Prudential Earnings: Higher Interest Income Offset by Lower Variable Investment and Fee Income

No-moat-rated Prudential Financials’ PRU first-quarter results marked the benefits of a higher interest rate environment that were offset by lower variable investment income, lower fee income, and elevated seasonal mortality experience. The company reported after-tax adjusted operating income of $990 million or $2.66 per share in the first quarter versus $1.19 billion or $3.10 per share in the first quarter of the previous year. The company paid a quarterly dividend of $1.25 per share in the first quarter, which represents approximately a 6% dividend yield as of the current stock price. We are maintaining our $105 fair value estimate for Prudential Financial after incorporating the first-quarter results.

Assets under management, or AUM, in the investment management business of the company were recorded at $1.27 trillion in the first quarter, down 10% compared with the $1.41 trillion in AUM a year ago. The decline in AUM was driven by higher interest rates, lower equity market valuations, and net outflows. The firm continued to record third-party net outflows for the third consecutive quarter as net flows were reported at negative $14 billion in the first quarter. The adjusted operating income in the investment management business was $151 million in the first quarter of 2023, compared with $188 million in the year-ago quarter, reflecting lower asset management fees due to a reduction in AUM.

The U.S. businesses of the company—including retirement strategies, group insurance, and individual life insurance—reported an adjusted operating income of $760 million in the first quarter compared with $813 million in the year-ago quarter. This U.S. business was impacted by lower net fee income and lower net investment spread results (due to lower variable investment income), partially offset by more favorable underwriting results in the overall segment.