the prior year to $1.80.
- Quarterly revenue grew 11.7% over the previous year to $6.7 billion.
- At the end of the quarter, the company had excess capital of more than $7 billion.
Second Quarter Fiscal 2007 Financial Highlights
Net income for the Financial Services business was $835 million for the second quarter compared to $424 million for the year ago quarter.
Current quarter results include pre-tax realized investment gains of $32 million, net of related charges and adjustments. These realized gains came mainly from the sales of equity securities and the firm’s Japanese and Korean insurance operations. Credit-related losses and impairments were $17 million in the current quarter. The gross unrealized losses on fixed income maturities in general account stood at $1.3 billion at the end of the second quarter, with the vast majority related to interest rate movements on investment grade securities. Only $92 million of the gross unrealized losses related to non-investment grade securities. Substantially all of the increase from the first quarter when gross unrealized losses were $551 million is interest rate-related.
Non investment grade fixed income maturities comprise about 6.5% of the Financial Services business fixed maturity portfolio at the end of the second quarter, essentially unchanged from the year ago quarter. The company’s exposure to residential mortgages is through the mortgage-backed and asset-backed securities included in fixed maturity portfolio, and is virtually all investment grade.
Mortgage-backed securities amounted to $8 billion at the end of the second quarter.
This portfolio accounted for $125 million of the total $1.3 billion gross unrealized loss. About 98% of the mortgage-backed securities are publicly traded agency pass throughs. These securities are issued by Fannie Mae, Ginnie Mae, and Freddie Mac, and supported by implicit or explicit government guarantees. As a result, the securities are rated AA or AAA.
Asset-backed securities amounted to $15 billion at the end of the second quarter.
They had gross unrealized losses of only $66 million as of June 30th. The firm independently evaluates the underlying collateral, which primarily comprises residential mortgages, credit card receivables, and auto loans. The firm had a total of $8.5 billion of securities collateralized by subprime mortgages in the Financial Services business, included in this ABS total. $7 billion are 2005 to 2007 vintage. $6.8 billion of the ''05 to ''07 vintage is rated AAA or AA and about 60% of that has an average expected life of less than one year. The firm has no CDOs collateralized by these instruments. All subprime collateral are first mortgages. The gross unrealized loss as of July 31st is not significantly different, although up from June 30th. Lastly, the firm’s worst case estimate of the credit loss on the subprime holdings is approximately $150 million after-tax in total over a five-year period, less than 1% of current equity.
The results of the Closed Block Business are associated with the firm’s class B stock.
Closed Block Business reported net income of $11 million for the current quarter compared to $29 million a year ago. Current quarter results include a charge to increase liability for future policyholder dividends based on cumulative results of the Closed Block. The firm measures results of the Closed Block only on a GAAP basis.
Prudential''s capital position remains rock solid.
The firm estimates that excess capital, which includes untapped capacity to issue capital debt and hybrid securities, as well as equity on the books is in the range of $7 billion or more. This is a static measure. Share repurchases, common dividends, and acquisitions reduce this total. But a significant portion of the earnings, about 60% of the after-tax adjusted operating income, increases it.
