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Investment Overview for Prudential Financial (NYSE:PRU)
Below are key drivers of Prudential's value that present opportunities for upside or downside to the current Trefis price estimate for Prudential:
- Prudential's International Insurance Revenues: Prudential has established its brand in some of the large and growing insurance markets outside of the U.S. and is well positioned to benefit from the growth in these economies.
- A third of the company’s international premiums came from Japan, where currency fluctuations affected growth in 2013.
- During the fourth quarter of 2013, net premiums, policy charges and fee income on a constant exchange rate basis were $4.3 billion but on an actual exchange rate basis, the figure was just $3.8 billion.
- Premiums from the Japan were $1.5 billion on a constant exchange rate basis, but just $1.2 billion on an actual exchange rate basis.
- We expect the company to maintain a high single digit growth rate through the decade. There is a 10% upside to our price estimate, should the growth rate be above 12%. However, there is also a 10% downside, should currency fluctuations deter growth, keeping the growth rate below 5%.
- Prudential's Retirement Revenues: Prudential's revenues from retirement services increased at an annual rate of about 3.5% from 2007 to 2012. In 2012, Prudential signed pension transfer agreements with General Motors and Verizon, which accounted for $33 billion in retirement sales and deposits.
- The latest study by Mercer shows that pension plans funded ratio (assets to liabilities) is around 93%, compared to level of 74% at the end of 2012. But Prudential believes that there is still potential for further agreements with mid and large cap companies. During the December quarter, the insurer announced agreements with Bergmann Associates and LiveOps to manage the companies’ retirement plans.
- The US Department of Health & Human Services estimates that by the year 2020 16.1% of the population will be aged 65 and above compared to 13% in 2012.
- The growing number of people reaching retirement age will expand the market for retirement products and services.
- On the other hand, weak economic growth, high unemployment and rising inflation could significantly affect Prudential's ability to grow its retirement revenues. As seen in 2009, Prudential's retirement revenues could decline in the event of a double-dip recession. There could be a 10% downside to our price estimate if Prudential's retirement revenues decline to about $3 billion by 2018.
Prudential Financial, Inc. offers a wide array of financial products and services, including life insurance, annuities, retirement-related services, mutual funds, investment management, and real estate services to individual and institutional customers through proprietary and third party distribution networks. It has operations in the United States, Asia, Europe and Latin America.
Prudential's most valuable businesses are its international operations and retirement solutions and investment management in the U.S. The company offers individual life insurance, retirement and related products to the mass affluent and affluent markets in Japan, Korea and other countries outside the U.S. through its Life Planner operations.
Over 10% Growth in Individual Annuity Revenues
Despite the global economic slowdown, Prudential managed to grow its individual annuity revenues by over 10% during 2006 to 2012. Pension transfer agreements with GM and Verizon drove growth in 2012 and 2013. The company might be able to further drive revenues through such deals int eh coming years. We expect retiring baby boomers to fuel sustained growth in annuity revenues during our forecast period.
Over 10% Growth in International Insurance Revenues
Insurance penetration outside of the U.S. and Japan remains low and thus provides an opportunity for insurance companies. Global insurance premiums are likely to continue to grow over the long term. The recovery of financial markets will likely stimulate the growth of unit-linked products, thereby pushing up the sales of saving products and in turn boosting the premiums of insurance companies. The long term prospects for life insurance remain favorable in view of the expected global impact that the aging population will have on the demand for life insurance products.
Modest growth in life and health insurance market in the U.S.
Growth in the life and health insurance business continues to be impacted by the current higher levels of unemployment and it is possible that people may further reduce or eliminate coverage in response to the financial pressures they are experiencing. As a result we do not expect any significant near-term growth in the U.S. life and health insurance market.
Industry Consolidation to Improve Scale and Cost Effectiveness
In the retirement solutions market, Prudential competes with other large, well-established insurance companies, asset managers, and diversified financial institutions based on pricing, variety of investment offerings and investment performance. Since the variety of investment offerings cannot increase indefinitely and investment performance tends to be similar across large insurance companies, industry consolidation will help companies increase scale, improve cost efficiencies, and enter new market segments.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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