Prudential Profits Rise on Overseas Gains

Posted on Nov 04, 2011 by Sergio Ulloa (G+)

Prudential Financial Inc, one of the world's largest life insurers, has posted a 23 percent rise in third quarter profit. Prudential has attributed much of its growth in the past year to the particularly robust performance of its Asian operations, and has been looking to further develop its business in the region to better protect itself against the market turmoil currently engulfing the United Sates and Europe. In an interim statement released by the Newark, New Jersey-based company today, net income rose to US$1.53 billion on nearly US$10 billion in revenue for its third quarter reporting period ending September 30th. This was up from US$1.24 billion in income claimed for the same period a year earlier. Earnings per share were US$3.06, compared to just US$2.46 last year. Despite this double-digit growth in profits however, Prudential's after-tax adjusted operating income, which excludes certain one-time losses or gains before the company went public as well some other investments, fell to US$520 million from US$1.004 billion during the third quarter in 2010, a considerable 48 percent decline. Earnings per common share based on the adjusted operating income thus were US$1.07, compared to US$2.12 last year. Overall, Prudential's returns fell short of market analysts' expectations, as charges chipped away at overall operating income. Analysts had predicted earnings of US$1.53 per share. John Stangfield, Prudential's chairman and CEO, dismissed analyst estimates and explained in the statement that given volatile market conditions, the company had done admirably. "While our third quarter results reflect the turbulent financial markets, underlying performance of our businesses was solid," Stangfield said. The CEO explained furthermore that Prudential's business performance in the U.S. retirement market and abroad would continue to grow, and would be complimented by the integration of the two new Japanese businesses acquired earlier in the year from the American International Group (AIG). "Looking forward, we are confident that we can continue to execute our strategies successfully, and we believe our balanced mix of businesses and risks support our ability to achieve our long term objectives over a variety of market conditions," Stangfield added. Prudential's confidence is founded on the back of their recent performance in the international insurance segment, which reported adjusted operating income of US$751 million for the third quarter. This was up almost 40 percent from US$540 million a year ago, due primarily to organic global business growth and a US$79 million boost from operations of the recently purchased Japanese businesses. These results were further amplified by the strengthening of the Japanese yen versus the dollar and interest-rate derivatives, which buoyed investment gains. In February, Prudential Financial bought two Japanese firms, Star Life Insurance Co. and Edison Life Insurance Co, from AIG in a US$4.8 billion deal, in order to expand their presence in the world's second largest life insurance market. The dual acquisition was funded through US$4.2 billion in cash and a further US$0.6 billion in third-party debt. The deal had been under discussion since September 2009 and will compliment Prudential existing business platform in Japan, which has now been active for over two decades. According to the company spokespeople, the addition of the Star and Edison operations will solidify Prudential's status as one of the top foreign life insurance companies in Japan based on in-force policy values, and will enable the firm to bring their products and services to more customers throughout the Asia Pacific. For AIG meanwhile, the capital raised from the sale of their two former Japanese life businesses will be allocated towards paying back the US$182 billion loan they received from the US federal government in 2008 to bailout the international insurer from financial insolvency in the aftermath of the global financial crisis. AIG and the US government recently agreed terms for the insurer to pay back the remaining US$21 billion owed. As part of the takeover, AIG's Star Life Insurance and Edison Life Insurance have been made of subsidiaries of Gibraltar Life Insurance, Prudential's pre-existing brand in Japan. So far, the bancassurance channels between the two companies have integrated, and the full cut-over of Star Life and Edison Life's core businesses is expected by early 2012. Existing AIG Star Life Insurance and AIG Edison Life policyholders have not been affected by the change in ownership. According to Prudential Financial Vice Chairman Mark Grier, the gradual integration of AIG's Japanese assets has gone smoothly thus far, enabling the insurer to maintain their ambitious growth strategy in the country. Although the Japanese life insurance market is mature and highly concentrated, there is plenty of room for Prudential to grow because around US$10 trillion is held in savings accounts and deposits in Japan. The Asia Pacific country accounted for 18 percent of the world's cumulative life insurance policy sales in 2010, according to a Swiss RE study. The next major Asian market on the horizon for Prudential Financial appears to be China. In August, the US-based financial group received regulatory approval from the China Insurance Regulatory Commission (CIRC) to acquire a maximum 50 percent stake in a life insurance company sponsored by Fosun Group, China's largest private investment conglomerate. This will be the second business partnership embarked on by these two groups in the past year. In January the two firms agreed to form a US$600 million private equity fund, which has enabled Fosun to better develop its financial services arm. The new Shanghai-based joint venture expects to launch within the next 12 months. Now Prudential Financial will be given the opportunity to establish a presence in the country's CNY1 trillion (US$156 billion) life insurance market. Prudential will be entering a Chinese life insurance market lead by China Life, Ping An Life and China Pacific. These entrenched state-owned companies have extensive strength in terms of branding and infrastructure and operate on a tremendous scale even by the standards of the multinational insurers originating from mature Western markets. The Chinese life insurance market is fast moving however and there has been increased competition in recent years as local and multinational insurers (28 foreign players at last count) attempt to strengthen their reach in the country. While overseas companies are permitted to enter the Chinese insurance market on their own, they are faced with considerably more obstacles, including a more active regulatory authority, entrenched business interests and different cultural norms. This has lead many foreign insurance companies in China to instead pursue success through direct investment and establishing join venture partnerships alongside preexisting local insurers and banks, as Prudential Financial now appears to be doing. The emerging insurance markets in Asia are now widely expected to outperform those in the West, with the likes of China and India leading the way. Insurance Companies Mentioned Prudential Financial Inc. Prudential Financial Inc. is a financial services leader, with approximately US$750 billion of assets under management as at September 2010. Prudential Financial operates in the United States, Europe, Latin American and Asia, with approximately 42,000 employees worldwide AIG The American International Group is a leading international insurance organization with operations in more than 130 countries and jurisdictions globally.