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Prudential Financial (NYSE:PRU)

Q4 2010 Earnings Call

February 10, 2011 11:00 am ET

Executives

Edward Baird - Chief Operating Officer and Executive Vice President of International Businesses

Eric Durant - Head of Investor

Richard Carbone - Chief Financial Officer, Executive Vice President and Chief Financial Officer of Prudential Insurance

Bernard Winograd - Chief Operating Officer of U S, Executive Vice President and Executive Vice President of Prudential Financial & Prudential Insurance

Mark Grier - Executive Vice President of Financial Management

John Strangfeld - Chairman, Chief Executive Officer and President

Analysts

Andrew Kligerman - UBS Investment Bank

Darin Arita - Deutsche Bank AG

John Nadel - Sterne Agee & Leach Inc.

Suneet Kamath - Bernstein Research

Jamminder Bhullar - JP Morgan Chase & Co

Nigel Dally - Morgan Stanley

A. Mark Finkelstein - Macquarie Research

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Prudential Fourth Quarter 2010 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Mr. Eric Durant. Please go ahead.

Eric Durant

Thank you, Cynthia. Good morning, and thank you for joining our call. Representing Prudential on today's call are John Strangfeld, CEO; Mark Grier, Vice Chairman; Bernard Winograd, Chief Operating Officer of Domestic businesses; Ed Baird, Chief Operating Officer International businesses; Rich Carbone, Chief Financial Officer; and Peter Sayre, Comptroller 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 fourth quarter of 2010, which can be found on our website at www.investor.prudential.com.

In addition, in managing our businesses, we use a non-GAAP measure 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 two for the quarter and year end December 31 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 Strangfeld

Thank you, Eric. Good morning. Thank you for joining us. Now that we've closed the books on 2010, I'll kick things off with some high-level comments regarding the year as a whole.

First, earnings. Earnings per share for 2010 increased 14% from 2009 based on after-tax adjusted operating income of the Financial Services businesses. Return on equity was 11%. Excluding from earnings the items we consider discreet or market-driven, the full year result would equate to just under a 10% return on equity. These returns reflect the drag from significant capital capacity, roughly half of which was redeployed on February 1 when our acquisition of Star/Edison closed. Net income for the year amounted to $2.7 billion, down from $3.4 billion in 2009, which included a $1.4 billion gain on our sale of our investment in Wachovia

Securities.

Second, capital. As Rich will share with you in a moment, our capital position remains exceedingly strong. We are well positioned to pursue business opportunities, and we have capacity to remain strongly capitalized even in severe stress environments. Book value per share on a GAAP basis increased by 22% during the year and amounted to $63 at year end. Excluding unrealized investment gains and losses and pension and post-retirement benefits, book value per share increased 10% to $59.48 at year end.

Next our commercial momentum has never been stronger. Strong sales and flows in our key U.S. Retirement and International Insurance businesses attest to their market leadership. In Individual Annuities, gross and net sales were both at record levels. In Prudential Retirement, which includes our Full Service business, as well as our institutional investment products activities, we had a 24% increase in net flows for the year. In Asset Management, net institutional long-term inflows exceeded $28 billion for the year, a record high and more than doubled 2009 inflows. Our International Insurance operations had record annualized new business premiums, which increased 25% from the prior year in constant dollars.

About 85% of our sales for the year in International Insurance came from Japan. Japan is a market that continues to present attractive opportunities for Prudential to build on our success in protection products and increasingly to address retirement needs. The acquisition of Star/Edison, which closed on February 1, who runs our distribution, increased at the scale of our operations and expands our client base by roughly 50%. This is a rich opportunity. We expect this acquisition to be accretive to enterprise ROE and to EPS based just on the value of the in-force we're acquiring and the expense synergies we expect to achieve after integration period. But our opportunity is significantly greater than this.

Prudential has a highly successful record of acquisitions in Japan and a management team in Japan that knows how to improve the operating performance of traditional Japanese insurance companies such as Star and Edison. We've shown we can improve sales productivity, policy persistency and product mix. So with the acquisition of Star and Edison, we will be applying capabilities that are well established to a new and attractive opportunity. Just as we improve the performance of Gibraltar, so too do we expect to improve the performance of Star and Edison.

Finally, before handing it off to Rich and Mark, I have to make some brief comments on Prudential's leadership. This Tuesday, Bernard Winograd announced his retirement, which will be effective shortly. Bernard has made a huge contribution to Prudential as Chief Operating Officer of our U.S. businesses over the last three years. Before that, Bernard led our Asset Management business with great distinction. And before that, he played a central role in developing Prudential real estate investors, our outstanding real estate investment advisory arm. We will miss Bernard as an Executive, and as a colleague, we will also miss his sense of humor. He leaves our U.S. businesses in the best shape they have ever been in terms of performance, momentum and quality and depth of leadership. We wish him well in retirement.

Charlie Lowrey will succeed Bernard as head of our U.S. businesses. Charlie has done an outstanding job running our Asset Management business the last three years, and we are enthusiastic about him and his new leadership role. Furthermore, he has a great team.

With that, I'll turn it over to Rich. Rich?

Richard Carbone

Thanks, John, and good morning, everyone. As you've seen from yesterday's release, we reported common stock earnings per share of $1.78 for the fourth quarter, and that's based on adjusted operating income for the Financial Services Businesses. This is an increase of nearly 50% from the $1.20 per share in the year ago quarter. ROE for the quarter was 12% based on annualized after-tax adjusted operating income.

