Prudential Misses EPS, Revs Up - Analyst Blog

U.S. life insurer, Prudential Financial Inc.’s (PRU) core operating earnings for the first quarter of 2012 came in at $1.56 per share, trailing the Zacks Consensus Estimate of $1.71 and down 3.7% year over year. The lackluster earnings were primarily due to higher claims experience and expense levels, partially offset by revenue growth and a lower share count.         

The life insurer reported a net loss (a GAAP measure of earnings) of $2.09 per share, in sharp contrast to a net income of $1.10 per share in the year-ago quarter. The reversal in results was primarily due to $1.5 billion of charges related to adverse foreign exchange movements as well as a decline in market value of derivatives.

Total revenue of the second biggest life insurer in the U.S. was $10.7 billion, up 16% year over year, attributable to higher premiums earned, policy charges and fee income, net investment income, partly offset by lower asset management fees.

Premiums earned increased 27% year over year to $6.1 billion, while net investment income increased 9.9% to $2.5 billion.

Total benefits and expenses increased 20% year over year to $9.6 billion due to higher, insurance and annuity benefits, interest and other expenses.

Segment Update

The U.S. Retirement Solutions and Investment Management division, which houses Individual Annuities, Retirement, and Asset Management, represents approximately 27% of the company’s total revenue. The segment recordedan operating income of $698 million, up 16% year over year. The increase was primarily the result of higher contribution from Individual Annuities, partially offset by a decline in contribution from the Retirement and Asset Management sub-segments.

Operating income at U.S. Individual Life and Group Insurance division declined 46% year over year to $74 million.  The lackluster performance was mainly due to the loss incurred at the Group Insurance sub-segment, which suffered from less favorable group disability claims. The other sub-segment, U.S. Individual Life, made a 14% higher contribution to operating income, benefiting from improved mortality experience.

The International Insurance and Investments division’s operating income decreased 3.5% year over year to $606 million, due to lower contribution from Gibraltar Life, partially offset by higher income at Life Planners insurance operation.

Prudential’s Closed Block Business posted operating income of $30 million, down 6% year over year. This segment consists of life insurance and annuity policies that were issued before the company went public in December 2001 and are still in force. Currently, Prudential has ceased offering such policies.

Assets under management increased 9.8% year over year to $943 billion as of March 31, 2012, reflecting strong institutional and retail flows.

Adjusted book value, which measures the net worth of a company, decreased to $55.85 per share as of March 31, 2012, from $58.02 as of December 31, 2011.

Prudential spent $250 million on repurchasing 4.0 million shares during the quarter under review.

Our Take

Though Prudential reported lackluster first quarter numbers, we remain upbeat about the company’s long-term performance. The company has been busy reshaping its underlying businesses by making significant acquisitions and shedding off non-core businesses.

Prudential carries a strong brand name and has been a niche player in the life insurance and retirement market. Moreover, the changing demography of the U.S. population bodes well for the company’s retirement business.

Its International business has a strong market presence in Japan, a region with a huge aging population. The acquisition of Star and Edison in Japan in 2011 is expected to further strengthen its position in the market.

A solid balance sheet along with sound capital management policies makes the stock a favorite with the investors.

We thus maintain our Neutral recommendation on the shares of Prudential Financial. The stock also retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.

Peer Update

Prudential’s close peer MetLife Inc. (MET), however, performed better by reporting net operating earnings of $1.37 per share, beating the Zacks Consensus estimate by 7 cents and was up 11% year over year.

Another peer American International Group Inc. (AIG) is expected to release its first quarter financial results after the market closes on May 3, 2012.