Prudential Grapples With Investment Losses But Shrewd Deals Will Lift Growth

Despite a strong performance in its core insurance business, Prudential Financial (NYSE:PRU) reported a net loss of $593 million for the third quarter of 2012 due to a $1.3 billion pre-tax net realized investment loss. This included a loss of $684 million from derivatives and hedging activities, a currency fluctuation driven $521 million loss and impairments and credit losses of $107 million. Income from premiums increased by nearly 50% while policy charges and fee income was up 28% from the same quarter in 2011, reflecting the strong growth observed in the various insurance divisions.

Prudential management increased annual dividend by 10% indicating healthy excess capital. We currently have a price estimate of $55 on Prudential’s stock, in-line with the market price.

See our full analysis of Prudential here

International Insurance

International insurance is the biggest bread winner for Prudential, accounting for 55% of the core financial services businesses operating income (without adjusting for corporate and other eliminations). The Gibraltar Life division, acquired by Prudential in 2001, benefited from the integration of Star Life Insurance Co., Ltd. and Edison Life Insurance Company which the company acquired from AIG (NYSE:AIG) last year.

Sales increased by 19% over the prior year leading to revenues that were nearly double those in 2011. This acceleration was due to the high success of the Single Premium Yen-based whole life bank channel product which accounted for $311 million in sales, up from $29 million last year. Prudential has announced that it will cut back on sales in the fourth quarter to limit concentration in the product and maintain returns.

The international Life Planner division reported an 8% year-on-year increase in revenues. Although sales were down slightly, the quarterly results benefited from refinements of reserves and other items. We expect sustained growth in the international division as Prudential builds on the momentum it has gathered and continues to gain share in the international insurance market.

Individual Life To Benefit From Hartford Deal

Individual life sales in the U.S. increased by 40% over the prior year, driven by strong universal life sales through third-party distribution channels. The division will be boosted by the acquisition of Hartford Financial Services Group’s (NYSE:HIG) individual life insurance business that includes 700,000 life policies and investment assets with a statutory book value of around $7 billion reserved for future claims on these policies. The $615 million deal is expected to close early next year.

General Motors Pension Transfer

Prudential announced the completion of the pension obligation transfer from General Motors (NYSE:GM) last week, receiving $25 billion in premiums from the later for a group annuity contract covering 110,000 salaried GM retirees. The insurer is also expected to close a deal with Verizon (NYSE:VZ) for the transfer of $7.5 billion of pension obligations, in the next month. Even though retirement sales were down nearly 30% from last year due to lower sales of stable value wrap products, which are sold to plan sponsors and fund managers, we expect pension transfers to fuel growth in the coming years.The Russell 1000 Index of large U.S. companies revealed a $435 billion gap between pension liabilities and assets ^[1] leaving a big hole for insurance companies to fill.

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1. GM Seen Fueling Pension Deals as Employers Face Shortfall, Bloomberg, 19^th June, 2012 [↩]