Prudential Financial Earnings Preview: Focus On Retirement Solutions, International Growth

Prudential Financial (NYSE:PRU) is scheduled to report earnings for the first quarter of 2014 on Wednesday, May 7. ^[1] The insurance giant’s results last year were helped by the pension risk transfer transactions with General Motors (NYSE:GM) and Verizon (NYSE:VZ), completed in 2012. ^[2] The company reported a 36% year-on-year increase in pre-tax operating income for its financial services business for the fourth quarter of 2013. The financial services business consists of the company’s continuing businesses and does not include the closed block business. We expect another strong quarter from the company this time around.

Our $80 price estimate for Prudential Financial’s stock is in line with the current market price.

See our full analysis of Prudential here

Retirement Division Will Be Key

The U.S. retirement solutions and investment management division is the biggest contributor to Prudential’s earnings, accounting for more than half of the operating income (excluding the corporate division). The retirement solutions division can be broken down into three sub-divisions: individual annuities, retirement and asset management. The individual annuities division offers variable and fixed annuity products to individual customers across the U.S., targeting mass affluent customers with household income over $100,000. The retirement division offers retirement income products and services to employers who set up retirement plans for employees. The asset management division provides investment management products including institutional portfolio management and mutual funds.

Prudential’s revenue comes primarily from fee income from account values.  Account values are driven both by sales and the impact of market changes. For the fourth quarter, the company reported an 11% increase in retirement account values, while reached a record high of $323 billion. Individual annuity account values increased 14%, crossing the $150 billion mark. Higher fees as a result of the increase in account values as well as a $112 million improvement in investment results led to a 31% increase in retirement operating income.

Prudential is the sixth largest seller of annuities in the U.S., with a market share of 7%. It is the fourth highest seller of variable annuities, with a market share of close to 10%. ^[3] More than 95% of the company’s annuity sales last year were through variable annuity products. Prudential uses a distribution network of independent financial planners, wirehouses, banks, and insurance agents including Allstate’s agency distribution force with over 300 wholesalers across the country. Prudential reported strong sales of its Prudential Defined Income Variable Annuity (PDI) product, which accounted for 7% of total sales in 2013. We expect a moderate growth in sales combined with market fluctuations to lead to moderate growth in account values in the coming years.

On the institutional side, Prudential announced agreements with Bergmann Associates and LiveOps to manage the companies’ retirement plans during the December quarter, following up the deals with GM and Verizon. ^[4] Management believes that there is potential for further agreements with mid and large cap companies.

FX Headwinds Will Affect International Performance

International operations account for 35% of Prudential’s operating income. Prudential 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).. However, currency fluctuations dampened earnings in 2013; for the fourth quarter, net premiums, policy charges and fee income were $4.3 billion on a constant exchange rate basis, but just $3.8 billion on an actual exchange rate basis.

A third of the company’s international premiums come from Japan, where 2013 fourth quarter premiums were $1.5 billion on a constant exchange rate basis, but just $1.2 billion on an actual exchange rate basis. Prudential has around more than 3,00 life planners in Japan and is expanding its bancassurance model to mega and regional banks, which currently encompasses over a hundred distributors across the country. There are only 43 life insurance companies in Japan, a very small number for a mature market. In comparison, the U.S. has more than 800 life insurers while France has more than 250. Foreign-owned companies have a combined market share of close of 20% in the life insurance market in Japan.

We expect Prudential to continue to focus on the Japanese market for international growth, but it is also looking to expand operations in other emerging markets including China, Argentina, Poland, and Mexico. For more on Prudential’s international prospects, see our recent article, A Look At Prudential’s International Operations.

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1. Q1 2014 Prudential Financial, Inc. Earnings Release, Investor Relations [↩]
2. PRUDENTIAL FINANCIAL, INC. ANNOUNCES 2013 RESULTS [↩]
3. LIMRA SRI U.S. Individual Annuities Sales Survey [↩]
4. Prudential Financial Inc : Prudential to Manage Retirement Plans for Bergmann Associates and LiveOps, December 2, 2013 [↩]