Prudential Financial Inc.’s (PRU) second quarter 2011 earnings of $1.71 per share have topped the Zacks Consensus Estimate of $1.55 as well as the prior-year quarter’s earnings of 88 cents. Results were aided by solid performance in the company’s U.S. annuities and asset management businesses as well as its international insurance operations.
Prudential has reported revenues of $10.2 billion, up 32% year over year primarily due to higher asset management fees, commissions and other income, net investment income as well as higher premiums. Premiums earned surged 45% year over year to $5.5 billion, while net investment income scaled up 20.0% year over year to $2.5 billion.
Assets under management hiked 28% year over year to $883 billion, led by increased net new flows and an overall improvement in markets.
Adjusted book value, which measures the net worth of a company, increased to $62.97 at June 30, 2011 from $59.48 at December 31, 2010.
The U.S. Retirement Solutions and Investment Management division, which houses Individual Annuities,Retirement, and Asset Management, recorded operating income of $621 million, significantly ahead of $130 million in the prior-year quarter. The hike was attributable to an operating income in individual Annuities segment, which had posted an operating loss last year. Asset Management unit clocked an 83% increase in operating income on the back of improved results from proprietary investing activities and more favorable outcome from commercial mortgage activities. Also, a 26% hike in operating income at the Retirement segment, helped by higher fees associated with a growth in retirement account values, expanded the segment’s profit.
The U.S. Individual Life and Group Insurance division, which comprises Individual Life segment and Group Insurance segment, registered operating income of $179 million, up 49% year over year. The increase was led by a 48% spike in contribution from the Individual Life segment and a 53% surge in contribution from Group Insurance segment.
The International Insurance and Investments division’s operating income upped 27% year over year to $590 million owing to increased contributions from Life Planner insurance operations as well as Gibraltar Life.
Prudential’s Closed Block Business posted $9 million of operating income as against the year-ago net income of $404 million. This segment consists of life insurance and annuity policies that were issued before the company went public in December 2001 but are still in force.
During the quarter, A.M. Best Co. reaffirmed the financial and issuer credit ratings (FSR and ICR) of “A+” and “aa-”, respectively, on Prudential and its subsidiaries, with a stable outlook.
Prudential is aggressively restructuring its business and considering acquisitions as well as spin-offs accordingly. The acquisition of Star Edison and the spin-off of its commodities business form a part of the company’s strategy to realign its business in order to generate high return on equity. The company has one of the best collections of businesses in the U.S. life insurance sector, with strong positions in high margin businesses and a significant diversification.
Despite a drag on revenue for the past couple of years due to a volatile economic environment, the company has consistently increased its revenues over the past several quarters. A right mix of business and strong fundamentals has helped it to garner market share from weakened competitors. Prudential is poised to improve its earnings faster than its peers in the upcoming years.
Prudential also has substantial financial flexibility, which positions it to participate in the consolidation of the global life insurance and retirement market. Considering the large amount of cash available for transactions, we believe Prudential has the capacity to execute an accretive acquisition for organic growth.
Prudential, the fourth leading life insurer only after American International Group Inc. (AIG), MetLife Inc. (MET) and New York Life Insurance Co., carries a Zacks Rank # 3, which translates into a ‘Hold’ recommendation over the short term (1-3 months). Also, considering Prudential’s fundamentals, we rate the stock “Neutral” over the long term.
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