This summary is based on the third quarter fiscal 2007 earnings call conducted by Prudential Financial, Inc. (PRU) on November 1, 2007.
Management:
Chairman, President and Chief Executive Officer: Art Ryan
Head of Investor Relations: Eric Durant
Chief Financial Officer: Rich Carbone
Vice Chairman of Investments and Chief Executive Officer: John Strangfeld
Vice Chairman of Financial Management: Mark Grier
Key Investors Issues
- EPS were $1.88 a share compared to $2.38 a share last year.
- Net earnings dropped to $860 million from $1.15 billion in the year-earlier quarter.
- Revenue fell to $8.39 billion from $8.36 billion a year ago.
Second Quarter Highlights
The company reported common stock earnings per share for the financial services business of $1.97 compared to $1.72 for the year-ago quarter.
- This amounts to a 15% increase in earnings per share.
- Core earnings performance was strong in the current quarter despite volatile conditions in financial markets.
- Third-quarter results also reflected a net benefit of around 6 cents per share for several items that are of an unusual or nonrecurring nature.
Individual life, individual annuity and group insurance businesses completed their annual reviews of experience and actuarial assumptions.
- This resulted in favorable unlockings of DAC and other amortization items along with reserve refinements for a total contribution of about 18 cents per share.
- Individual life business received compensation based on multiyear profitability of certain third-party products distributed by agents contributing another 8 cents per share and results for International Investment segment included income from the sale of an interest in an operating JV, mark-to-market income on securities related to exchange memberships and a benefit from a recovery on a former investment for a total of about 12 cents per share.
Retirement business recorded a pretax charge of $81 million or about 12 cents per share reflecting payments made to clients who authorized to proceed on their behalf to seek recovery of losses on several investment funds managed by State Street Global Advisors.
Several of businesses recorded mark-to-market losses within adjusted operating income amounting to $78 million pretax or 12 cents per share on externally managed fixed income investments in the European market. These investments contributed to portfolio of diversification since the underlying assets are mainly European corporate bonds and asset-backed securities. About 90% of the underlying assets are investment grade and there are no investments in the U.S. subprime mortgage paper.
Structures are used to swap the underlying cash flows to currencies that are a good match for Japanese and U.S. insurance liabilities. Accounting treatment is based on the investment structure and the negative mark-to-market in the current quarter reflects spread widening in European credit markets rather than defaults or impairments.
In asset management business, realized and unrealized losses due to the widening credit spreads resulted in a $42 million loss from the commercial mortgage securitization operation. Comparison of this loss to average results for this operation in recent quarters results in a negative swing of about 8 cants per share.
The sum of these unusual or nonrecurring items is a net positive of about 6 cents per share to the current quarter''s results.
Results a year ago also benefited from favorable unlockings and other items of a nonrecurring nature with an estimated contribution of about 27 cents per share. Taking these items out of both the current year results quarters, EPS would be up 26%.
Corporate and other operations reported a loss of $5 million compared to adjusted operating income of $4 million a year ago.
The contribution from real estate and relocation business, which is included in corporate and other results, was down $15 million from a year ago reflecting a less favorable real estate market.
Adjusted operating income for individual life insurance business was $247 million compared to $183 million a year ago.
Current quarter results benefited from two items, the DAC unlocking, which came mainly from updating actuarial assumptions to give effect to mortality experience over a five-year period contributed $78 million and compensation receive based on multiyear profitability of third-party products distributed by agents contributed another $57 million.
