Prudential Financial (NYSE:PRU) is scheduled to report earnings for the fourth quarter of 2013 on Wednesday, February 5.  The insurance company reported positive net income for the first time in five quarters for the three months ending September, helped by pension risk transfer agreements with General Motors (NYSE:GM) and Verizon (NYSE:VZ) signed in 2012.  Prudential’s results were also helped by the January 2013 acquisition of The Hartford Financial Services Group’s (NYSE:HIG) individual life insurance business which led to a 60% increase in U.S. individual life premiums. We expect another quarter of strong results from the company.
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
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%.  Last year, Prudential completed the acquisition of Hartford’s individual life insurance business to provide reinsurance for approximately 700,000 life insurance policies, with a net retained face amount in force of approximately $141 billion. Hartford had market share of 1.2% in the individual life insurance market prior to the acquisition and the consolidation allowed Prudential to expand its market share to 3.1%, with 7 million policies in force. 
Individual life insurance premiums across the U.S. grew 4% through the first nine months of 2013, with a 19% increase in variable universal life insurance policy premiums, a 5% increase in whole life and 4% in term life insurance premiums.  Prudential reported a 106% increase in premiums from universal life products during the September quarter, driven by the Hartford acquisition. These policies accounted for 65% of the company’s individual life new business premiums.
Prudential, along with AIG (NYSE:AIG), has been named as a non-bank systemically important financial institution (SIFI) by the Financial Stability Oversight Council (FSOC). This designation will impose stricter capital requirements along with other regulations which might hamper Prudential’s growth in the coming years. Wall Street Journal has reported that Prudential is currently challenging this regulation, although the insurer earlier announced that it will not appeal against the designation.  
Scope For Retirement Solutions
Retirement account values reached a record high of $312.5 billion at the end of September, with around $32 billion coming from the aforementioned transfer agreements. Standalone institutional gross sales were $5 billion, compared to $3 billion during the same period in 2012. As a result of spread earnings from the pensions agreements, Prudential was able to report operating earnings of were $241 million, up $89 million over the prior year.
The latest study by Mercer shows that pension plans’ funded ratio (assets to liabilities) reached a five year high of 93% at the end of November, compared to level of 74% at the end of 2012.  However, Prudential’s management believes there is potential for further deals, particularly with mid and large cap companies. During the December quarter, the insurer announced agreements with Bergmann Associates and LiveOps to manage the companies’ retirement plans.  Prudential will assume responsibility for Bergmann Associates’ $33 million retirement plan for 330 participants, and LiveOps’ $13 million retirement plan. We will keep a close eye on developments in this area.
Currency Fluctuations Might Affect International Performance
About a third of Prudential’s premiums come from its international operations. The company operates under the name “Pramerica” in countries including Japan, Taiwan, Italy, Korea, Brazil, Argentina, Poland and Mexico and has been expanding at an aggressive pace. Premiums from these operations grew at a CAGR of 36% from 2008 to 2012, helped by the acquisition of Star Life Insurance Co., Ltd. and Edison Life Insurance Company from AIG (NYSE:AIG).
A quarter of Prudential’s 12 million individual international policies in force are in Japan, and currency fluctuations have affected the company’s earnings in the country. For the third quarter, Prudential reported a 10% decline in net premiums, policy charges and fee income from the country on an actual exchange rate basis. However, on a constant exchange rate basis, premiums from the country were actually up 7% over the prior year. The company employs hedging strategies to counter currency fluctuations, particularly concerning the Yen, which contributed $13 million to earnings last quarter. Prudential also employed pricing actions to limit concentration on the yen-based, bank-channel, single premium whole life insurance product, sales of which surged during 2012. Excluding a $280 million decline in sales of this product, Prudential’s international insurance sales were up 11% over the prior year. We expect the company to maintain growth in international markets, but currency fluctuations might hinder the rate of expansion.Notes:
- Q4 2013 Prudential Financial, Inc. Earnings Release, Events Calendar, Investor Relations [↩]
- Prudential Financial Management Discusses Q3 2013 Results – Earnings Call Transcript [↩]
- 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 [↩]
- LIMRA’s U.S. Individual Life Insurance Sales Summary Report, Third Quarter 2013 [↩]
- Insurers Push Back Against Stricter Regulation – WSJ.com [↩]
- Statement from Prudential Financial, Inc. regarding final designation as a non-bank systemically important financial institution [↩]
- 2013 press releases [↩]
- Prudential Financial Inc : Prudential to Manage Retirement Plans for Bergmann Associates and LiveOps, December 2, 2013 [↩]