Prudential Earnings Preview: What We Are Watching

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Prudential Financial

Prudential Financial (NYSE:PRU) is scheduled to report its earnings for the first quarter of 2015 on Wednesday, May 6. [1] 2014 was a successful year for Prudential, as the company rebounded on the back of growth across business lines, generating an annual net income of  nearly $1.4 billion compared to a net loss of $667 million in 2013.  [2] During the first quarter, we expect the company’s investment income and performance in the international markets, especially Japan, to drive results. We will also be watching for the impact of new business deals the company closed during the quarter.  In its outlook for 2015, Prudential announced plans to invest more in technology and infrastructure in 2015 to improve efficiency and business growth. [3] We will be keeping a close watch on the steps the company undertook in that direction during the first quarter.

In this note, we take a look at the key factors, mentioned above, that will drive the company’s performance in the first quarter. We have a price estimate of $86 for Prudential’s stock, which is slightly higher than the current market price.

See our Complete Analysis of Prudential here

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FX Headwinds, Investment Income Will Be A Concern

Prudential earns a sizable portion of its revenues from operations outside the U.S. In the fourth quarter, annualized new business premiums in the international insurance division were up by about 3% y-o-y to $724 million as the total number of policies in force increased, especially in Japan. However, the weakening of the Japanese Yen erased those gains, as sales in dollars were down by around 4% y-o-y in Q4 2015. [4] During the first quarter of 2015, we expect currency fluctuations to continue to impact the company’s earnings.

Prudential’s yield on investments for the retirement division has been around 1% for the last couple of years.  It fell to 0.9% in 2014. As most of the company’s investments are in fixed maturity securities, the low interest rate environment has kept returns suppressed, and we expect that to continue in the near term. [5]

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Notes:
  1. Prudential Financial to announce first quarter 2015 earnings, Prudential Press Release []
  2. SEC 10-K Filing, 2015 []
  3. 2015 Financial Outlook Conference Call Presentation, Investor Relations []
  4. SEC 8-K Filing []
  5. The Puzzle of Low U.S. Treasury Yields, Office of Financial Research, U.S. Department of Treasury []