A Review Of Prudential’s Turnaround In 2014

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2014 was a turnaround period for Prudential (NYSE:PRU). The company registered robust growth during the year, as it reported net income of $2.8 billion for the nine months ended September 2014, compared to a net loss of $667 million reported for the year 2013. Revenues for the first nine months of 2014 stood at $38 billion, an over 21% jump compared to a year ago. [1] The company’s net investment income also improved by about 4% during the first three quarters of 2014 compared to a year ago.

In this article we review Prudential’s performance in 2014 by looking at the key metrics from each division. We have a price estimate of $102 for Prudential’s stock, which is about 15% higher than the current market price.

See our Complete Analysis of Prudential here

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Acquisitions Aid Expansion Of International Business

Total operating income from international operations grew by about 2.5% during the first nine months of the year compared to a year ago, driven by returns on investments. However, FX headwinds in Japan, which forms a major chunk of Prudential’s international operations, continued to affect earnings. Lower net expenses in the second quarter were offset by an increase in expenditures on technology and distribution costs in the third quarter.

In October, Prudential acquired Administradora de Fondos de Pensiones Habitat S.A., a leading retirement solutions company in Chile. With the acquisition, Prudential expects to capitalize on the growing pension market in Chile. Chile’s private pension fund assets are expected to rise at a compound annual rate of around 11.7% through 2017. [2] [3]

In a bid to expand business in the growing South Asian market, in January the company completed the acquisition of Malaysian life insurance company UniAsia Life Insurance Berhad.

U.S. Life

Total revenues from the U.S. Life and Group Insurance business grew by over 5%, led by better sales in individual life products. However, operating income from the division was down by more than 30%, primarily due to lower operating margins in the individual life business and a loss from the group insurance line. In particular, individual life insurance sales fell significantly, largely in sync with the industry-wide decline in sales of guaranteed universal life insurance products in the first half of 2014.((Prudential Financial’s (PRU) CEO John Strangfeld on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha))

U.S. Retirement Solutions

Prudential’s U.S. retirement solutions business consists of three sub-divisions: Individual Annuities, Retirement and Asset Management. The company’s total assets in the division across products grew by about 4% in the first three quarters of 2014, compared to a year ago. The retirement solutions division reported around a 7% decline in operating income for the first three quarters of 2014 compared to 2013. There was a drop of about 30% in income from the individual annuities product line, but income from the asset management and retirement product lines showed positive growth.

Outlook For 2015

After a year of healthy growth, the company expects to carry on the momentum in business growth in 2015. However, a low interest rate environment in the U.S. will continue to be a concern, as Prudential’s net income is heavily significantly contingent on the returns it generates on investments, which are largely in fixed income securities. The company is planning to invest in technology and infrastructure; this could put pressure on near-term margins, though it should have a long-term benefit. The company expects an effective tax rate of about 27% for the upcoming calendar year. Despite a mix of favorable factors and headwinds, the company expects a strong growth in EPS. During the Financial Outlook Call, the company provided EPS guidance of $9.60-10.10 for 2015. [4]

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Notes:
  1. SEC 10-Q Filing, November 2014 []
  2. Chilean pensions lure US investors, Financial Times []
  3. Pension Markets In Focus 2013, OECD []
  4. 2015 Financial Outlook Conference Call Presentation, Prudential Investor Relations []