I'll start with some high-level comments on the quarter, and then discuss the impact of some discrete items. Our enhanced competitive position has driven strong sales and net flows over the past year in Annuity Retirement and Asset Management business, leading growth and account values and assets under management and in turn higher fees. In our Annuity business, significant recovery of account values and our inflows block has led to lower benefit cost and contributed to higher fees as well. In the Asset Management business, credit-related charges were modest in the current quarter in contrast to a year ago when declining commercial real estate values had a significant negative impact on our results. In our U.S. Protection businesses, results were down modestly from a year ago, reflecting a lower benefit from favorable mortality and Individual Life.

Our International Insurance businesses turned in a strong performance, Gibralter Life benefited from a greater contribution from fixed annuity, serving the retirement market in Japan along with the expansion of the Life Insurance business sold through the Bank channel, which is beginning to make a noticeable contribution to reported results. Continued growth of our Life Planner business also contributed to the increase in International Insurance results for the quarter.

The list of significant items this quarter affecting the quarter is short. In Annuity business, we had a benefit of $0.15 per share from the release of a portion of our reserves from guaranteed minimum death and income benefits and a further benefit of $0.07 per share from an unlocking that reduced amortization of the third policy acquisition and other cost. In International Insurance, Gibraltar Life had a benefit of $0.10 per share from the partial sale or indirect investment in the China Pacific Group. In total, the items I just mentioned had a favorable impact of about $0.32 per share on our earnings per share for the quarter, fourth quarter, that is, of course.

Our results for the year ago quarter benefited by about $0.12 per share from favorable reserve true-ups and unlockings, which were largely market-driven. Taking these items out of both the current and year ago quarters would produce an increase in EPS of about 35%. As you know, we issued 18 million common shares and $1 billion of debt in mid-November as part of financing for the Star/Edison acquisition that we closed last week. The financing costs and dilution from the new shares had a negative impact of about $0.04 per share on the current quarter results. With the closing of the acquisition now behind us, we are in the process of determining the purchase accounting adjustments to be reflected in our reported results. Under GAAP accounting, valuation of the investment portfolio and related adjustments for policy reserves and value of business acquired or VOBA are done as of the closing date.

As of June 30, the companies had a combined $41 billion general account portfolio consisting of about $17 billion of Japanese government and corporate bonds, about $10 billion of U.S. dollar-denominated bonds. And the remaining $14 billion was comprised of other investments, structured products, real estate and equities. We estimate the average duration of the portfolio to be between 6.5 and seven years. From June 30, 2010, to February 1, 2011, interest rates from tenured securities have increased about 15 basis points on Japanese government bonds and about 50 basis points on U.S. Treasuries. Directionally, rate increases reduced the fair value write-ups on securities that we are required to make on the purchase accounting. However, there will be an offsetting impact on policy reserves and VOBA, also as a result of the change in the market. Given we are early and the purchase accounting process, it would be premature to estimate the net impact on the results for the acquired companies. We will report results for Star and Edison on a one-month lag. As a result, the February 1 closing date means that our 2011 results will reflect 10 months of operating earnings to Star/Edison, Star and Edison, of course.

Moving to GAAP results for the Financial Services businesses. We reported net income of $213 million or $0.45 per share for the quarter. This compares to net income of $1.8 billion or $3.78 per share a year ago, which included a gain from the sale of our interest in the Wachovia joint venture of $2.95 per share. GAAP pretax results include amounts characterized at net realized investment losses of $912 million in the quarter. Now on this amount, $581 million represents changes in the value of derivatives and other items on our balance sheet that are driven by changes in interest rate inflection in foreign currency exchange rates during the quarter. About half of the $581 million relates to the strengthening of the yen during the quarter, and the remainder came mainly from an increase in interest rates. An additional $211 million came from product-related hedges, differences, of course, including NPR. We now report these items outside of adjusted operating income.

Impairments and credit losses were at $161 million in the quarter, primarily related to sub-prime holdings. Our total sub-prime holdings and amortized costs are $3.4 billion as of the year end, down from $4.3 billion a year ago. Pay downs during the quarter were about $600 million. The realized losses I just mentioned were partially offset by net gains from other general portfolio activities of about $40 million. Book value per share on a GAAP basis amounted to $63.11 at year end. This compares to $51.52 a year earlier. Gross unrealized losses on a general account fixed maturities were $3.1 billion at year-end 2010 compared to $4.4 billion a year ago. We were in a net unrealized gain position of $5.7 billion at year end 2010 compared to a net gain, unrealized gain position, of $1 billion a year earlier. Excluding unrealized gains and losses, and pension and post-retirement benefits, book value per share increased by $5.30 from a year ago to $59.48 at year end 2010.

Now I'll give you an update on where we stand on capital. First, I'm going to focus on the insurance companies. We're continuing to manage these companies at capital levels consistent what we believe are AA standards. Prudential Insurance began last year with an RBC ratio of 577. This included the benefit of about $2.7 billion of statutory capital that came from the sale of our increase in the Wachovia joint venture at the end of 2009. That was the sale, of course, of the Wachovia joint venture at the end of 2009.

Given PICA's excess statutory capital position in relation to our target, PICA paid dividends to Prudential Financial of $3 billion in 2010. While these dividends had no impact on our overall capital position, they did enhance our financial flexibility in funding the Star/Edison transaction. Favorable equity markets had a positive impact on PICA statutory capital during the year, and credit migration and impairments were also modest.

