Prudential Financial (NYSE:PRU) is scheduled to report earnings for the second quarter on Wednesday, August 6.  During the first quarter, Prudential reported a strong performance, bouncing back from a net loss of $735 million in 2013 to a net profit of $1.23 billion.  We expect growth in the U.S. to continue, given an improvement in macroeconomic indicators during the second quarter. We also expect Prudential to grow internationally, although currency fluctuations in Japan will have an adverse impact on earnings.
We have a price estimate of $86 for Prudential’s stock, which is in line with the current market price.
Prudential’s U.S. Retirement Solutions division accounts for more than half of Prudential’s operating income. In the first quarter, retirement account values increased 9% over the prior year, helped by a 51% surge in sales and a positive impact of $2 billion from changes in market values. Additionally,a $123 million benefit from investments resulted in a 60% year-over-year increase in adjusted operating income.
With a market share of around 7%, Prudential is the sixth largest seller of annuities in the U.S. Variable annuities in particular form nearly 95% of the company’s total annuities sold in the country. In the previous quarter, operating income for the individual annuities segment grew 4% year-over-year, with a 9% increase in account values. Total variable annuity sales were around $2.3 billion in the first quarter. We expect Prudential to further strengthen its market position and report growth in line with the previous quarter’s results.
The U.S. economy has bounced back from a contraction in GDP in the first quarter. According to the initial estimates of the Bureau of Economic Analysis, U.S. GDP grew by 4% in the second quarter,  while solid job growth continued. We expect a continued improvement in economic conditions to help drive growth for Prudential, especially in the life insurance segment.
Outside the U.S., Prudential operates under the brand name “Pramerica” in countries including Japan, Taiwan, Italy, Korea, Brazil, Argentina, Poland and Mexico. International operations account for nearly one-third of Prudential’s operating income. In the first quarter, net premiums, policy charges and fee income from international operations were down 24% on a reported basis and 18% on a constant currency basis compared to the previous year. The annualized new business premiums – or the premiums from new sales that are expected to be collected over the year – decreased by 14% on a reported basis and 8% on a constant currency basis.
One of the major concerns for the company is the foreign currency fluctuations that impact earnings. The Japanese Yen was weak in the first quarter, and since Japan accounts for a significant portion of its international business, this adversely impacted Prudential’s earnings. Fluctuations in the Yen continued in the second quarter as well, as it dropped by 1.8% in the April-June period against the U.S. Dollar.  We expect the currency trends to continue to reflect in the upcoming earnings, but we will also be following Prudential’s growth in markets besides Japan.Notes: