Prudential Beats on Accounting Gains - Analyst Blog

Prudential Financial Inc.'s (PRU) third quarter operating income of $2.12 per share was significantly ahead of the Zacks Consensus Estimate of $1.43. Earnings also compared favorably with $1.78 in the year-ago quarter. Results for the quarter benefited from a greater reduction in policy acquisition costs and a higher reduction in minimum guaranteed benefit reserves, coupled with a strong performance in asset management business and international insurance operations. 

The life insurer, ranked #2 in the country, reported revenues of $7.9 billion, higher than the Zacks Consensus Estimate of $7.3 billion. Also on a year-over-year basis, revenues increased 16%, primarily due to higher asset management fees, commissions and other income, net investment income as well as higher premiums. Premiums written increased 18% to $4.0 billion, net investment income increased 7.4% to $2.2 billion. Assets under managementincreased 17% to $750 billion led by increased net new flows and an overall improvement in markets.

Adjusted book value, which measures the net asset value of a company, increased to $60.40 per share, up 18.1% year over year.

The U.S. Retirement Solutions and Investment Management division's operating income of $855 million increased 85% year over year. This was due to a substantial increase of 87% in Individual Annuities segment, led by a higher reduction in amortization of deferred policy acquisition costs and reduction in reserves for minimum death and income benefits. Another major contributor was the Asset Management segment, where operating income shot up more than fivefold to $148 million. 

Group Insurance segment The U.S. Individual Life and Group Insurance divisionoperating income declined 18% to $251 million year over year. The decline was led by a 22% decline in contribution from Individual Life segment Group Insurance segment coupled with a 5% decline in contribution from Group Insurance segment 

The International Insurance and Investments division operating income of $531 million was up 5% year over year on the back of a 6% increase in contribution from International Insurance, partially offset by an 86% decline in contribution from the International Investment segment. The increase in International Insurance was brought about by higher investment gains coupled with favorable currency effects.

Prudential'sClosed Block Business,which consists of life insurance and annuity policies issued before the company went public in December 2001 but are still in force,posted $77 million of net income, contrasting with the year-ago net loss of $8 million.

During the quarter, the life insurer and annuity provider announced that it will be acquiring two of the Japanese life operations of American International Group Inc. (AIG) for $4.2 billion – mostly in cash – which will conclude by the first quarter of 2011. Japan being the largest business base of Prudential outside the US and contributing approximately 40% to its revenues, the company will be able to consolidate its already strong footprint in the country.  

Just before the release of Prudential's third quarter's results, the rating agency Fitch Ratings made an upwards revision to the company's ratings, taking into consideration factors such as reduced leverage, low reliance on short term debt and stronger financial flexibility. Fitch upped Prudential's issuer default rating, senior debt ratings and subordinated debt rating by one notch each to “A-”, “BBB+” and “BBB-”, respectively.

Along with this, the rating agency also upgraded the ratings of some of Prudential's subsidiaries and reiterated the “A+” rating of its American arm – Prudential Insurance Company of America – and all other company ratings. Fitch views the ratings as “Stable”.

Prudential has a balanced portfolio of business with favorable growth and return prospects. The company is gaining ground with strong sales and asset flows across the board. It also stands to benefit from strong capital positing and significant financial flexibility, which position the company to pursue organic growth as well as acquisition opportunities.