Key Takeaways And Trends From Prudential’s Q1 Results
Prudential Financial (NYSE: PRU) reported mixed first quarter results, as revenue missed market expectations but earnings per share beat estimates. Consequently, the stock price dipped by about 4.5%, but has recovered since then. The company’s revenues grew by 7.2% year-over-year to $12.9 billion, largely driven by impressive growth in U.S. Workplace Solutions, Investment Management, and International Insurance divisions. Moreover, operating return on average equity of 13.7%, although lower than in Q1’17, was higher than the company’s expectation of 12% – 13%. Furthermore, despite the initial negative reaction from investors, the company’s adjusted EPS actually increased by 10.4% to $3.08 on the back of top-line growth and a lower tax rate.
Our interactive dashboard details our forecasts and estimates for the company. Below we outline the key takeaways and what to watch for going forward.
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Top-Line Growth Across Segments
- U.S. Individual Solutions – The Individual Annuities business did well, as Annuity sales for the quarter grew about 20% to $1.7 billion on the back of higher HDI sales. Meanwhile, a greater contribution from policy charges and fee income contributed to the $54 million increase in the Annuities earnings. However, weak results from the Individual Life business offset the growth as earnings from this business declined from $82 million in Q1’17 to $36 million in Q1’18. Also, the Individual Life business experienced weakness in sales of guaranteed universal life product.
- U.S. Workplace Solutions – Premiums for the segment increased 18% year-over-year, reflecting organic growth and seasonality effect on Group Insurance, which registered the highest numbers in Q1. However, relatively flat retirement gross deposits and net outflows partially offset the growth.
- Investment Management – Fixed income net flows and equity market appreciation drove 8.3% growth in assets under management and administration. Moreover, the company reported about $800 million of positive third-party net flows.
- International Insurance – Revenue for this division grew by 11.7% as premiums, policy charges & fee income, and net investment income saw respectable growth. Although sales in Japan have saturated, Gibraltar and Life Planner continue to do well in Asia region.
Future Outlook
Surprisingly, Prudential did not convert a single Pension Risk Transfer (PRT) transaction in the first quarter. It is one of the leading companies in the PRT market, and has over $65 billion in funded pension account values. Also, the company has significant penetration in the U.K. PRT market. The company realized over $9 billion of positive net flows in 2017. With plan sponsors getting increasingly interested in PRT transactions, we expect that Prudential’s expertise in such transactions will fetch high-level deposits in the upcoming quarter. Moreover, efficient pricing will likely drive the growth in the Individual Annuities business. PGIM, the company’s investment management division, has outperformed many of its contemporaries in the past. AUM for the division has been on an upward trajectory, and this trend will likely fuel growth in management fees.
Moreover, the International Insurance Segment is Prudential’s largest segment, contributing about 40% to the Total Revenue. Although sales in Japan, the largest market for Prudential in Asia, have saturated, the company’s effort to increase sales of USD-denominated products has reduced the volatility. We expect this strategy to boost the sales of Gibraltar Life products. Also, the company continues to expand in China, Malaysia, and Brazil. With lower life insurance penetration in markets such as Malaysia, there is potential for growth.
We expect the company to generate about $13.3 billion in revenue in the second quarter. Furthermore, we expect Prudential’s net margin to remain stable in the near term due to robust cost management efforts and strong underwriting results. We forecast adjusted net income of about $1.35 billion, or EPS of about $3.15.
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