Prudential Heads For $55 With Asia Expansion And GM Deal

Prudential Financial (NYSE:PRU) reported operating earnings of $627 million for the send quarter of 2012, a drop of 19% over the same period last year. Although the company’s international businesses performed quite strongly, U.S. operations were effected by the unfavorable market scenario. ^[1] We currently have a price estimate of $55 on Prudential’s stock, about 10% above the market price. Discussed below are a few key parameters which influence our valuation.

See our full analysis of Prudential here

International Business Going Well

Operating income for Prudential’s international insurance division grew 36% year-on-year, to $681 million. This growth was driven by the integration of Star and Edison Japanese insurance businesses acquired from industry peers AIG (NYSE:AIG), last year. ^[2] As a result of this acquisition, Gibraltar Life sales rose by $211 million to $735 million in the quarter ending June.

Total insurance sales for the international business amounted to $1.1 billion for the second quarter, an increase of $356 million from last year. The company’s cancer whole life product proved to be exceptionally popular, with sales of $212 million in Asia.

With increased focus on Asia, where the target demographic is expanding rapidly, we expect steady growth in Prudential’s international revenues. International insurance is an integral part of the company’s business, accounting for 35% of its stock value.

Annuities Down But Set To Recover With GM Deal

Prudential’s U.S. Annuity business saw a 5% fall in operating income after adjusting for unfavorable deferred acquisition cost (DAC) unlocking and reserve true-ups. The annuity division reported an income of $231 million. Although income from policy charges and fees increased $31 million over the prior year, amortization of deferred acquisition costs and an increase in operating expenses took their toll on the division, affecting the decline.

We remain optimistic for the retirement planning division despite its relatively poor performance this quarter. The pension risk transfer agreement with General Motors (NYSE:GM) (See Prudential Signs Agreement With General Motors For Pension Obligations) is scheduled to close by the end of this year and will provide a much needed boost to Prudential’s annuity business.

Please read Good Times Ahead For Retirement Solutions Providers for more details on our stance

Consolidating Assets Under Management

The adjusted operating income for the asset management business fell from $109 million in 2011 to $105 million in the current quarter. Fund start up costs and other related expenses were the primary reason for this decline. Prudential increased assets under management by 11% year-on-year to $650 billion, in-line with our forecast for the same. Asset management accounts for 16% of the company’s stock price, according to our estimate.

You can gauge the effect of a change in forecast on our price estimate by modifying the interactive charts above.

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1. Prudential Financial Management Discusses Q2 2012 Results – Earnings Call Transcript, Seeking Alpha, 2^nd August, 2012 [↩]
2. Prudential Financial acquires AIG Star and AIG Edison in Japan, Press Release, 1^st February, 2011 [↩]