How broad was the improvement in third-quarter earnings?

  • Prudential Financial reported third-quarter earnings per share of $ 3.77; core earnings per share, excluding unusual items, were $ 3.73, above Morgan Stanley’s estimate of $ 3.38 and the market consensus of $ 3.34.
  • Morgan Stanley believes that different factors drove performance across several major businesses, making this one of the company’s stronger quarters recently and providing further support for its bullish view of the stock.

What drove earnings in the U.S. businesses?

  • Adjusted operating income in the U.S. retirement business was 620 million dollars, above the market consensus of 591 million dollars. Higher spread income was the main driver, but the gains were partly offset by higher sales-related expenses, weaker underwriting performance in pension risk transfer, and lower earnings from joint ventures.
  • Adjusted operating income in individual life was 199 million dollars, above the market consensus of 151 million dollars. Reserve measurement adjustments resulted in more favorable underwriting results, and net investment spread income also increased.
  • Retirement annuity sales reached 3.9 billion dollars, up 15% year over year, setting a record for quarterly retail annuity sales since 2013. However, the U.S. retirement business as a whole posted net outflows of 976 million dollars during the quarter, compared with net inflows of 220 million dollars in the previous quarter.

What changed in asset-management flows?

  • PGIM’s adjusted operating income was 263 million dollars, above the market consensus of 255 million dollars, benefiting from higher asset-management fees, lower expenses, and savings from integrating its operating platforms.
  • Institutional clients recorded net inflows of 7.7 billion dollars and retail clients recorded net inflows of 1.3 billion dollars, both better than the market’s previous expectation of net outflows; affiliated accounts, meanwhile, had net outflows of 1.6 billion dollars.

Why does the Japan business continue to weigh on valuation?

  • Adjusted operating income in Japan was 559 million dollars, in line with Morgan Stanley’s estimate but below the market consensus of 588 million dollars, and down 25.5% year over year. The report estimates that the sales suspension at Prudential of Japan reduced earnings by about 140 million dollars.
  • Morgan Stanley maintained its Underweight rating and 100-dollar price target, below the closing price of 118.81 dollars on 3 November. The firm’s sum-of-the-parts valuation applies a multiple of 7 times expected 2027 earnings to the Japan business, a discount of about 40% to peers because of sales fraud in Japan and the sales suspension.