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Prudential Financial Inc.’s (PRU - Analyst Report) core operating earnings for the third quarter of 2012 came in at $1.53 per share, much lower than the Zacks Consensus Estimate of $1.67. However, the results augmented 82.0% on a year-over-year basis.                            

In the quarter under review, Prudential reported a net loss (a GAAP measure of earnings) of $1.41 per share against net income of $3.18 per share a year ago. The disappointing result was due to $684 million of pretax losses on derivatives and $521 million of various charges.  

Total revenue reported by this U.S. based life insurer was $13.3 billion, up 36% year over year, attributable to higher premiums earned, policy charges and fee income, net investment income, as well as higher asset management fees.

Premiums earned increased 55% year over year to $8.3 billion in the quarter, while net investment income climbed 4.9% to $2.6 billion.

Total benefits and expenses soared 33% year over year to $12.3 billion, primarily owing to higher insurance and annuity benefits.

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 reported adjusted operating income of $504 million, compared with a mere $42 million in the year-ago quarter.

Operating income at the U.S. Individual Life and Group Insurance division declined 6.0% year over year to $147 million.  The muted performance was mainly due to less favorable group life claims experience.

The International Insurance and Investments division’s operating income increased 19% year over year to $783 million, attributable to higher contribution from both Gibraltar Life and Life Planners insurance operations.    

Prudential’s Closed Block Business posted operating profit of $43 million, compared with an operating gain of $32 million in the year-ago quarter.  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 stopped offering such policies.

Prudential’s assets under management (AUM) increased 8.8% year over year to $1.005 trillion, rising from $901 billion at December 31, 2011, and $871 billion at September 30, 2011.  

Adjusted book value, which measures the net worth of a company, increased to $59.35 per share as of September 30, 2012, from $58.02 as of December 31, 2011.

Share Repurchase and Dividend Update

During the third quarter, Prudential acquired 2.7 million shares of its stock under its current share repurchase authorization at a total cost of $150 million.

Concurrently, the company announced a hike in its annual dividend payment by 10%. The new dividend of $1.60 per share will be paid on December 14, 2012 to shareholders of record at the close of business on November 20, 2012.  The company is also changing its dividend disbursements to quarterly intervals from first quarter 2013, compared with its present practice of paying dividend annually.

Our Take


Prudential’s results for the first nine months of 2012 reflect strong performance across all its business segments. The recently announced acquisition of Hartford’s individual life insurance chalks out a long-term strategic growth path for the company. This buyout will help Prudential to acquire a place among the top five individual life insurance companies in the U.S. in terms of new recurring premium sales.

Peer Performance

Earlier during the week, peer American International Group Inc. (AIG - Analyst Report) reported its third-quarter 2012 operating earnings per share of $1.00, significantly beating the Zacks Consensus Estimate of 85 cents as well as year-ago quarter’s loss of $1.58 per share.

Another peer MetLife Inc. (MET - Analyst Report) reported its third-quarter 2012 operating earnings per share of $1.32, comfortably beating both the Zacks Consensus Estimate of $1.28 and year-ago quarter’s earnings of 91 cents. Operating earnings surged 47% year over year to $1.42 billion.

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

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