Prudential Financial’s (NYSE:PRU) earnings for the first quarter of 2013 were adversely impacted by a weakening yen leading to a net loss of $721 million. More than 30% of the company’s premiums outside the U.S. come from Japan where its products are accounted for in yen. The yen has fallen significantly against the dollar as Prime Minister Shinzo Abe has undertaken measures to provide monetary stimulus. 
Currency fluctuations aside, Prudential reported a 42% increase in operating income helped largely by the landmark pension transfer agreements with General Motors (NYSE:GM) and Verizon (NYSE:VZ) that were signed late last year. The acquisition of The Hartford Financial Services Group’s (NYSE:HIG) individual life insurance business also boosted earnings, contributing $63 million to the current quarter sales.
Our price estimate of $58 for Prudential’s stock is in-line with the current market price.
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International Growth On Track
Prudential earns half of its operating income (excluding corporate expenses) from international operations and has shown high double digit growth outside the U.S. in the last few years. International earnings for the three months ending March were up 47% from the prior year’s figure. Premiums collected increased by 7% as revenues, including net investment income, increased by 9%. The major change in operating income came from a 17% decline in general and administrative expenses (G&A).
Prudential has insurance operations in Japan, Taiwan, Italy, Korea, Brazil, Argentina, Poland and Mexico. As mentioned earlier, Japan is the fulcrum of operations for the company outside the U.S. Prudential has a market share of over 10% in terms of new business face amount in the country. For more on life insurance in Japan, read our article An Overview Of The Japanese Life Insurance Market.
Retirement And Annuities
The company’s operating income for the U.S. retirement solutions division increased by 46% influenced primarily by the aforementioned pension risk transfer agreements with GM and Verizon. 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  on the balance sheets of the country’s employers. Look out for future deals and subsequent revenue growth in the coming years.
Prudential experienced a slowdown in its variable annuities business with an ending account value of $139 billion. Gross sales for the quarter were down 15% from the prior year’s figure, while increased surrenders and withdrawals led to a 25% decline in net sales. Prudential was the highest seller of variable annuities in 2012 with a market share of 14%.  Unlike MetLife (NYSE:MET), which is cutting back on its equity-linked products, Prudential has not yet given an indication on whether or not it plans to consciously reduce sales. We will keep a close eye on developments in this field and update our model accordingly.Notes:
- Analysis: Weak yen trend to slow as wary Japan insurers take stock of “Abenomics”, Reuters, February 25, 2013 [↩]
- GM Seen Fueling Pension Deals as Employers Face Shortfall, Bloomberg, 19th June, 2012 [↩]
- LIMRA databank [↩]