February 10, 2016
Prudential Financial, Inc.
(PRU - NYSE)
$64.06
Note: FLASH REPORT; more details to come; changes are highlighted. Except where noted, and highlighted,
no other sections of this report have been updated.
Reason for Report: Flash Update: 4Q15 and Full Year 2015 Earnings Results
Previous Ed.: 3Q15 Earnings Update, Feb 1, 2016
Flash Update
On Feb 10, 2016, Prudential Financial Inc. announced its fourth quarter and full year 2015 earnings
results. Fourth-quarter 2015 after tax adjusted operating income was $1.94 per share that missed the
Zacks Consensus Estimate by 14.5%. Earnings also decreased 8.5% year over year due to lower
revenues.
Including the impact of one-time items, net income came in at $1.60 per share. The company had posted
a loss of $2.69 million in the year-ago quarter.
Total revenue decreased 16.3% year over year to $13.2 billion due to lower premiums (down 24.2%),
policy charges and fee income (down 4.2%), net investment income (down 1.9%) and asset management
fees, commissions and other income (down 4.9%). Nonetheless, the top line surpassed the Zacks
Consensus Estimate of $11.6 billion.
Total benefits and expenses were $12.1 billion in the quarter, down 16.7% year over year. The decrease
was due to lower insurance and annuity benefits (down 23%), interest credited to policyholders' account
balances (down 4.4%), interest expense (down 1.8%) and other expenses (down 0.41%)
Full-Year Highlights
Prudential Financial’s adjusted operating income for 2015 came in at $10.04 per share, up 9.01 % year
over year.
Total revenues climbed 2.04% year over year to $48.6 billion.
Quarterly Segment Update
U.S. Retirement Solutions and Investment Management reported adjusted operating income of $776
million, down 5.7% year over year. The downside can be attributed to a lower contribution from
Retirement business.
U.S. Individual Life and Group Insurance reported adjusted operating income of $126 million, down
22.2% from year-ago quarter. Lower income in both Group Insurance and Individual Life segment
resulted in the underperformance.
International Insurance reported adjusted operating income of $738 million, up 7.6% year over year.
© Copyright 2016, Zacks Investment Research. All Rights Reserved.
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The increase was due to higher profits at Gibraltar Life, and Other operations.
Corporate and Other Operations reported adjusted operating loss of $458 million, wider than a loss of
$326 million in the year-ago quarter.
Prudential Financial’s assets under management inched up 0.7% from year-end 2014 to $1.184 trillion of
Dec 31, 2015. Book value, a measure of the company’s net worth, was $73.59 at Dec 31 2015 compared
with $64.75 as of Dec 31, 2014.
Share Repurchase and Dividend Update
During the fourth quarter, Prudential spent $250 million to buy back 3.1 million shares. From Jul 2011
through Dec 2015, the company bought back 65 million shares for $4.4 billion.
Dividend
The company’s board of directors approved a 21% hike of its quarterly dividend to $0.70 per share.
MORE DETAILS WILL COME IN THE IMMINENT EDITIONS OF ZACKS RD REPORTS ON PRU.
Portfolio Manager Executive Summary [Note: Only highlighted material has been
changed.]
Prudential Financial, Inc. (PRU) headquartered in Newark, NJ, is a leading diversified insurance
company offering a variety of products and services, including life insurance, pension, and retirementrelated services, asset management, and securities brokerage, among others. The company operates
through its Financial Services Businesses, which consist of its U.S. Retirement Solutions and Investment
Management, U.S. Individual Life and Group Insurance, International Insurance and Investments
divisions as well as its Corporate and Other operations.
Almost 79% of the firms in the Digest group covering the stock provided positive ratings, while the
remaining 21% provided neutral ratings. None of the firms rated the stock negatively. Of the 14 firms
covering the stock, 11 provided target price ranging from $92.00 (6.9% upside from the current price) to
$107.00 (24.3% upside from the current price).
Buy or equivalent outlook – 11/14 firms or 78.6%: The firms positively view a series of capital-related
transactions (such as redeeming of IHC debt) undertaken by the company, which will consolidate its
capital structure and lead to an increase in Prudential’s readily deployable capital while reducing the
amount of estimated on balance sheet capital capacity.