Recent changes in guidance or the rules were capital charges on commercial mortgages, and CMBS are not expected to have a material impact on our RBC ratio. While still finalizing the RBC calculation, considering everything I mentioned, we expect the 2010 RBC with PICA as, of course, Prudential Insurance Company of America, to be above 450. Prudential of Japan and Gibraltar recently reported solvency margins as of September 30, 2010. Both companies were well above their benchmarks for a AA rating, and we are confident that at the end of this current fiscal year, which ends March 31 for them, their solvency margins will continue to be strong in relation to our targets. And Star and Edison were adequately capitalized at the closing.

Looking at the overall capital position for the Financial Services business, we measured and you've heard this several times in the past, nothing's changed. We measure our on-balance sheet capital capacity by starting with the capital we need to run the company, which we call required equity and compare that to the sum of our actual GAAP equity, hybrid securities, on-balance sheet, and long-term debt that we classify as capital debt also on the balance sheet. At our Investor Day presentation, in early November, we estimated that net on-balance sheet capital capacity after giving effect to the Star/Edison acquisition, would be in the range of $1.8 billion to $2.3 billion. When we closed the transaction last November, we funded the purchase price of $4.2 billion with $2 billion of proceeds from our November 2010 financings and the remainder with on-balance sheet capital, including a combined $800 million from Gibraltar and POJ. At year end 2010, giving effect to the closing of Star/Edison, we estimate that net on-balance sheet capital has not substantially changed and is still at $1.8 billion to $2.3 billion.

Turning to the cash position at the parent company and also giving effect to the Star/Edison acquisition. Cash and short-term investments at the parent, net of short-term borrowings and commercial paper, amounted to $3 billion at year end. We would expect to use about $1 billion of this amount for tax payments and operating purposes during the year. Leaving the remainder well in excess of our $1 billion liquidity target, which represents approximately 18 months of fixed charges. And now Mark is going to take you through the quarter's results for the business.

Mark Grier

Good morning, good afternoon, or good evening. Thank you all for your interest in Prudential during what I know is a very busy time for insurance company earnings. Let me start with the U.S. businesses. Our Annuity business reported adjusted operating income of $345 million for the fourth quarter compared to $197 million a year ago. The reserve true-ups and back unlocking that Rich mentioned had a favorable net impact of $146 million on current quarter results. This includes a benefit of $100 million from the release of a portion of our reserves for guaranteed minimum death and income benefits and a further benefit of $46 million from reduced amortization of deferred policy acquisition and other costs, in both cases reflecting favorable market performance.

Results for the year ago quarter included a net benefit of $79 million from a favorable back unlocking and reserve true-ups. Stripping out the unlockings and true-ups, Annuity results were $199 million for the current quarter compared to $118 million a year ago. The $81 million increase in what I would consider underlying results reflects higher fees due to an increase of more than $20 billion in average account values over the past year driven by over $14 billion in net sales coupled with about $10 billion of market appreciation over the past year, bringing total account values to $106 billion at year end. The recovery of account values for our earlier vintages of business has also contributed to profitability by lowering the cost of guaranteed benefits.

All of the variable annuity living benefit features we offer today come packaged with an auto-rebalancing feature, where customer funds are reallocated to fixed income investments to support our guarantees in the event of market declines. Given the popularity of these features over the past several years, driven by our highest daily benefits, more than three quarters of our account values with living benefits at year end are subject to auto-rebalancing, reducing our risk profile and limiting our exposure to potentially volatile cost of hedging equity risk. Our auto-rebalancing algorithm has functioned well, producing net transfers of about $7 billion from auto-rebalanced fixed income investments to funds that clients have selected since the market trough in early 2009. As of year end, less than 12% of account values subject to auto-rebalancing remain in the designated fixed income accounts. Put another way, 88% of the account values for auto-rebalancing products are now in client-selected funds, providing participation in equity and fixed income markets. At the trough of the market, more than 3/4 of the account values were in auto-rebalance fixed income accounts.

Our gross rate of Annuity sales for the quarter amounted to $6.1 billion compared to $4.8 billion a year ago. Our highest daily products have fueled growth in each of our distribution channels and supported development of significant new relationships, especially in the bank channel, where quarterly sales passed the $1 billion mark for the first time and are up more than 70% over the year ago quarter.

In late January, we introduced the next generation of our living benefit product feature called highest daily income or HDI. This feature continues the basic design of our HD 6 products, including auto-rebalancing and other product-based risk management such as minimum age at purchase and asset allocation requirements. But this product offers a 5% annual roll up for protected value rather than the 6% offered by our HD 6 product and lower payouts at some age bands.

These for the writer were increased by 10 basis points for individuals to 95 basis points. We believe our updated product allows us to continue to offer a superior value proposition while enhancing our return prospects in the current interest rate environment. The Retirement segment reported adjusted operating income of $147 million for the current quarter, an increase of $15 million from $132 million a year ago. The increase was driven mainly by higher fees reflecting growth in account values, both in full service retirement and in the remainder of the business with total account values reaching $205 billion at year end.

In Full Service Retirement, we focus on the mid- to large-case market, where both sales and laps activity are lumpy from one quarter to another. Gross sales and deposits were $4.4 billion in the current quarter, up from $4 billion a year ago. A spike in lapses reflecting business combination activity and transfers of record keeping on several cases resulted in net withdrawals of about $1 billion for the quarter in Full Service. Strong sales in the investment-only market, where we have grown sales of Stable Value products to plan sponsors on a stand-alone basis, brought net additions for the overall Retirement business to $4.5 billion for the quarter compared to $2.4 billion a year ago, an increase of more than $2 billion.

