Prudential’s Japan suspension threatens to overshadow record annuity sales

A sales suspension in Japan has become large enough to overwhelm otherwise solid operating progress at Prudential Financial, Inc. (NYSE:PRU). The insurer reported third-quarter net income attributable to the company of US$1.388 billion, down from US$1.431 billion a year earlier, while after-tax adjusted operating income, a non-GAAP measure, fell to US$1.321 billion from US$1.444 billion.

Japan sales suspension cuts into earnings

The sharpest deterioration came from Japan Businesses, where adjusted operating income fell to US$559 million from US$750 million. Prudential said the decline primarily reflected the impact of the Prudential of Japan sales suspension, including higher expenses and less favourable underwriting results, alongside lower net investment spread results. Constant-dollar sales dropped 36% to US$291 million.

That drag stands out against the rest of the operating portfolio. PGIM’s pre-tax adjusted operating income rose to US$263 million from US$244 million, helped by higher asset management fees and lower expenses. Third-party net inflows reached US$9.0 billion, including US$7.7 billion from institutional clients and US$1.3 billion from retail clients, although affiliated assets recorded US$1.6 billion of net outflows.

US annuity growth meets legacy run-off

US Businesses produced US$1.173 billion of pre-tax adjusted operating income, a modest decline from US$1.188 billion. Retirement account values increased 3% to US$363.7 billion, while total quarterly sales reached US$8.2 billion. Retail annuity sales contributed US$3.9 billion, including record Registered Index-Linked Annuities sales, according to the company.

The US result was less clean beneath the headline. Retirement earnings fell to US$620 million as higher variable expenses, lower joint-venture earnings and less favourable underwriting offset stronger net investment spread results. US Legacy Products earnings dropped to US$253 million from US$308 million, with net legacy annuity account values down 12% to US$71.8 billion as the traditional variable annuity block continued to run off. Individual Life was a brighter spot, with adjusted operating income rising to US$199 million from US$153 million.

Capital returns continue as book values diverge

Prudential returned US$741 million to shareholders in the quarter, comprising US$491 million of dividends and US$250 million of share repurchases. The quarterly dividend was US$1.40 per common share, while parent-company highly liquid assets stood at US$4.0 billion. Total assets under management edged up to US$1.616 trillion from US$1.612 trillion a year earlier.

The balance-sheet picture depends heavily on which measure is used. GAAP book value per diluted common share fell to US$84.88 from US$90.69, while adjusted book value per share, a non-GAAP measure, rose to US$102.39 from US$99.25. Prudential also reported US$368 million of pre-tax net realised investment losses and related charges in the quarter, including US$184 million of credit-related losses.