The firms note that Prudential generates close to half of its earnings from international businesses
(primarily Japan), where the company should continue to earn high-teen returns due to its strong
franchise and favorable market dynamics. These firms expect sales growth in the Japan division, which
has been weak in recent quarters, to pick up in 2015. In particular, sales at Pru of Japan should benefit
from higher average policy face amounts and a mix shift from pure protection to retirement products as
the population ages. Meanwhile, at Gibraltar, growth is expected to accelerate as comps ease (results in
the past were inflated by sales of yen-denominated products in the bank channel). Outside Japan,
Prudential’s business in Brazil continues to gain scale and is expected to become an important driver of
earnings growth over the next few years.
The life consultant count at Gibraltar resulted in a consistent stabilization at higher productivity levels and
has displayed success in the expansion of the bank channel footprint of Prudential, along with continued
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emphasis on death protection products, where the company has the ability to best achieve their targeted
margins.
Moreover, the firms are optimistic about the company’s position in the U.S. where its business mix is
tilted toward less capital intensive product lines such as asset management and retirement, and it has a
smaller footprint than its peers in the low-return individual life product.
The firms view Prudential’s growth momentum across a number of retirement oriented businesses – both
retail and institutional in U.S. market – as a positive. Driven by a growing base of assets under
management, the company has seen a spike in its asset management fees.
The firms also foresee the company’s U.S. business generating strong flows in the annuity, asset
management, and stable value products. Prudential has gained share in the annuity and stable value
markets by maintaining a consistent presence amid competitors who retrenched in recent years.
The firms favorably view the recent pension risk transfer transaction undertaken by the company. Per the
firms, Prudential should benefit from General Motors, and Verizon, and Bristol-Myer pension transfer
deals. The firms are also optimistic about the company’s institutional business, which represents a longterm growth opportunity for it, given its strong position in both pension closeout and stable value markets,
and expect it to earn long-term returns in the 10–12% range.
Prudential’s vast distribution channels and a strong relation with third-party distributors is an important
feature, which has enabled it to expand its market share.
Neutral or equivalent outlook – 3/14 firms or 2.41%: The cautious firms are concerned about the
earnings from the U.S. insurance segment, which may suffer due to low interest rates and depressed
disability margins.
These firms forecast revenue growth in the group business to remain challenged in the short term. For
the longer term, they project the group division to generate healthy returns and grow at a mid-to-high
single-digit pace as economic conditions improve and the impact of price hikes in the disability book
eases. Prudential has a leading group life franchise, and should benefit from a greater scale than its
competitors. In contrast, the company’s disability business is not as well positioned and firms expect its
market share to decline.
The firms remain wary of the company’s high exposure to below investment grade fixed income
securities relative to capital and surplus and its above-average exposure to commercial real estate in the
form of commercial mortgage-backed securities and its direct commercial loan portfolio.
Dec 11, 2015
Overview [Note: Only highlighted material has been changed.]
Prudential Financial is one of the largest diversified financial services providers in the U.S. It includes the
Prudential Insurance Company of America, one of the largest life insurance companies in the country.
Prudential Financial is a large-cap insurer with a broad product line, strong market share, vast distribution
system, large and uniquely successful international operation, and an enviable capital position.
The company offers a wide variety of products and services, including life insurance, mutual funds,
annuities, pension and retirement-related services and administration, securities brokerage, banking and
trust services, real estate brokerage franchises, and relocation services. Prudential also manufactures,
distributes and services retirement plans, provides retail and institutional asset management services,
and engages in equity sales, trading and research. It sells its products to a variety of markets through
specialized distribution channels. Additional information on the company is available on its website:
www.prudential.com.
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Key investment considerations identified by the firms are as follows:
Key Positive Arguments
Prudential has a strong balance sheet with
substantial cash, which will be utilized for
acquisitions and/or buybacks, thereby adding to the
earnings per share (EPS) outlook.
Prudential has a diverse business mix, solid
earnings, and a strong management team
committed to enhance shareholder value.
Superior franchise, expanding distribution and
penetration, and attractive growth opportunities
enhance Prudential’s capacity to gain market
share.
Prudential scores strongly with leading rating
agencies with an investment grade rating.
Prudential is well positioned to serve the graying
baby boomers, which is going to be one of the
most attractive markets going forward.
About 40% of Prudential’s earnings come from the
international segment, mainly Japan and Korea.
Given the demographic characteristic of these
regions, this segment will contribute to increased
growth.
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Key Negative Arguments
Prudential operates in a highly challenging and
regulatory environment.
The company’s operational sensitivity to the equity
market makes it vulnerable to price declines.
Prudential’s investment portfolio includes exposure
to some higher risk assets within its investment
portfolio including subprime RMBS, CMBS and
commercial mortgage loans.
Potentially onerous capital requirements of
systemically important financial institution (SIFI) are
concerns for the company. SIFI insurers would be
subject to more onerous measures such as bankbased standards. This, in turn, will likely hamper
the pace of capital deployment
NOTE: The company’s fiscal year coincides with the calendar year.
Long-Term Growth [Note: Only highlighted material has been changed.]
Prudential expects to generate Return on Equity between13–14% over the long term. The firms believe
that international expansion and growth in Retirement products, which will witness heavy demand from
the baby boomers, will aid in the achievement of the long-term target. While these will drive top-line
growth, the company’s strong capital management policies will boost the bottom line. The firms also
believe that the U.S. market will not be a significant contributor to the near to mid-term growth as the
market remains plagued with high unemployment levels and economic instability. The company’s longterm growth will be driven by:
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Favorable long-term trends to fuel growth in U.S. businesses – With an attractive mix of
businesses in the U.S., Prudential is focused on achieving a sustainable financial performance.
Given its size, brand name, network and market presence since a long time, Prudential is among
the best positioned in the industry to capitalize on a number of favorable long-term trends such as
an aging population with a growing pool of assets, increasing consumer expenditures on
healthcare, rapid growth of target date funds, and the movement toward de-risking in large
defined-benefit markets.
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Penetration in Pension Risk Transfer Market – The firms favorably view Prudential’s efforts to
position itself as a leader in the pension closeout market with the General Motors and Verizon
deals, which offer major long-term opportunities. The firms believe that business win from General
Motors and Verizon makes Prudential a top player in the market. Given modest competition and
an expectation that interest rates will rise, the pension risk transfer market provides long-term
growth opportunity. Continuous favorable underwriting results from the pension risk transfer
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market have encouraged the firms to predict positive long-term growth opportunities for the
insurer. However, no large pension transfer transaction was executed by Prudential in this
quarter.
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Accretion from Recent Acquisitions – Prudential completed the acquisition of The Hartford’s
individual life business in Jan 2013. The firms expect earnings from the acquired business to grow
as integration costs decline and Prudential extracts higher cost savings in late 2014 and 2015.
The firms are of the opinion that apart from being accretive to earnings the acquired business has
enhanced Prudential’s product development capabilities and distribution presence, particularly in
the wirehouse and bank channels.
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Growing Asset Management Business – Prudential is a leading global asset manager with a
distinct multi-manager model providing diversified product offerings for clients. The firms hold a
constructive outlook on the company’s asset management business, reflecting expectations of
healthy sales/flows and strong growth in asset under management (AUM) and fee income. At the
end of 3Q15, the company ranked 15th globally with $1.1 trillion in total AUM. The firms feel that
Prudential has a leading platform for fixed income and real estate investments, which should drive
healthy growth in the business over time. The company’s strong fixed income and real estate
investment platforms should lead to robust performance. The company’s expansion in retail asset
management with the help of warehouse and broker-dealer channels is also viewed positively by
the firms.
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International Business Growth – The firms favorably view the company’s top market position in
Japan from where it generates nearly half of its earnings. The acquisition of Star/Edison has
further strengthened the company’s position in the region. Favorable market dynamics such as an
ageing Japanese population will fuel demand for the company’s retirement products,
consequently generating sales growth. The firms are also upbeat on Prudential’s international
business outside Japan. Prudential’s business in Brazil and Korea has achieved sufficient scale
and the firms expect it to contribute meaningfully to the international division over the next few
years. The company has also entered markets like India, China and Malaysia, which offer future
potential opportunities.
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Vast Agent Network – Prudential has a large distribution network, which maintains underwriting
discipline. This deep agent network and strong relationship with third-party agent distributors will
bring more business for the company.
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Capital Management – The firms note that Prudential has sufficient capital flexibility to
supplement organic growth with modest share buybacks. Finally, these firms believe that
Prudential will indulge in massive share repurchases in order to meet its ROE target. According
to the firms, at the end of 3Q15, Prudential had more than $3 billion in balance sheet capacity.
According to the estimates presented by the firms, Prudential will set aside capital for reduction of
debt in the future.
The company’s long-term growth will, however, be checked by the following factors according to the
firms:
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Regulatory Constraints – With new regulatory constraints on the horizon related to its
designation as a systemically important financial institution (SIFI), the firms expect the company's
capital flexibility to decline marginally.
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Continued Poor Group Disability Margins – Prudential’s disability claims rose in 2010 and
have remained elevated since then due to mispricing. Prudential has re-priced about 60% of the
disability block and expects to finish the rest by early 2015. Given the ongoing re-pricing, the firms
expect Prudential to lose market share in the disability market, which in turn, should challenge
revenue growth.
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Feb 1, 2016
Target Price/Valuation [Note: Only highlighted material has been changed.]
Rating Distribution
Positive
Neutral
Negative
Avg. Target Price
Digest High
Digest Low
No. of Analysts with Target Price/Total
78.6%↑
21.4%↓
0.0%
$107.00
$92.00↑
$98.73↓
11↓/14↓
According to the firms, risks to target price include deteriorating asset quality, prolonged retail weakness,
sustained improvement in housing markets, declining net investment income, depressed group insurance
margins, weakening international sales, onerous capital standards implemented by SIFI and
catastrophes or other large losses.
Recent Events [Note: Only highlighted material has been changed.]
On Dec 10, 2015, Prudential Financial, Inc. announced that it expects to generate earnings in the range
of $9.75–$10.25 in 2016. The company also targets capital deployment of $1.5 billion through share
repurchases in 2016.
On Nov 10, 2015, the Board of Directors of Prudential approved a quarterly dividend of $0.70 per share.
The dividend will be paid on Dec 17, to shareholders on record as of Nov 24, 2015.
On Nov 4, 2015, Prudential reported 3Q15 operating net earnings of $2.40 per share that missed the
Zacks Consensus Estimate by 1.23%. Earnings, however, increased 9.1% on a year-over-year (y-o-y)
basis.
Including the favorable impact of one-time items of $0.76 net income came in at $3.16 per share,
skyrocketing from $0.99 per share earned in the year-ago quarter.
Prudential’s assets under management decreased 0.4% from the 2014-end level to $1.2 trillion as of Sep
30, 2015. Book value, a measure of the company’s net worth was $73.19 as of Sep 30, 2015, up 13%
from that as of Dec 31, 2014.
During 3Q15, Prudential spent $250 million to buy back 3 million shares, thereby exhausting the $1 billion
authorization. From Jul 2011 through Jun 2015 the company has bought back 61.9 million shares for
$4.1 billion.
Revenues [Note: Only highlighted material has been changed.]
Total revenue decreased 5.6% y-o-y to $11.1 billion in 3Q15 primarily marked on lower premium.The top
line was almost in line with the Zacks Consensus Estimate.
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3Q15 was a good quarter for sales, which served as the key growth drivers for Prudential. In Japan, Life
Planner count saw an increase of 6% over the prior-year figure, while in Brazil the count surged by 1000
Life Planners.
Total premiums were $5.3 billion in 3Q15, down from $5.9 billion in the year-ago quarter. Total policy
charges and fee income was $1.6 billion in 3Q15, up from $1.5 billion in the year-earlier quarter. Net
investment income was $3.02 billion, down from $3.04 billion in the prior-year quarter. Asset
management fees, commissions, and other income of $1.2 billion down from 1.3 billion in the yearago quarter.
Provided below is the summary of revenue as compiled by the Zacks Digest:
Revenue (In $M)
Digest High
Digest low
Digest Average
Y-o-Y Growth
3Q14A
2Q15A
3Q15A
1Q16E
2014A
2015A
2016E
$11,766.0
$12,500.0
$11,078.0
$10,647.0
$49,644.0
$47,279.0
$46,876.0
$11,766.0
$12,500.0
$11,078.0
$10,647.0
$49,644.0
$46,830.0
$42,162.0
$11,7660
$12,5000
$11,0780
$10,6470
$49,6440
$47,0545
$44,5190
12.5%
-5.8%
-9.8%
9.6%
-5.2%
-5.4%
5.9%
-11.4%
-10.5%
9.1%
Sequential
Growth
5.9%
2017E
Note: Blank cells denote brokers did not provide estimates
Segment Update
Prudential operates through its financial services businesses, which consists of its U.S. Retirement
Solutions and Investment Management, U.S. Individual Life and Group Insurance, and International
Insurance and Investment divisions as well as its Corporate and Other operations.
Prudential's Class B Stock, which is not traded on any exchange, reflects the performance of its Closed
Block Business.
U.S. Retirement Solutions and Investment Management division recorded 3Q15 revenues of $3.8
billion, down from $4.3 billion in the year-ago quarter.
The U.S. Individual Life and Group Insurance division recorded 3Q15 revenues of $2.7 billion
compared with $2.6 billion in the prior-year quarter.
The International Insurance and Investments division recorded 3Q15 revenues of $4.8 billion, down
from $5.0 billion in the year-earlier quarter.
Please refer to the separately published spreadsheet for additional details and updated forecasts.
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Margins/Operating Income [Note: Only highlighted material has been changed.]
Total benefits and expenses were $10.7 billion in the reported quarter, 12.6% higher y-o-y. The increase
was due to higher insurance and annuity benefits, and interest expenses.
Provided below is the summary of margins as compiled by the Zacks Digest
Margins (In )
Pretax Operating
Income
Net Operating
Income
3Q14A
2Q15A
3Q15A
1Q16E
2014A
2015A
$1,353.0
$1,841.0
$1,463.0
$1,499.0
$5,892.1
$6,367.0
$6,089.0
$1,109.0
$4,355.0
$4,733.0
$4,506.0
$1,034.0
$1,350.0
$1,110.0
2016E
2017E
Note: Blank cells denote brokers did not provide estimates
Segment Update
U.S. Retirement Solutions and Investment Management reported adjusted operating income of $732
million in 3Q15, down 11% y-o-y. The downside can be attributed to lower contribution from Individual
Annuities, Retirement business and Asset Management.
Adjusted operating income at U.S. Individual Life and Group Insurance surged to $227 million from
$24 million in the year-ago quarter. Income in Group Insurance reversed the year-ago loss, while
Individual Life witnessed sturdy growth.
Adjusted operating income at International Insurance decreased 3.9% y-o-y to $812 million. The
decline stemmed from lower profits at Life Planner and Gibraltar Life and Other operations.
Corporate and Other Operations’ adjusted loss narrowed to $308 million from a loss of $339 million
recorded in the year-ago quarter due to lower expenses and higher investment income.
Please refer to the separately published spreadsheet for additional details and updated forecasts.
Earnings per Share [Note: Only highlighted material has been changed.]
Prudential reported 3Q15 operating net earnings of $2.40 per share that missed the Zacks Consensus
Estimate by 1.23%.
Prudential witnessed a benefit of about $0.05 to its EPS in 3Q15.
Earnings, however, increased 9.1% y-o-y on higher contribution from the company’s Retirement
Solutions and Investment Management, and U.S. Individual Life and Group Insurance segments. A lower
share count on account of the company’s continuous share buybacks also aided bottom-line growth.
Including the favorable impact of one-time items of $0.76, net income came in at $3.16 per share,
skyrocketing from $0.99 earned in the year-ago quarter.
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Provided below is the summary of EPS as compiled by the Zacks Digest
EPS (In $)
3Q14A
2Q15A
3Q15A
1Q16E
2014A
2015A
2016E
$2.20
$2.91
$2.40
$2.59
$9.21
$10.53
$10.45
$2.20
$2.91
$2.40
$2.42
$9.21
$10.24
$9.87
$2.20
$2.91
$2.40
$9.21
$10.43
$10.22
-24.1%
16.9%
9.2%
-9.8%
-4.8%
13.3%
-2.0%
-11.7%
4.3%
-17.5%
9.4%
Digest High
Digest low
Digest Average
YoY Growth
HSequential
i Growth
g
$2.52
2017E
Note: Blank cells denote brokers did not provide estimate
Highlights from the EPS table are as follows:
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2015 forecasts (total 3) range from 10.24 to $10.53; the average is $10.43.
2016 forecasts (total 3) range from $9.87 to $10.45; the average is $10.22.
Outlook
Per the Zacks Digest model, the firms expect 2015 EPS to increase on an improvement in net operating
income. However, the same is expected to decline in 2016 as net operating income decreases
Please refer to the separately published spreadsheet for additional details and updated forecasts.
Research Analyst
Copy Editor
Priyanka Bhattacharyya
Content Editor
Tanuka De
Lead Analyst
Sapna Bagaria
QCA
No. of brokers
reported/Total brokers
Reason for Update
Tanuka De
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