The Asset Management segment reported adjusted operating income of $132 million for the current quarter compared to a loss of $6 million a year ago. The improvement came mainly from more favorable results from commercial mortgage activities. Results for the year ago quarter were negatively affected by credit and valuation charges amounting to roughly $110 million on interim loans we hold in the Asset Management portfolio. Over the past year, we have seen evidence of improving commercial real estate valuations, and these charges have largely abated. Credit and valuation charges on this portfolio were about $10 million in the current quarter.

The remainder of the improvement in the results came mainly from higher Asset Management fees driven by growth in assets under management. The segment's assets under management increased by roughly $80 billion or 18% from a year ago, reaching $537 billion at year end, reflecting positive net flows in each of the last four quarters as well as cumulative market appreciation.

Adjusted operating income for our Individual Life Insurance business was $131 million for the current quarter compared to $141 million a year ago. Mortality experience was favorable in relation to our average expectations, both in the current quarter and the year ago. However, the benefit from favorable mortality was greater in the year ago quarter, resulting in the decrease in results. A greater contribution from investment results, reflecting growth of invested assets, tracking an increase of $28 billion or 6% in term and universal life insurance in force over the past year, partly offset the lower benefit from mortality.

The Group Insurance business reported adjusted operating income of $69 million in the current quarter, unchanged from a year ago. More favorable Group Life underwriting results were essentially offset by a negative swing in disability results for the quarter. Group Insurance sales for the quarter were $109 million, including $82 million for Group Life. This compares to a total of $62 million a year ago. More than 2/3 of the current quarter Group Life sales were voluntary business, representing coverage purchased by employees or association members rather than employer-paid insurance.

Turning to our International businesses. The International Insurance segment earned $584 million in the fourth quarter and $2.1 billion for the full year. As Gibraltar, its Bank Channel business and our Life Planner business all continue to perform extremely well. Business drivers and financial results are very strong, and the closing of the Star and Edison acquisitions last week adds meaningful distribution capacity, a profitable in-force book and more than 3 million customers to our already significant International Insurance business.

Within our International Insurance segment, Gibraltar Life's adjusted operating income was $256 million in the current quarter compared to $151 million a year ago. As Rich mentioned, Gibraltar's results for the current quarter include income of $66 million from the partial sale of our investment in China Pacific Group by the call-out consortium. As of year end, our remaining investment in China Pacific has a cost of about $60 million with market appreciation of roughly $400 million included in the $5.7 billion of net unrealized gains reported for our balance sheet.

Excluding the China Pacific gain, Gibraltar's adjusted operating income was up $39 million from a year ago. The increase came mainly from higher net investment spreads, reflecting growth of Gibraltar's Fixed Annuity business. In addition, a growing book of Life Insurance Protection business, distributed through the Bank Channel, contributed to results. Sales from Gibraltar Life, based on annualized premiums in constant dollars, were $242 million in the current quarter, up $85 million from $157 million a year ago. Bank Channel sales were $104 million in the current quarter, up from $48 million a year ago. The increase was driven almost entirely by sales of Life Insurance Protection products, which have grown sequentially in each of the last four quarters.

Sales from the Life Advisor Channel and other distribution amounted to $138 million, up $29 million or 27% from a year ago, driven entirely by the sales of Life Insurance Protection products. Current quarter sales include about $20 million from recently commenced production through independent distributors. Life Insurance Protection sales benefited from a recently introduced cancer whole life product. The closing of the Star and Edison acquisitions last week adds over 7,000 new captive agents, about 60 new bank distribution relationships and over 5,000 independent distributors.

Our Life Planner business reported adjusted operating income of $328 million for the current quarter compared to $302 million a year ago. Current quarter results benefited from continued business growth mainly in Japan as well as more favorable mortality. Sales from our Life Planner operations, based on annualized premiums in constant dollars, were $259 million in the current quarter, up $37 million or 17% from a year ago. The increase was driven by strong sales in Japan, where we are benefiting from increased demand for Retirement income and Life Insurance Protection products, especially in the business and executive market.

International Insurance sales on an all-in basis, including Life Planners, Life Advisors and the Bank Channel, were $501 million for the fourth quarter, passing the $500 million milestone for the first time with a 32% increase from a year ago. The International Investment segment reported adjusted operating income of $14 million for the current quarter, up from $2 million a year ago with stronger results from our global commodities operation.

Corporate and Other Operations reported a loss of $231 million for the current quarter compared to a $220 million loss a year ago. The loss we report for Corporate and Other Operations is primarily driven by interest expense, net of investment income, which was largely unchanged from a year ago. The greater loss in the current quarter was mainly a result of higher expenses. The expenses within Corporate and Other include non-linear items such as benefit plans.

To wrap up, I'd like to sum up where we came out for the year.

Earnings per share based on after-tax adjusted operating income of the Financial Services Businesses was $6.27, up 14% from a year ago. Pretax adjusted operating income for our three divisions was $4.9 billion for the year, up 21% from 2009. Strong sales and net flows drove underlying business growth in our U.S. Retirement and International Insurance businesses. In Individual Annuities, gross sales for the year were $21.8 billion, up 33% from a year earlier. And net sales were $14.6 billion, both record high levels. Account values passed the $100 billion milestone, ending the year at $106 billion.

Prudential Retirement registered gross sales of $34.6 billion for the year, including $19.3 billion of Full Service business and net flows of $10.8 billion, up 24% from a year ago. Account values surpassed the $200 billion milestone, reaching $205 billion at the end of the year. Our Asset Management business reported net institutional long-term inflows of $28.6 billion for the year, a record high and more than double the level of a year ago. These inflows, together with market appreciation, drove an 18% increase in assets under management for the year with solid growth in each major asset class.

Our International Insurance business registered $1.8 billion of annualized new business premiums for the year, also a record high and up 25% from a year earlier based on constant dollars. Double-digit sales increases in our Life Planner and Life Advisor Channels were complemented by our existing bank distribution, where our emphasis on protection products has proven a strong competitive advantage. About 85% of our sales for the year came from Japan, where we see continued growth opportunities in both Life Insurance Protection and Retirement. And we look forward to expanding our success in those markets with the just completed Star and Edison acquisitions.

Thank you for your interest in Prudential. Now we look forward to hearing your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from the line of Suneet Kamath from Sanford Bernstein.

Suneet Kamath - Bernstein Research

I have two questions. The first is on the variable Annuity business. Just wondering if you can talk a little bit about how the changes that you made between HD 6 and HDI have impacted the ROE of the new business that you're writing?

Bernard Winograd

This is Bernard Winograd. Let me try to be clear about this. When we think about the pricing and given the pricing flexibility that our model gives us because of our relative lack of risk and compared to the competitors, we are trying to balance our objectives for return on equity with the market environment. And at each time that we restrike the mix here, we are aiming for a return that is in the high-teens. We have in this business market cycles that are reasonably short but nevertheless typically six months between price adjustments. And sometimes the markets in the interim, in the initial period, move in ways that were not contemplated by our initial pricing. But we're taking a long-term view of this while we're simultaneously trying not to ignore that. So when we adjusted from HD 6 to HDI, what we tried to do was to relook at what it would take at the environment as it had evolved over the following six months since our last price adjustment in order to get back to, in today's market, an expected return over a long-time horizon that's in the high-teens and that's what we did.

Suneet Kamath - Bernstein Research

But if we went back to the HD 6 business that you added, I guess, in 2010, what would be the sort of the ROE differential? If your new product has high-teens, kind of where do that HD 6 end up shaking out?

Bernard Winograd

Well, it's too early to tell is the answer to that question. Based upon the market environment it encountered, it obviously earned below that market return for the first six months of its existence, but it's well short of the period of time in which we can really know what the ultimate result will be.

Suneet Kamath - Bernstein Research

And then I had a separate question either for Mark or for John on capital. At the end of last year, you increased your dividend pretty significantly. And I think if I think about your capital redeployment, precrisis, it seem like the mix between buybacks and dividends sort of skewed to buybacks with maybe 15% to 20% of total capital return, representing dividends. Should we think about maybe a different capital return philosophy going forward where it's a little bit more of an even mix between share repurchases and dividends? Or should we use that historical kind of relationship as a guide?

Mark Grier

Suneet, it's Mark. Thanks for that question. That's a very good and interesting question in this environment. Our sense, as we contemplated dividend actions last year, was that there had been a shift in the market in favor of dividends. And I don't want to talk about what we may do going forward beyond telling you that we'll continue to evaluate what we believe is the market sentiment and the market view and the market sensitivity to the mix between dividends and share repurchases, in addition, obviously, in the context of our own capital position and capital redeployment thoughts. So that's kind of a long way of saying it's an open issue about which we continue to be very thoughtful.

Operator

Our next question comes from the line of Mark Finkelstein with Macquarie.

A. Mark Finkelstein - Macquarie Research

I guess just on the capital outlook. $1.8 billion to $2.3 billion was the number back at the Investor Day. Equity markets are pretty strong. You've tended to be reasonably sensitive to rises in equity markets and freed up capital. I guess why wasn't the capital a little bit higher given the environment we're in?

Richard Carbone

Mark, this is Rich. That effect is going to be felt inside of PICA. And as we look at the 2011 dividend from PICA, any benefited from that will come in that dividend in 2011. And it is also reflected in the number now as capital in PICA where the RBC ratio and PICA improved, but it won't get up to the holding company until 2011.

A. Mark Finkelstein - Macquarie Research

Just on Asset Management, I start a little bit to figure out kind of what the core earnings numbers in this area are. The earnings actually kind of went down sequentially despite relatively consistent at PICAM earnings, and AUM was up pretty strongly. So the ROAs were obviously down sequentially. Was the third quarter an anomaly? Were there other weaknesses in the fourth quarter, like, how should we think about Asset Management earnings adjusting for PICAM?

Bernard Winograd

Well, it's Bernard. I would say that the right way to think about our Asset Management earnings is to focus on the breakdown that you have in mind, which is the PICAM component to the revenue and then there is the Asset Management fee component to the revenue. I think if you focus on the Asset Management fees and apply reasonable industry standards to the margins that should be expected on that kind of revenue and then you can get to a pretty good understanding of what's going on. And the noise in the fourth quarter, which is just basically the true-up of bonuses at the end of the year, is just that, it's noise. So I think that if you're trying to do annual analysis of what's going on in the business, I think what you've seen since 2007 is a dramatic shift in the mix, where the Asset Management fees are growing quite strongly along with all the net inflows from clients, compounding the effect of improving markets. That's the most reliable annuity like part of a revenue stream that's reasonably easy to model what the earnings impact of that growth are. And then you can just, as you now know, if PICAM is a much shrunken share of the business and it therefore makes it, I think, much easier than it used to be when it was a larger share to estimate the earnings from an annual or even a quarterly basis.

A. Mark Finkelstein - Macquarie Research

So just to clarify, the fourth quarter had higher bonuses which kind of distorted the ROAs in how we look at them?

