Prudential Financial (NYSE:PRU) reported a positive net income for the first time in five quarters as its third quarter results were helped by pension risk transfer agreements with General Motors (NYSE:GM) and Verizon (NYSE:VZ) signed last year and the January acquisition of The Hartford Financial Services Group’s (NYSE:HIG) individual life insurance business.  The company reported net income of $1.06 billion compared with a net loss of $584 million for the same period last year. Excluding the closed block business, pre-tax adjusted income from the financial services business was up 90% from the year-ago quarter.
Our $80 price estimate for Prudential Financial’s stock is in line with the current market price.
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U.S. Life Insurance
In January, Prudential completed the acquisition of Hartford’s individual life insurance business to provide reinsurance for approximately 700,000 life insurance policies with net retained face amount in force of approximately $141 billion. The company benefited from the transaction in the third quarter, as U.S. individual life premiums increased 60% over the prior year to $165 million, a third of which came from the Hartford acquisition. The effects of the acquisition were particularly evident in the performance of the Universal Life segment, as new business premiums were up 106%, accounting for 65% of the total individual life new business premiums.
Hartford had a market share of around 1.2% in the individual life insurance market in the U.S. before the acquisition; the transaction allowed Prudential to expand its market share to 3.1%.  We expect Prudential’s market share to increase to around 3.5% in the coming years.
Prudential’s group insurance segment, which provides insurance contracts to corporate employers across the U.S., reported operating income of $68 million for the third quarter, compared to $35 million last year. New business premiums were up 83% for group life insurance but down 54% for group disability.
Retirement Gets A Big Lift
Operating earnings for Prudential’s retirement division, excluding one-time items, were $241 million, up $89 million over the prior year. Results were driven by spread earnings from the ground breaking pension transfer agreements. Retirement account values were up 24% from the prior year to a record high of $312.5 billion, around $32 billion of which came from transfer agreements. Standalone institutional gross sales were $5 billion, compared to $3 billion last year.
Improving equity markets have led to an increase in pension funding levels for employers in the U.S. The latest study by Mercer shows that pension plans’ funded ratio (assets to liabilities) reached a five-year high of 91% at the end of October, compared to level of 74% at the end of 2012.  Prudential’s management believes there is potential for further deals, particularly with mid and large cap companies. We will keep a close eye on developments in this area.
International insurance operating earnings for the third quarter were up 14% over the prior year. Insurance sales were down 23% on a constant dollar basis. This decline was primarily because the company employed pricing actions to limit concentration in the yen-based, bank-channel, single premium whole life insurance product, the sales of which surged last year. Excluding a $280 million decline in sales of this product, Prudential’s international insurance sales were up 11% over the prior year.
Net premiums, policy charges and fee income were down 42% on an actual exchange rate basis, with a 10% decline in Japan. However, on a constant exchange rate basis, the premiums from the country were up 7% over the prior year. A quarter of Prudential’s 12 million individual international policies in force are in Japan. The company employed hedging strategies to counter currency fluctuations, particularly concerning the Yen, which contributed $13 million to earnings. Results were also helped by improved mortality rates, which management insinuated were $10 million more favorable than the average contribution of the past four quarters.
The company usually observes a seasonal increase in sales through the first and second quarter in Japan as lump-sum payouts to retiring teachers become available for investment in life insurance products. Prudential is also integrating the Star Life Insurance Co., Ltd. and Edison Life Insurance Company businesses acquired from AIG (NYSE:AIG) in 2011 into its operations and has realized $60 million in cost savings so far.Notes: