Prudential Earnings Preview: Focus on Retirement Business, International Growth

November 4th, 2014 by Trefis Team
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PRU
Prudential Financial

Prudential (NYSE:PRU) is scheduled to report its third quarter earnings on Wednesday, November 5. [1] The company registered a solid performance in the previous quarter, with net income rising to over $1 billion compared to a loss of $517 million the year prior. [2] An increase in fees in the annuity and assets management businesses, gains from the acquisition of the individual life insurance business from Hartford (NYSE:HIG) as well as robust performance of the retirement business, drove the company’s performance in the second quarter. [3]

We expect the company to sustain the growth momentum it gained in the previous quarter from increased activity in the retirement and asset management businesses. In addition, we expect the life insurance business to grow. Below we take a look at the key metrics of the company’s U.S. and international operations that are likely to be major drivers in the third quarter.

We have a price estimate of $102 for Prudential’s stock, which is about 15% higher than the current market price.

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See our full analysis of Prudential here

Operations In The U.S.

Prudential is the third largest life insurance company in the U.S. with a market share of about 5.5%  in terms of premiums earned. [4] During the previous quarter, the U.S. retirement solutions division recorded solid 11% year-over-year growth in operating income to $876 million. The division offers individual annuities, retirement and asset management solutions. Higher fixed income returns led to into higher net investment returns for the company in the previous quarter; as a result, income from the retirement business also increased. Total annuity (fixed and variable) sales and account values increased by almost 13% year-over-year to nearly $160 billion in the second quarter. Variable annuities accounted for more than 95% of the total sales.

We expect sales to continue to grow in the third quarter, aiding the company’s overall growth. In addition, ongoing integration and improving synergies between Prudential and Hartford’s life insurance business will continue to result in reduced expenses and improved earnings. [5]

Growth In International Markets Is Important

Outside of the U.S., Prudential has operations in Asia, Europe and Latin America. Japan, which is the world’s second largest life insurance market, is one of the prime markets for Prudential. International operations are vital for the company’s overall growth, especially as it earns nearly a third of its total international premiums from Life Planner operations and another 60% from Gibraltar Life operations in Japan. In the previous quarter, the Life Planner business reported a 4% year-over-year increase in earnings, coupled with growth in revenues from premiums, policy fees and charges.

We expect Prudential to continue to benefit from its leading position in the Japanese market. A growth in demand for retirement products in the country owing to an aging population will also help the company to expand its retirement solutions business. [6] In addition, Prudential’s efforts to improve its distribution channels via the bancassurance model and independent agents will also play an important role in growing its business in the country. However, foreign currency fluctuations will remain a challenge for the company, due to which Gibraltar operations suffered an $11 million loss in the last quarter.

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Notes:
  1. Prudential Financial To Announce Third Quarter 2014 Earnings, Prudential Press Release [↩]
  2. SEC 10-Q Filing, Aug 7, 2014 [↩]
  3. Prudential Financial’s (PRU) CEO John Strangfeld on Q2 2014 Results – Earnings Call Transcript, Seeking Alpha [↩]
  4. NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS LIFE AND FRATERNAL INSURANCE INDUSTRY 2013 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM [↩]
  5. 2014 New York Investor Day Slides, Investor Relations [↩]
  6. 2014 Tokyo Investor Day Presentation, Investor Relations [↩]