Bernard Winograd

Yes. Inevitably, if you get to the end of the year and you have a strong surge in the business as we did, in the end of the year, particularly in the items where that drives some of the bonus pools, we'll have some catch-up in the fourth quarter. It won't happen every year. But every year that ends strongly, that can happen in the fourth quarter.

Operator

Our next question comes from the line of Nigel Dally with Morgan Stanley.

Nigel Dally - Morgan Stanley

So if market conditions today are a lot better than when you shared guidance, I know you're not going to update your guidance or view them, so it is an accretion. Is it possible to revise them a bit at APS sensitivity, market conditions, and for example, how does that 10% change in the equity market impacted core EPS? Second, with the Retirement outflows, I understand that sales can be lumpy, but also it just can give you that how competition has changed in that business as well.

Mark Grier

Nigel, it's Mark. I appreciate your sensitivity early in the question to our reluctance to update guidance based on the policy that we've established. And that applies to also talking about some of the very complex and non-linear kind of sensitivities that you asked about. So we will not be addressing those kinds of line item sensitivities. And I'll ask Bernard to comment on the Retirement business.

Bernard Winograd

I think that the lumpiness in the fourth quarter is just that. But I would also say that in general, what's going on in that business that's relevant to the top line is we are seeing improvements in consumer or, if you will, beneficiary behavior, people saving more again. And we are beginning to see a meaningful trend towards increased company matches, the end of the suspensions of company matches and things of that kind. The pipeline is still quite thin. I don't think that the competitive environment against others is really driving what's going on there.

Operator

Our next question comes from the line of Andrew Kligerman with UBS.

Andrew Kligerman - UBS Investment Bank

A few questions. First, with regard to the Star/Edison transaction, I think the last time you did give any sort of guidance around the earnings impact was early November. And of course, interest rates have come up a fair amount since that time. So I guess you don't want to give guidance, that's clear. But what was the unrealized gain in Star/Ed's investment portfolio at the time of the last time you gave guidance? And where is that unrealized gain now? And I'll try to do the work myself in terms of figuring out what the improvement is since interest rates have risen quite a bit since then?

Mark Grier

Andrew, I get to respond to your question as I think was the case last quarter, you're on your own. We're not going to update you on realized gain on the Star/Edison portfolio.

Andrew Kligerman - UBS Investment Bank

We'll face it, but the question then would be, we're probably looking at some meaningful improvement in what we were thinking back in November, is that fair?

Mark Grier

When we say we're not going to update guidance, that means we're not going to update guidance, Andrew. I'm sorry.

Andrew Kligerman - UBS Investment Bank

All right, that's brutal, but I'll move on. Asset Management area. Per the press release, it states that the net credit valuation charges of roughly negative $10 million versus approximately $110 million in the prior quarter. And you mentioned improvement in commercial real estate. Why not a net gain there? What are you -- just give maybe a little color around that area.

Bernard Winograd

Andrew, it's Bernard Winograd. Let me try to shed some light on that. I think that we have, as I think you know, a portfolio not in the general account, but on the balance sheet of Mortgage business that was originally supposed to be in support of the now discontinued conduit business. And that portfolio has been one where we've had reserves, added reserves throughout much of 2009. The overall trend is very much down there from $240 million in 2009 to $50 million in 2010. But we do still have periodically an individual loan or in this case it was a portfolio of loans that get to the moment of realization and you find that there's a discrepancy between what you expected and what you actually recovered. So I think what you got here, and we've had some -- I should say, we've had some discrepancies in the other way, too, where on final liquidation we've had a little bit of gains in this line. So I think what you got here is just sort of the statistical noise of the individual loans working their way through. Overall, as I've said before, we feel like we've got this portfolio well reserved for at this point.

Andrew Kligerman - UBS Investment Bank

Last question around Gibraltar. Do you think this pick up in bank sales is sustainable? I mean, the momentum was phenomenal, and I'm wondering if you can kind of sustain that with the banks continuing to grow in Japan.

Edward Baird

Yes. Andrew, this is Ed Baird. The bottom line answer is, yes, I think it's sustainable. Let me give you a few observations and facts to support that point of view. First, as you know, we're still relatively new to the Bank Channel business compared to a number of our competitors. So at this stage, we're still only selling through about 30 banks. That number will increase substantially quite soon as a result of the Star and Edison acquisitions. Both of those companies have been in the business of bank distribution quite a bit longer, and they have more than twice as many 70-plus relationships with banks. So I think from a point of distribution perspective, there's a lot more that we can gain. Secondly, even within the 30 or so that we currently have, we're not even actively selling in all of them yet. So there's still, I think, upside growth opportunity as a result of deeper penetration into those organizations. The additional factor that, I think, will be into this is that the most productive relationships we have continues to be our original one with the Bank of Tokyo Mitsubishi. At one point, that constituted virtually all of the bank sales. It's now down into the low- to mid-70%. And the reason it's been so successful because it's growing in absolute terms, it's just that the percentage is not as concentrated as with these other banks. But the reason it's been so productive is because, as you know, from earlier discussions, we were able to use a different business model than the typical insurance company. We send not just a product, but we send a product along with the Life Planner, which makes this model, I think, virtually unique. The success of that particular approach with BTMU has been noticed by other banks, and we're now starting to get inquiries to whether we could expand that model with them as well. The reason I cite that is that that particular model produces an unusually high average premium. So for example, even our highest producing Life Planner model of POJ sells about $3,000 per policy, through the BTMU, that average premium is $10,000. So to the extent that we're able to get this compounding growth through expanded points of distribution, deeper penetration, that can be further supplemented by the utilization of Life Planners and other bank relationships, which to date again is extremely limited. If you put that whole package of factoids together, I think it's fair to say that we think we can continue what is already eight consecutive quarters of steady growth.

