Prudential Financial Earnings Call Insights: Share Repurchases and Gibraltar Immigration Costs

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

Share Repurchases

Christopher Giovanni – Goldman Sachs: I guess, first question just on share repurchases. So you still have the $250 million authorization out there that you’ve intended to complete by the end of 2Q. Just wondering if that’s still the case or has anything changed either from regulatory uncertainty or additional M&A that should lead us to believe that you won’t get that done this quarter?

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Mark B. Grier – Vice Chairman: This is Mark. That is still the case. When we discussed the Hartford acquisition and share repurchases, we indicated at that time that we anticipated using $250 million more of our share repurchase authorization in the first half, and we still expect to do that.

Christopher Giovanni – Goldman Sachs: Then just on the Hartford Life, the transaction there, I just want to make sure I’ve the pieces here that you pointed to. So you’ve paid $600 million for it. I guess you had the $32 million or so contribution this quarter, so if we annualize, we’ll be talking about $100 million odd of annual earnings and that’s before the $90 million of cost saves post integration. Are those pieces correct?

Robert Falzon – EVP and CFO: Yes, they are. Don’t forget that there was about $9 million of that synergy was in the first quarter, but those numbers are correct, yes.

Mark B. Grier – Vice Chairman: Just maybe one small qualifier. Capital in the individual insurance business actually went up by $700 million for the quarter, and the $600 million was the ceding commission. There’s a little bit of other stuff going on in there, but you got the gist of it…

Christopher Giovanni – Goldman Sachs: Then, just one quick one just for John. You’ve laid out the 13% to 14% ROE target for this year, and I think in the past you said you’re not going to stop there. So, curious if you still believe you can generate returns in excess of that 13% to 14% or has anything changed that could maybe cap your returns on that 13% to 14% range?

John R. Strangfeld – Chairman and CEO: Let me offer a couple of observations. One as it relates to the current year and the other it relates to going forward. On the one hand, we would caution you about annualizing Q1 results. On the other hand, I’d also say though that Q1 gives us confidence in our ability to achieve our 13% to 14% objective. So I think that’s how I look at it in terms of the current year. In terms of long-term, we actually think 13% to 14% is right in proper place for our line of business, with our mix of business and it creates a right balance between strong and differentiated returns and also achieving growth in investing in the business. So I think that’s actually a representative place that we would think is not only attainable but sustainable over the long-term.

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Gibraltar Immigration Costs

John Nadel – Sterne, Agee & Leach, Inc.: A question on immigration costs as it relates to Gibraltar. They are pretty light this quarter. I’m just wondering whether that’s a matter of timing or if we should infer that maybe total integration costs are going to ultimately come in below your original expectations?

Edward P. Baird – EVP, International Businesses: John, it’s Ed Baird. It’s a matter of timing. I think it’s too soon to conclude just from this quarter that it’s anything other than that. If we think at some point that it’s going to be even lower than (450), we’ll let you know, but it would be premature to signal that.

Mark B. Grier – Vice Chairman: Remember we ratcheted that down once already.

John Nadel – Sterne, Agee & Leach, Inc.: I do. I remember. And maybe a broader, bigger picture question for you on Japan. So we’re seeing now an environment where currency has moved significantly, risk assets in Japan are in again. Monetary policy is aggressive. Short-term this is obviously driving JGB yields down. I’m just curious if the combination of all of these factors is leading you or management to make any shifts in your strategy or day-to-day operations in what is clearly a very important market for you?

Robert Falzon – EVP and CFO: In terms of basic strategy, no, no shift. As you know, our primary focus has always been on (debt) protection and recurring premium. And in those areas we’re not seeing any material movement. The one area in which you are seeing changes and it’s reflected in this quarter is on the more volatile single premium bank channel sales, which as you know made major movement in the third and fourth quarter of last year. We quickly took action that Mark mentioned in terms of reducing both the crediting rates, which were already pretty low. We were at 1.0 during that period of time, which I think you’ll find was conservative, and we took it even lower down to 80 bps. We reduced the commission. We put in caps, etc. So that’s why you see the kind of material drop in those sales, because they are more reflective of some of the factors you described, in particular interest rates. But the vast majority of our business is unaffected by that, and again as you know that carries through into our earnings, because 80% of our earnings comes from mortality expenses and so shift in investments really only affects the Gibraltar book and the reason that that book has influenced from investments, it simply could have got the reset on the crediting rates. So, the bulk of our earnings continue to come from the M&A and it’s not being fully affected by this. So, bottom line, no change in strategy.

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John Nadel – Sterne, Agee & Leach, Inc.: And then just a real quick one for John or Mark, any updated thoughts as it relates to federal regulation, the financial stability over State Council had indicated. They expect to make decisions on non-bank SIFI soon, I was wondering if you have any additional color you might be able to provide based on your discussions and interaction?

Mark B. Grier – Vice Chairman: This is Mark. Calendar-wise we are getting a sense that we should be expecting some conclusions from FSOC which – remember would result in around of reviewing discussion with us and then back to FSOC again. I’d add calendar-wise we are also anticipating developments on the international side as the FSB considers G-SIFI and as a subset of that considers the globally systemic important insurance companies and timing of that may also be within the next few months. Let me just comment on a couple of things, one to reinforce that our engagement with FSOC has been very high quality. We’ve had a chance to respond to the data request, but also respond to the data request with subset of context as we view it. We continue to believe that we don’t meet the standard quantitatively to be designated systemically important. Beyond the process which again has been high quality. The SIFI issue tends to cascade pretty quickly down through capital and solvency standards to the question of scaling capital and ultimately to the question of whether or not we would be inappropriately constrained with respect to the management of capital as the SIFI, and I want to just make two points about this. One is that we are engaged in discussions with various regulators about appropriate capital standards, and I think we’re being heard with respect to the concerns that Prudential as well as others in the industry are expressing about the inappropriate application of bank-centric capital models to insurance companies, and we have a chance to talk about why and how we think the approach to capital and solvency should be different, reflecting the intrinsic characteristics of insurance relative to banking. The second point to make is that, we are spending a lot of time trying to explain why our GAAP balance sheet is not a very good representation of solvency and risk, and it kind of comes down to that as the starting point focusing on things like separate accounts and participating policies, the nature of reserving activities, and real guts of product design as it impacts liquidity, are very much in front of us as we talk to the regulators and we feel right now like the level of engagement is pretty good and the opportunity that we have to have a high-quality discussion around capital and solvency thought of in the context of a company like Prudential, I think right now is appropriate and favorable.

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