Prudential Earnings: Business Mix Continues To Shift Toward Lower Market Sensitivity

No-moat-rated Prudential Financials’ PRU second-quarter results were largely in line with our expectations. The company reported aftertax adjusted operating income of $1.09 billion or $2.94 per share in the current quarter, versus $0.89 billion or $2.34 per share in the prior-year second quarter. These second-quarter results reflect underlying business growth, benefits of a higher interest-rate environment, and favorable underwriting experience, which elevated expenses and lower variable investment income partially offset. The adjusted book value per share, which removes the impact of accumulated other comprehensive income, was reported at $97.38 per share versus $97.91 per share in the second quarter of the previous year. The company paid a quarterly dividend of $1.25 per share, which represents approximately 5.3% dividend yield as of the current stock price. We are maintaining our $105 fair value estimate after incorporating the second-quarter results.

We like the company’s strategy to shift its focus away from long-tail products, which are highly sensitive to capital markets. The company is reallocating more capital to increase earnings contribution from higher-growth and more stable businesses like group insurance, and investment management and reducing the earnings contribution from certain products that are more exposed to fluctuations in the capital markets. During the second quarter, the company executed two transactions that align with its long-term strategy of reducing market sensitivity and increasing capital flexibility. The company completed the insurance transaction for a $10 billion block of traditional variable annuities and received proceeds of $650 million. In addition to this, Prudential announced another transaction to reinsure a $12.5 billion block of guaranteed universal life policies and expects to receive approximately $450 million of proceeds when the transaction closes.