Prudential Financial Earnings Call Insights: Higher International Expenses and Capital Estimates

Prudential Financial Inc (NYSE:PRU) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Higher International Expenses

Erik Bass – Citigroup: I guess if we could just talk a little bit about the international business and you outlined some of the higher expenses that affected earnings this quarter. Just hoping you could give a little bit more color on what these costs were and what if any of these expenses are likely to continue? Then as we think about modeling this business, what type of seasonality should we expect in earnings in 2013?

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Edward P. Baird – EVP, International Businesses: Erik, this is Ed Baird. There were in this quarter the kinds of seasonal factors as well as normal fluctuations that frankly you’re going to find in almost every quarter. Now, while some of these have a certain regulatory to them, others do not. So, for example, on the IT, it was lumpier in this quarter, but totality for the year of the IT expenses were still well within the budget. So, I would just caution on taking the result of this quarter or any one quarter and trying to do a straight linear extrapolation from there. I think you will find it more fruitful if you look at the totality of it for the year, and if you do that, I think you will find something more reliable that’s particularly true on the earnings, but it’s even true if we get over on to the sales side.

Erik Bass – Citigroup: Then, within the businesses, are there seasonal trends in terms of whether it’s investment income or dividend payments or other things that we should expect to recur?

Edward P. Baird – EVP, International Businesses: Yeah. Just to drill down on that, if you think in simplistic terms as the money coming in and the money going out, there are sort of two channels on each of them. On the money coming inside of it, there is certain seasonality or other causes of fluctuation. So, for instance, on the premium, particularly these days where there is more of a shift away from recurring premium to single premium or to advanced pay, so that can start to cause in quarter-by-quarter some fluctuation on the incoming premium. Secondly, as your question touches upon, you can get the same on investments beyond the normal shift that can take place naturally from quarter-to-quarter. You do get – for example, in the third quarter you tend to get more dividends. So, if you’re doing a third to fourth quarter sequential comparison you’re going to see some downward pressure there that is actually completely natural and not indicative of any broader story. And the same is going to be true on sort of two channels with the outflow and you already raised one of them. One would be around expense as you’re going to see quarter-to-quarter certain natural fluctuations that can be caused simply by scheduling; that’s particularly true and you’ve got major projects going on such the Star Edison integration where those kinds of expenses are naturally going to have certain lumpiness to them. And you can even get it in the mortality. With a book that’s big, quarter-to-quarter you’re going to see certain fluctuations in mortality, but I would observe that this quarter as frankly with lot of the others would have seen during the year, it’s well within standard deviation, and so if you’re comparing one quarter to a prior quarter, one could be at the high end, went at the lower end, but there is no underlying trend there that I would note or bring attention to.

Capital Estimates

Nigel Dally – Morgan Stanley: First, just with the $100 million of expenses above your baseline, should we read this as one-time in nature impacting any fourth quarter results, or will some of those expenditures continue through 2013?

Charles F. Lowrey – EVP, COO, U.S. Businesses: Nigel, this is Charlie. I think the former is true. We did take about $100 million, as you said, above the baseline charges, but I think we wouldn’t have lined those off if we didn’t think they were one-timers. And to give you some examples of what they were, and Mark gave a couple, but one would be the fund formation fees that we had for $19 million in the fourth quarter; the $33 million for the year. Second would be increased cost in Retirement that should make the full service business more competitive. We’re always looking to do that. And third, there are some technology and back office expenses in annuities that will improve both expense management, and I think the product itself over time. So, these are just three examples of the kinds of things that we think were non-reoccurring and that’s why we lined them off.

Nigel Dally – Morgan Stanley: Second is capital; Rich, you mentioned your capital estimates included what was necessary to satisfy the asset adequacy test. Is it possible to put some numbers around how much capital that absorbed and which business lines that related to? I’m presuming it’s predominantly long-term care, but was it related to other business lines as well?

Richard J. Carbone – EVP and CFO: It was predominantly long-term care. It was kind of $1 billion that we added.

A Closer Look: Prudential Financial Earnings Cheat Sheet>>