Prudential Financial Earnings: Higher Investment Spreads Drive Strong Quarter

No-moat-rated Prudential Financial PRU posted a good set of numbers in the third quarter. Aftertax adjusted operating income was $1.26 billion, or $3.44 per share, versus $0.89 billion, or $2.37 per share, in the year-ago quarter. These results reflect the benefits from higher interest rates, more-favorable variable investment income, and underwriting experience, partially offset by lower fee income. Adjusted book value per share, which removes the impact of accumulated other comprehensive income, was reported at $94.20, down 2.3% from $96.40 in the third quarter last year. Prudential paid a quarterly dividend of $1.25 per share, which represents approximately a 5.4% dividend yield at the current stock price. We are maintaining our $105 fair value estimate after incorporating third-quarter results.

Prudential and Warburg Pincus recently announced the launch of Prismic Life Reinsurance, a life and annuity reinsurance company. Prudential and other investors have made an equity investment of around $1 billion in the entity. Prismic and Prudential have done a $10 billion initial reinsurance transaction, in which the newly formed entity will reinsure a block of Prudential’s structured settlement annuity contracts. The Prismic transaction is in line with management’s strategic objective of reducing Prudential’s market sensitivity.

Prudential’s U.S. business, which includes retirement strategies, group insurance, and individual life insurance, reported adjusted operating income of $1.09 billion in the third quarter compared with $0.62 billion a year ago. Results were driven by higher net investment spread results and lower expenses, partially offset by lower net fee income.

The international business reported adjusted operating income of $811 million compared with $748 million a year ago, primarily due to higher net investment spread results.