Operator

Our next question comes from the line of Darin Arita with Deutsche Bank.

Darin Arita - Deutsche Bank AG

Just wanted to focus on Star and Edison here, and your Prudential has been very successful with Gibraltar and was wondering if we could compare your various productivity and profitability metrics of Star and Edison versus where Gibraltar is today?

Edward Baird

Sure. But first, just to remind you, the valuation, the model that we use for the pricing did not focus or weigh to any measurable degree, revenue growth. I just want to contextualize that issue, nonetheless, as based entirely off of the value at the in-force book and expense synergies that will come from the scale effect that's intrinsic to this Life Insurance business. Nonetheless, in support of the point that John made, which I think is a trigger of your question, we think there is indeed revenue expansion opportunity here. Let me give you a couple of examples. Unlike Key Language was a bankrupt company, these two are not bankrupt, so they don't suffer to a comparable degree. On the other hand, they have undergone severe market stress in the last two years as a result of the overhang of the AIG reputational issues. That's especially true in the arena of third-party distribution, which in those companies is more significant than it has been inside of our Gibraltar organization. So we believe and have some degree of confidence that with the reputation enhancement that will come about through the restabilizing of these companies now that they're closed, we can get considerable improvement. So for example, whereas in our independent agency system, which was pointed out earlier, started at zero at the beginning of the quarter and produced a little over $20 million in the fourth quarter, we do that with just a couple of hundred independent agents. They have well over 4,000 independent agents. That channel in particularly in the last two years had substantial drop-off in productivity. So there's an area where we think we can, even if we just get it back to the productivity levels they were at precrisis, offers considerable opportunities. The other is, as you know, when you're managing a proprietary distribution system, you always have this balance between scale and productivity. And that's why you see quarter-to-quarter the size of our sales force will fluctuate. Now that we will be growing the size of more than doubling the size of the distribution force in Gibraltar, which is a little over 6,000, we'll be adding over 7,000, it gives us a rich set of opportunities to decide how we want to calibrate between expanding the reach geographically around the country or tightening up through standards to a higher level of quality and productivity. So that doesn't lend itself to a precise number, it just shows it gives us an array of options that I think is quite promising.

Darin Arita - Deutsche Bank AG

And then just going back to the Bank Channel, can you give us the number of the kind of Life Planners that has gone over to the banks and where do you think that could go? I'm wondering if the limiting factor is the number of Life Planners that can go over or it's the number of banks that are willing to take these Life Planners.

Edward Baird

Yes, it's a little bit of both. It's more of the number of banks at this point. We've sent well over 300 in total. Currently, there are about 170 that are active inside the system. Now because they go for a period of time, one, two years and then they rotate back and either become Life Advisors or serve somewhere else within the organization, they serve multiple roles, I should point out. Some of them act as trainers. Some of them act as active player coaches, whereby they not only train, but they actively sell. And so we give set of options to the bank as to what role they would like our re-distributed Life Planners to play. And again at the moment, that's primarily within the BTMU relationship, that these other banks are now in active discussion with us as to how they can utilize them either as wholesalers, trainers or as active personal distributors. So I think an opportunity there, as you say, is we have within the Life Planner model, a steady source from which we can pull to feed into the bank system.

Operator

Our next question comes from the line of Jimmy Bhullar with JPMorgan.

Jamminder Bhullar - JP Morgan Chase & Co

I had a few questions. First, just a clarification on Andrew's point on Star/Edison PICA adjustment. When we look at the change in PICA adjustment versus your guidance, we should be comparing the end of January of this year to the end of June last year, right, not September? Does your guidance was based on their rate for as of the end of June, right?

John Strangfeld

You should be comparing it from the end of June last year to February 1 this year.

Jamminder Bhullar - JP Morgan Chase & Co

Yes, because the corporate bond yields are actually lower in some cases, even though government bond yields are higher. So that's the reason I was asking.

Mark Grier

This is Mark. Let me just stick in one point which is, there are a lot of moving parts in this. There's the portfolio, there's VOBA, there are reserves, so just be careful about oversimplifying based on what you see in specific asset markets.

Jamminder Bhullar - JP Morgan Chase & Co

No, that's true. And the reason I was asking is because in Richard's comments, I think, he mentioned a couple of positives, which is Japanese government bond yields rising and the U.S. government bond yields rising. But he didn't mention any offset and the 35% of the portfolio is actually corporate or non-Japanese government corporate, which some of them are U.S. corporate. U.S. corporate bond yields are actually lower now or lower at the beginning of February than they were at the end of June. So that would actually be an offset. So that's the reason I was asking.

Mark Grier

If that is the case Jimmy, you're correct.

Jamminder Bhullar - JP Morgan Chase & Co

But anyway, a couple of questions I had. The first one was on POJ Life Planner growth. It's been slower recently than it's historically been, even adjusted for the transfers to Gibraltar. So just wondering what your long-term expectation or aspiration is for growth in the POJ Life Planners? Obviously the base is a lot larger than it used to be, but what's your growth and growth expectation and then I have another one.

