Prudential Financial Q3 Earnings Preview: What We’re Watching

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Prudential Financial (NYSE:PRU) is scheduled to announce earnings for the third  quarter on Wednesday, November 7th. The company’s increased focus on emerging markets has helped it mitigate the effect of the economic uncertainty prevalent in the U.S. and Europe. Prudential reported a 36% year-over-year increase in international insurance operating income in the last quarter, and we expect this trend to continue. We currently have a price estimate of $56 for Prudential’s stock, which is about in line with the market price.

See our full analysis of Prudential here

Expansion in Asia

International insurance accounts for a third of Prudential’s net revenue. The insurer operates in Japan, Taiwan, Italy, Korea, Brazil, Argentina, Poland and Mexico under the name “Pramerica”. Japan currently accounts for 56% of the company’s net international premiums, policy charges and fee income. Prudential acquired Star Life Insurance Co., Ltd. and Edison Life Insurance Company from AIG (NYSE:AIG) last year, expanding its market share in terms of new business face amount from 7.3 to 10.4% post-acquisition. (See Prudential To Expand Its Asian Reach With Japan As The Fulcrum for more details)

Prudential has also reached an agreement with Chinese conglomerate Fosun Group to launch Pramerica Fosun Life Insurance Co. in China. The joint venture is expected to launch in the fourth quarter and will allow Prudential to enter one of the world’s fastest growing economies. Insurance penetration in China, measured in terms of premium income as a share of GDP, is quite low at below 4% compared to about 8% for the U.S. Coupled with its vast population of over 1 billion, this presents huge potential for future growth. [1] Please read our article: Prudential Financial Ready To Enter China for more details.

Prudential’s U.S. Annuity business saw a 5% fall in operating income last quarter. However, pension risk transfer agreements with General Motors (NYSE:GM) and Verizon (NYSE:VZ) might set the platform for future growth in this business. (See Prudential Signs Agreement With General Motors For Pension Obligations) The $29 billion deal with the American automaker giant earlier this year opened up a new window of opportunities for insurance companies. Verizon followed GM’s lead by transferring $7.5 billion of its obligations to Prudential in October. [2]

The lucrative offer of de-risking pension plans, particularly in the current market conditions, might lead to more companies opting to transfer obligations to insurers in the near future. The Russell 1000 Index of large U.S. companies revealed a $435 billion gap between pension liabilities and assets [3] leaving a big hole for insurance companies to fill.

Life Insurance Boosted By Hartford’s Divestiture

In late September, Hartford Financial Services Group (NYSE:HIG) announced that it will sell its individual life insurance business to Prudential, transferring more than 700,000 life policies and investment assets with a statutory book value of around $7 billion, that were reserved for future claims on these policies. Although it will not have an effect on third quarter earnings, the $615 million deal will allow Prudential to expand its Individual life insurance business in the U.S.

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Notes:
  1. Foreign insurance companies in China, PWC []
  2. Prudential signs pension risk transfer agreement with Verizon Communications Inc., Press Release, 17th October, 2012 []
  3. GM Seen Fueling Pension Deals as Employers Face Shortfall, Bloomberg, 19th June, 2012 []
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