Low Investment Income, Weak Revenue Dampen Prudential’s Earnings

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PRU: Prudential Financial logo
PRU
Prudential Financial

Prudential Financial (NYSE:PRU) reported mixed quarterly results for the fourth quarter on Thursday. [1] The company reported revenues of $13.25 billion during the quarter, which was better than consensus estimates of $11.53 billion but were far short of the $15.8 billion reported a year ago. This year-over-year (y-o-y) decline is attributable to a decline in premiums earned, lower net investment income as well as lower income from asset management services. Additionally, costs related to technology, advertising, annual policyholder communications and onboarding and other variable expenses were higher compared to prior quarters. The aforementioned factors resulted in the company’s adjusted operating earnings declining by about 12% y-o-y to $891 million or $1.94 a share in Q4 2015, against analyst consensus estimates of $2.30 a share.

For the full year, the company reported an improvement in adjusted operating earnings from $4.3 billion in 2014 to about $4.7 billion in 2015. [2] Even though the company posted about 2% y-o-y decline in revenues during the year, reduced benefits and expenses paid to policyholders mitigated the net impact on earnings.

See our Complete Analysis of Prudential here

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International Operations

Prudential earns a major chunk of its operating income from outside the U.S., with Japan contributing a significant portion of those revenues. During the fourth quarter, operating income from the segment increased 7% y-o-y to $738 million primarily driven by income from the Gibraltar Life and Other operations, wherein reduced expenses, claims and benefits offset lower revenues.

The total number of individual policies in force in Japan, excluding Gibraltar, increased by roughly 5% y-o-y to 3.3 million by the end of 2015. In the overall international market, the company added 214,000 individual policies during the year taking the total number of Prudential individual policies in international markets to 12.4 million.

U.S. Operations

In the U.S. market, Prudential’s retirement division’s operating income before taxes declined from $823 million in Q4 2014 to $776 million in Q4 2015. This resulted from a 30% y-o-y decline in revenues due to lower premiums earned and lower investment income. For the whole year, operating income remained flat at nearly $3.5 billion as the slight decrease in revenues was balanced by a similar reduction in benefits and expenses.

Operating income from the company’s individual life and group insurance business in the U.S. declined from $162 million in Q4 2014 to $126 million in the fourth quarter of 2015, as benefits and expenses increased on flat revenues. Although the company registered some growth in the universal life and term insurance business, a less favorable claims experience and lower investment income dampened earnings. The group life division also performed poorly as it was affected by weak investment income and unfavorable disability claims experience. Going forward, the company could come under pressure to split its unprofitable businesses like MetLife planned to split its U.S. retail business earlier this year.

We are in the process of revising our $93 price estimate for Prudential’s stock.

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Notes:
  1. Prudential Financial, Inc. Announces 2015 Results, Prudential Investor Relations []
  2. SEC 8-K Filing []