Richard Carbone

Yes. it's an interesting issue you raised. Did you know that number has been slowing down steadily over the years. But I want to observe the following to you. It's increasingly less relevant, and let me explain why. First of all, you'll notice that the year-over-year is a very small, it's essentially flat and if you give credit for the transfers to the banks, it's about 3.5%. And yet, you'll see that sales are up in POJ about 25%. So that reveals what I think is an important lesson for us to keep in mind rather than focus to singularly on headcount. And that is that headcount is one of the drivers but frankly, of equal if not at sometimes greater significances, we want to also look at productivity measured both the number of policies sold per person which has gone up. The retention, which is improving, the related persistency, which has been improving and most importantly of all relative to the business, is the average premium, which in the case of POJ has gone up about 10% quarter-over-quarter from a little over 2,700 to a little over 3,000. Frankly, those are the factors that we tend to look at more than just the headcount. So again, I think tracking headcount, that's fine. But I don't weight too much on it. As long as we can see sales going up 25%, even though headcount is flat, from my perspective, that's a positive result. Having said that, we always will push to steadily grow Life Planner account as long as we don't have to sacrifice the quality.

Jamminder Bhullar - JP Morgan Chase & Co

And lastly, just on your Annuity sales in the U.S. I'm assuming there was a little bit of prior fire sale element in your production since the new feature was a little less generous than the older one was. And I think the new one was rolled out in January or at end of January, so should we expect the same phenomena because part of the quarter, you were selling same phenomena in the first quarter this year since part of the quarter you were selling the previous HD products?

Bernard Winograd

Jimmy, it's Bernard Winograd. I think you know that applications for the old product has to be in our hands by the end of January to be honored. So we will have some of this, but not a lot of it. And we don't really know with precision what percentage of our fourth quarter sales were driven by this. But we did make efforts to make the filing with the specifics of the changes in the projects as latest as possible in the quarter didn't actually happen until December 6. And we estimate, best guess, it's probably no more than $200 million or $300 million of the sales experienced in the fourth quarter.

Operator

And we do have time for one final question, and that will come from the line of John Nadel with Sterne Agee.

John Nadel - Sterne Agee & Leach Inc.

John, I guess, I was hoping you could give us an update on the overall M&A environment and your appetite for additional deals, especially just in light of the fact that obviously your international team is busy and you've got some transition going on in the leadership with the U.S. businesses. So I was wondering if you could give us an update.

John Strangfeld

Sure, John. Well, a couple of thoughts on this. I mean, first, as you correctly identify, in our eyes, successes in announcing a deal, successes in closing a deal, success in the making it work. And we have a lot of people and a lot of resources focused on ensuring that the Star/Edison experience is reflective of our own expectations and of the potential that we see. So we're feeling very confident about that, but we don't underestimate the importance and the resource commitment necessary to make that happen. Now having said that, as we referenced before, let's also recognize that Star as it is entirely a one-country situation in a market environment that we've been in for 30 years and with the management team that's done this in the past. So our feeling is that we're not taking anything for granted, but we're feeling very good about our capacity to execute, and it also makes us feel that we do have the management capacity as well as the financial resources to consider other alternatives. When we think about other alternatives, it's a nice to do, not have to do. Because you look at the success we're having in our organic lines of business, in the opportunity cost, in the intrusion and the likes, so we believe we have the capacity, but we don't feel like it's something we have to do. It has to be darn compelling to be prepared to do it. We recognize to leave that question a little bit that our ability to achieve our aspirations and our ROE have to do with how we deploy the capital either in the business are getting it back. And so we keep that in our mind as well. But we also recognize we're still in an environment where the quality of the counter-party in terms of the financial capacity throughout the business and so forth is still very, very relevant as it relates to some potential franchises influx. So it's a situation where it hasn't fully played out yet. We're keeping our options open. But at the end of the day, we'll either deployment the capital in the business or we'll give it back and we'll just let it stay on the course.

John Nadel - Sterne Agee & Leach Inc.

And then just finally, if I could just go back to Nigel's question around EPS sensitivity, and Eric please, don't cut me off immediately. I guess I'm wondering what makes your businesses so difficult to quantify that sensitivity to macro-factors when so many of your peers are able or at least willing to try to do so for us. I mean, during the crisis, you guys were able to give the sensitivities despite the non-linear issues on your risk-based capital ratios at lower SMP levels. And I guess I'm not sure how this would be so different from that exercise.

Mark Grier

Well, John, this is Mark, and thanks for that question. One thing that we've emphasized in the past is that non-linear nature of the impact of markets on us and that continues to be true for a variety of reasons related to the nature of the calculation of DAC, for example, and unlockings and some of the other aspects, particularly of the insurance products. But the other thing is that we're focused on the holistic outcome and don't want to get particularly tangled up in a line item influence when there are many other things going on to produce the financial results that we report and talk about.

John Nadel - Sterne Agee & Leach Inc.

Yes, if I can interject, I'm thinking about it holistically, too. I'm thinking about it from the perspective of not necessarily can I get my first quarter 2011 earnings estimate right on target. I'm trying to figure your company is worth more when market conditions are better, and I'm trying to figure out how much more your company is worth.

Mark Grier

Yes, again, I appreciate that view, and our sensitivity to this relates to both the narrower issue around non-linear moves and getting it right and, secondly, the broader context.

Operator

And ladies and gentlemen, today's conference call will be available for replay after 1:30 p.m. today until midnight February 17. You may access the AT&T TeleConference Replay System by dialing (800) 475-6701 and entering the access code of 185705. International callers dial (320) 365-3844. That does conclude our conference call for today. Thank you for your participation and for using AT&T Executive TeleConference Service. You may now disconnect.

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