Prudential Financial (NYSE:PRU) is one of the largest financial organizations globally, offering a wide range of insurance products and services around the world. Although the company reported a loss of $988 million for the first quarter of 2012, we maintain a positive outlook for the company (See Prudential Worth $54 Despite Group Insurance Underperformance). Our price estimate for Prudential’s stock is $54.02, which is 15% above the current market price, and we discuss below a few important factors that have influenced our valuation.
U.S. Retirement Figures Set to Grow
- What Was Prudential’s Operating Margin By Business Segment In Q1?
- What Was Prudential’s Revenue And Operating Income Breakdown By Operating Segment In Q1?
- Prudential’s Q1 Earnings Drop On Lower Premiums, Investment Gains
- What Is Prudential’s Fundamental Value Based On Expected 2016 Results?
- How Much Did Prudential’s Revenue & EBT Grow In The Last Five Years?
- How Has Prudential’s Revenue Composition Changed In The Last Five Years?
Prudential is one of the largest providers of retirement products in the U.S. and will look to leverage its brand image and reputation to capitalize on the increasing number of people approaching retirement in the U.S. We believe that the growing awareness among the youth in the country (See Hartford Financial Targets Youth To Drive Retirement Plans) coupled with the onset of the retirement age for the baby boomers generation will lead to increased annuity sales. U.S retirement solutions is a major source of revenue for Prudential, and the division accounts for 35% of our price estimate and has been performing well in the last few years.
Expansion in Emerging Markets
A period of economic growth in emerging markets, particularly in Asia, provides huge growth potential for Prudential, which is looking to expand its operations in the geography in the coming months. (See Prudential Sharpens Focus on Asian Growth Potential) The company has already established a solid base in the region with strong operations in Japan and Korea. We believe that Prudential will see steady growth in revenues generated from its international insurance business, which accounts for 33% of our price estimate.
Restructuring in Group Insurance…
The group insurance division, which accounts for 5% of our price estimate, showed lackluster performance in Q1 2012 and was the primary reason for the dip in Prudential’s earnings during the period. We expect structural reforms and innovations in products and offerings such as the inclusion of dental coverage will help in turning around the division’s performance. (See Prudential Looks To Boost Group Insurance By Including Dental Coverage)
Dental insurance is a much sought-after product as oral hygiene is considered to be very important to the U.S. customers. Prudential has established a solid base of operations for this offering, with over 190,000 provider locations throughout the country. Group insurance has performed well historically, and we expect an increase in revenues generated through this division.
… And in Life Insurance
Prudential has built a strong reputation in the U.S. as a leading provider of life insurance products. Although the division has been profitable, the company has undertaken some reforms, such as the discontinuation of long-term coverage to sustain the performance of this division (See Prudential Exits Individual Long-Term Care Market).
The management of long-term care policy was quite tricky as it was difficult to estimate the cost of care or life expectancy of customers opting for this coverage. Prudential has assumed the longevity risk , faced by an insurer when a customer lives longer-than-expected, from Rothesay Life. This risk helps Prudential counter the mortality risk it faces in the life insurance market. (See Prudential Assumes Longevity Risk of Rothesay Life) We expect these measures taken by the company to have a positive impact on the revenues generated through the Individual Life Insurance division.