After Prudential Financial (PRU -0.23%) reported its second-quarter results, its management team shared some important information with investors during the subsequent conference call. Here are the key takeaways for long-term shareholders.
1. The core business is performing well despite an unfavorable interest rate and foreign exchange environment.
Prudential reported strong second quarter results driven by solid fundamentals across our businesses. We achieved operating earnings per share of $2.62 after adjusting for market-driven and discrete items, representing a 4% increase over prior year earnings. This quarter's ROE is in excess of 15% as we continue to outperform our longer-term target of 13% to 14%. Our operating results reflect solid core growth fundamentals across many of our businesses and favorable underwriting margins, which more than offset the headwinds presented by continuing low-interest rates and adverse currency impacts.
Prudential's more than 15% return on equity is particularity impressive, especially considering that historically low interest rates are making it difficult for the company to earn adequate returns on its fixed-income investment portfolios. And with the Federal Reserve appearing to be edging closer to raising rates here in the U.S., Prudential's profitability could be about to receive a boost.
2. Prudential's U.S. individual life insurance business is delivering solid growth.
Our Individual Life Insurance business produced 26% sales growth over the prior year. This was accomplished while achieving appropriate returns and meeting product diversification targets.
Prudential delivered impressive performance in its individual life insurance business, with U.S. sales jumping 26% year over year to $130 million with increases across its universal, term, and variable life product lines.
3. Retirement solutions and asset management are also important growth drivers.
We are pleased with the core growth drivers across our enterprise. Retirement and Asset Management both had $6 billion of positive net flows. Retirement benefited from pension risk transfer cases that closed in the quarter and Asset Management continues to attract assets based on its strong investment performance and proven capabilities.
Prudential is successfully striking deals with large corporations that help to mitigate the risk in their pension plans, with "four significant pension risk transfer transactions" helping to contribute $5.7 billion of retirement net inflows in the second quarter. Institutional and retail assets under management also benefited from net inflows, to the tune of $6.4 billion during the quarter.
All told, retirement account values rose 13% year over year to $372.6 billion and institutional and retail assets under management increased 6% to $471.1 billion. Rising AUM leads to higher asset-based fees, which should help to propel Prudential's revenue and earnings in the years ahead.
4. Prudential has completed its integration of The Hartford Life.
And in Individual Life, we absorbed integration costs of about $0.01 per share related to The Hartford Life acquisition. The current quarter marks the substantial completion of the business integration and these costs. Over the two-and-a-half years since the acquisition, we have integrated the distribution platforms and product portfolios and achieved our targeted $90 million of annual run rate cost savings, with the full impact commencing in the third quarter of this year. Total integration costs amounted to $110 million or $10 million less than our original expectation.
With a demonstrated ability to successfully integrate acquisitions in its insurance operations as well as other areas of its business, expect Prudential to seek to acquire more complimentary businesses for which it can expand revenue via its powerful sales and marketing platform and boost profitability by streamlining operations.
5. Prudential's strong cash flow generation gives it multiple ways to create shareholder value.
Overall, as we look at our businesses and our opportunities for measured growth, we remain confident that we will continue to produce strong earnings that will generate substantial deployable capital that can be used to support outsized organic and inorganic growth initiatives and returns of capital to shareholders through dividends and buybacks all while maintaining a strong balance sheet. Recall that we believe our business model generates cash flow equal to about 60% of operating earnings over time.
In addition to the cash used to fund growth initiatives and acquisitions, Prudential is attempting to generate value for its shareholders through share repurchases and dividend payments. The company acquired 2.9 million of its shares during the second quarter and nearly 60 million since Prudential began its share repurchase program in July 2011, which has helped to significantly lower the company's share count and thereby boost earnings per share. And with its stock currently yielding more than 3%, Prudential's dividend will also be an important aspect of its total shareholder return in the years ahead.