Prudential Financial reported strong earnings for the second quarter of 2014, with net income of over $1 billion compared to a loss of $517 million in the second quarter of 2013. The strong results were driven by an increase in fees in the annuity and assets management businesses, gains from the acquisition of the individual life insurance business from Hartford as well as robust performance of the retirement business. Prudential offers retirement solutions, annuities and life insurance across major markets in the world, including the U.S. and Japan. Owing to Prudential’s large operations in Japan as well as other international markets such as Korea, foreign currency headwinds had some negative impact on the earnings. But compared to last year, a relatively stable Japanese Yen against the U.S. Dollar had only a moderate impact on this quarter’s income.
We have a price estimate of $86 for Prudential’s stock, which is in line with the current market price.
Steady Growth in U.S. Retirement Division
The U.S. retirement solutions division reported an 11% year-over-year surge in operating income to $876 million. This division offers individual annuities, retirement and asset management solutions. The retirement segment reported adjusted operating income of $286 million for the second quarter of 2014, up 2.5% year-over-year. This increase is attributed to net investment returns of around $5 million, particularly driven by higher returns from fixed income investments. The asset management business reported a more than 16% year-over-year increase in adjusted operating income.
Total annuity (fixed and variable) sales and account values increased by almost 13% year-over-year to nearly $160 billion in the second quarter. Pre-tax earnings were $394 million, up 21% year-over-year. Variable annuities accounted for more than 95% of the total sales. International Operations Prudential earns nearly a third of its operating income from outside the U.S. Itoperates under the brand Pramerica in countries including Japan, Taiwan, Italy, Korea, Brazil, Argentina, Poland and Mexico. During the second quarter, the company reported adjusted operating income of $884 million compared to $850 million in the same quarter of 2013, on the back of sustained business growth. The company earns nearly a third of its total international premiums from its Life Planner operations and another 60% from Gibraltar Life operations in Japan. Prudential had acquired Gibraltar Life Insurance in 2001, and since has expanded its operations in Japan via the bancassurance and retail banking models to target the larger middle class market. Earnings from the Gibraltar Life business shot up by nearly 4% year-over-year on the back of improved returns from fixed income investments, lower net expenses and some fixed asset sales.
Individual Life and Group Insurance
Adjusted operating income for the U.S. individual and group life insurance segments combined grew by a solid 25% year-over-year to $204 million. In 2013, Prudential acquired The Hartford Financial Services Group’s individual life insurance business, thereby adding 700,000 policies in force to its portfolio. The individual life insurance segment reported a 12% year-over-year increase in operating income (adjusted) to $158 million.
Going forward, we expect Prudential to continue to grow its individual and group life insurance business, taking advantage of its acquisition as the company further integrates with the Hartford business.