Prudential Financial Earnings Preview: What We’re Watching

Prudential Financial (NYSE:PRU) is expected to report earnings for the fourth quarter of 2012 Wednesday, February 6. The company reported a net loss of $593 million for the third quarter primarily due to a $1.3 billion pretax net realized investment loss but delivered strong revenue growth with a 50% year-on-year increase in premium income and a 28% increase in policy fees. We expect the company to maintain growth through the fourth quarter.

Our price estimate of $56 for Prudential’s stock implies a premium of nearly 10% to the current market price.

See our full analysis of Prudential here

Shrewd Deals Drive Growth Outside The U.S.

Prudential earns 55% of its core financial services businesses operating income (without adjusting for corporate and other eliminations) through its international operations. The company operates under the name “Pramerica” in countries including Japan, Taiwan, Italy, Korea, Brazil, Argentina, Poland and Mexico.

Japan is a key geography for Prudential, accounting for 56% of the net premiums, policy charges and fee income. (See Prudential To Expand Its Asian Reach With Japan As The Fulcrum for more details). The company acquired Star Life Insurance Co., Ltd. and Edison Life Insurance Company from AIG (NYSE:AIG) in 2011, expanding its market share in terms of new business face amount in the country from 7.3 to 10.4%, post-acquisition. In the third quarter, Prudential reported a 20% increase in sales driven by high popularity of its single premium Yen-based whole life bank channel product.

Prudential has also launched a life insurance joint venture named Pramerica Fosun Life Insurance Company Ltd. in China, in collaboration with Chinese conglomerate Fosun International Limited. ^[1] Compared to a mature market like the U.K., which has an insurance penetration of 14%, China has a low penetration rate of 4%. ^{[2] [3]} The country’s high population makes for a vast potential for future growth.

In The U.S.

In June 2012, Prudential issued a group annuity contract worth approximately $29 billion to General Motors (NYSE:GM) and followed it up with a similar deal with Verizon (NYSE:VZ) covering $7.5 billion in pension liabilities. ^[4] We believe that there might be similar deals in the pipeline. The Russell 1000 Index of large U.S. companies revealed a $435 billion gap between pension liabilities and assets ^[5] on the balance sheets of the country’s employers. We will watch for future deals and subsequent revenue growth in 2013.

The company has also acquired The Hartford Financial Services Group’s (NYSE:HIG) individual life insurance business for $615 million in cash. The reinsurance deal involves the transfer of 700,000 life policies and investment assets with a statutory book value of around $7 billion, reserved for future claims on these policies. Prudential’s share of the U.S. individual life insurance market at the end of 2011 was around 2.7%, whereas Hartford’s share was around 1.2%.

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1. Prudential Financial and Fosun International commemorate launch of life insurance joint venture in China, Press Release, 29^th November, 2012 [↩]
2. Presentation To The American Council Of Life Insurers, Goldman Sachs Investment Banking Division, 28^th March, 2012 [↩]
3. Foreign insurance companies in China, PWC [↩]
4. Prudential Financial Inc : Prudential completes pension risk transfer transaction with Verizon, 4 traders, 10^th December, 2012 [↩]
5. GM Seen Fueling Pension Deals as Employers Face Shortfall, Bloomberg, 19^th June, 2012 [↩]