Prudential’s Earnings Plummet Due To Investment Losses, FX Headwinds

Prudential (NYSE:PRU) announced third quarter earnings on Wednesday, November 5. The company reported a more than 50% year-over-year decline in earnings for the quarter. Net income fell from $966 million in the third quarter of 2013 to $465 million in 2014. ^[1] Operating earnings per share of $2.20 was also down from $2.89 a year ago. The company’s performance suffered due to a combined effect of net realized losses on investments and FX headwinds. Foreign currency exchange rates had a negative impact of around $4 million on earnings during the quarter. ^[2] The company’s revenues increased 9% year-over-year to about $11.7 billion.

On the back of a below par quarterly performance, the company’s stock has fallen around 4% since November 5. We have a price estimate of $102 for Prudential’s stock, which is about 20% higher than the current market price.

See our full analysis of Prudential here

U.S. Operations

The U.S. retirement solutions division offers individual annuities, retirement and asset management solutions. During the third quarter, pre-tax adjusted operating income from individual annuities decreased to $367 million from $821 million a year ago. After adjustments for market driven and discrete items, earnings from individual annuities were $403 million during the quarter. Driven by appreciation in the market, account values in the third quarter were 6% higher than a year ago.

Individual life insurance sales based on new business premiums in the U.S. fell from $165 million in the third quarter of 2013 to $97 million in 2014, largely due to a $61 million decline in sales of guaranteed universal life insurance products. According to the company, this sharp fall is largely in sync with the industry-wide decline in sales of guaranteed universal life insurance products by about 40% year-over-year in the first half of 2014. ^[2]

Going forward, we expect the growth in Prudential’s retirement and life insurance business to gain momentum. This is supported by the fact that more companies in the U.S. are transferring pension and retirement plans to insurance companies. ^[3] Recently, Prudential benefited from two such deals worth around $4.5 billion that it signed with Motorola Solutions (NYSE:MSI) and Bristol-Myers Squibb (NYSE:BMY). ^[4] We will be keeping a close watch on how it impacts the company’s performance in the coming quarters.

International Operations

Operating in countries including Japan, Taiwan, Italy, Korea, Brazil, Argentina, Poland and Mexico, Prudential earns nearly one-third of its operating income from outside the U.S. An increase in expenses (including technology costs) and FX headwinds had a net negative impact on the earnings from international operations. ^[2] Revenues declined by over 10% year-over-year.  Life Planner and Gibraltar Life in Japan are also major contributors to the company’s earnings from international operations. ^[5] Pre-tax operating income from Life Planner operations was $414 million, compared to $424 million a year ago, whereas for Gibraltar Life it was $431 million compared to $354 million last year.

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1. Prudential Financial, Inc. Announces Third Quarter 2014 Results, Prudential Press Release [↩]
2. Prudential Financial’s (PRU) CEO John Strangfeld on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha [↩] [↩] [↩]
3. Rising U.S. Life Spans Spell Likely Pain for Pension Funds, The Wall Street Journal [↩]
4. Agreements With Motorola, Bristol-Myers To Boost Prudential’s Retirement Business, Trefis [↩]
5. Prudential Financial, Inc. Announces Third Quarter 2014 Results, Investor Relations [↩]