Prudential Financial Inc.’s (PRU) core operating earnings came in at $1.07 per share, substantially lower than the Zacks Consensus Estimate of $1.56. This also compared unfavorably with earnings of $2.12 in the year-ago quarter.
Recent stock market declines owing to threats from a deeper European debt crisis and the uncertain outlook for the U.S. economy primarily dented the company’s earnings.
Results were negatively impacted by approximately $650 million in charges that included a long list of nonrecurring items. Approximately three-fourth of the total amount was attributable to charges related to strengthening of reserves.
In contrast, net income (a GAAP measure of reporting earnings) rose 24% year over year to $3.06 per share, helped by a stronger yen coupled with gains related to interest-rate derivatives.
Total revenue of the second biggest life insurer was $9.95 billion, up 27% year over year due to higher asset management fees, commissions and other income, net investment income as well as premiums. Premiums earned surged 37% to $5.4 billion, while net investment income inched up 16.0% to $2.5 billion.
Segment Update
The U.S. Retirement Solutions and Investment Management division, which houses Individual Annuities, Retirement, and Asset Management and represents approximately 27% of total company’s revenues, recorded a significant decline in operating income to $43 million from $855 million in the prior-year quarter.
The lion’s share of the decline was bought about by the Individual Annuities business which reported an operating loss of $191 million, in contrast with an operating income of $588 million a year ago. The other sub-segments – Retirement (earnings down 6% year over year) as well as Asset Management (down 18% year over year) also contributed to the overall decline albeit by a lower magnitude.
The U.S. Individual Life and Group Insurance division, which comprises Individual Life segment and Group Insurance segment, registered an operating income of $209 million, down 18% year over year. The decrease was led by a 24% decline in contribution from the Individual Life segment, partly offset by a 5% increase in contribution from Group Insurance segment.
The International Insurance and Investments division’s operating income increased 39% year over year to $751 million, reflecting growth in the protection and retirement income security markets with expanding multiple channel distribution, along with the ongoing integration of the Star and Edison businesses, acquired earlier this year.
Prudential’s Closed Block Business posted $42 million of operating income, down 63% year over year. This segment consists of life insurance and annuity policies issued before the company went public in December 2001, but continue to remain in force.
Assets under management improved 11% year over year to $871 billion, led by increased net new flows, partly offset by an overall deterioration in the equity markets.
Adjusted book value, which measures the net worth of a company, increased to $74.52 at September 30, 2011 up from $59.48 as on December 31, 2010.
Our Viewpoint
If the equity market continues to decline for a longer period, it can result in reduced assets under management and account values, reduced fee revenues and negative DAC unlocking for Prudential. On the other hand, an extended period of low interest rates would compress Prudential’s spread income. Both the factors together can significantly dent the company’s results in the upcoming quarters.
Despite challenging macro trends, Prudential is busy improving its underlying businesses. To counter the low interest rate environment, Prudential has been trying to reduce the interest rate sensitivity in its business mix.
The company has also been aligning its business by offloading non-core operations. Last month, the company announced its decision to sell its stake in a Mexican private pension-fund manager to Grupo Financiero Banorte SAB.
Also, we believe Prudential is better positioned compared with its peers given a solid and growing international business. Additionally, accretion from recent acquisitions, a healthy balance sheet and strong operating trends could partially offset the headwinds.
We maintain our Neutral recommendation on Prudential Financial. The stock also retains a Zacks #3 Rank, which translates into a short-term Hold rating.
Last week Prudential’s close peer MetLife Inc. (MET) reported earnings of $1.11 per share, three cents ahead of both the Zacks Consensus Estimate and the year-ago quarter earnings, led by robust growth in the International business segment, improved underwriting results as well as higher demand for variable annuities.
Another close competitor, American International Group Inc. (AIG) is scheduled to release its third quarter results after the market closes on November 3.
