Prudential Financial (NYSE:PRU) is expected to report earnings for the third quarter of 2013 on Wednesday, November 6.  The insurance company reported a 77% year-on-year increase in pre-tax adjusted operating income for the second quarter of the year, driven by the groundbreaking pension risk agreements with General Motors (NYSE:GM) and Verizon (NYSE:VZ) signed last year. We expect another strong operational performance from the company, which recently decided to not appeal its designation as a non-bank systemically important financial institution by the Financial Stability Oversight Council (FSOC).  However, foreign exchange fluctuations, particularly regarding the Yen, could affect Prudential’s international operations. A quarter of the company’s 12 million individual policies outside the U.S. are in Japan.
Our $80 price estimate for Prudential Financial’s stock is in line with the current market price.
U.S. Performance Will Be Helped By Acquisition
Prudential is the third largest life insurer in the U.S., behind MetLife (NYSE:MET) and Aflac Group, with a market share of 6.14%.  The company has around 7 million policies in force in the country and has a market share of 3.1% in the individual life insurance market. 
Prudential’s individual life premiums for the second quarter of 2013 grew 11% from the prior year, largely helped by the acquisition of The Hartford Financial Services Group’s (NYSE:HIG) individual life insurance business, which contributed $58 million to second quarter sales. The deal allowed Prudential to assume coverage for more than 700,000 life policies and investment assets, reserved for future claims on these policies, with a statutory book value of around $7 billion. Hartford’s share of the individual life insurance market in the U.S. was around 1.24%, pre-acquisition. The transaction was completed in the first quarter of 2013 and we expect it to contribute to third quarter results.
Total individual life insurance policies in the U.S. fell 3% in the first half of the year; universal life insurance policies fell 16%, while their variable counterparts increased 5%.  Total annualized premiums grew 6%, and we expect premium growth to continue through the third quarter. MetLife, the leading life insurance company in the country with a market share of 10%, recently reported a 6% increase in retail premiums.
Currency Fluctuations Could Affect International Operations
One third of Prudential’s premiums come from its international operations. The company operates under the name “Pramerica” in international markets like 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. In 2011, the company acquired Star Life Insurance Co., Ltd. and Edison Life Insurance Company from AIG (NYSE:AIG), expanding its market share in terms of new business face amount in the country to 10.4%.
For the second quarter, Prudential reported a 2% year-on-year increase in premiums from international operations, with premiums from Japan up 7%. We expect the company to maintain sales growth, but currency fluctuations might affect earnings. MetLife recently reported that its third quarter premiums from Asia were up 12% on a constant currency basis, but foreign exchange fluctuations meant that the reported value was down 5%.Notes:
- Events Calendar [↩]
- Statement from Prudential Financial, Inc. regarding final designation as a non-bank systemically important financial institution [↩]
- NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS LIFE AND FRATERNAL INSURANCE INDUSTRY 2012 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM [↩]
- Life Insurers Fact Book by American Council of Life Insurers [↩]
- Individual Life Insurance Growth Rates by Product , Limra [↩]