A Look At Prudential’s International Operations

Prudential Financial (NYSE:PRU) is one of the biggest life insurance companies in the world, with over $1.107 trillion of assets under management, ranking 12^th in the Towers Watson’s list of world’s largest money managers. ^[1] It is the third largest life insurer in the U.S., behind MetLife (NYSE:MET) and Aflac Group, with a market share of 6.14%. ^[2] Prudential has also established operations in some of the biggest markets in the world, including Japan, Taiwan, Italy, Korea, Brazil, Argentina, China, Poland, Mexico and South Korea.

Due to the nature of its insurance operations, we use a dividend discount methodology (DDM) to estimate the value of the company. Our $86 price estimate for Prudential Financial’s stock is in line with the current market price. In our last article, we took a look at Prudential’s U.S. Retirement business. In this note, we take a look at the company’s international operations, which accounted for more than 40% of its revenues in 2013.

See our full analysis of Prudential here

International Expansion

Prudential has been expanding its international operations over the last few years, with the 2011 acquisition of AIG’s (NYSE:AIG) Star Life Insurance Co., and Edison Life Insurance Company units. Revenues from international operations grew from $12 billion in 2010 to $29 billion in 2012, but fell to $22 billion in 2013 as the Japanese Yen weakened against the U.S. dollar.

Japan is a key market for Prudential, accounting for half of the net premiums, policy charges and fee income from international operations. The company entered the Japanese market in 1988, focusing primarily on the business and professional market as well as the mid-affluent to affluent customer base. However, it wasn’t until it acquired Gibraltar Life Insurance Company, Ltd., in 2001, that Prudential became a major player in the Japanese market. The acquisition allowed Prudential to expand its offerings to the mass middle market in the country. ^[3]

Japan is the second biggest life insurance market in the world after the U.S., accounting for 20% of the world’s premiums and more than half of the premiums originating in Asia. ^[4] Therefore, it is an important market for any company looking to make its mark in Asia. Insurance penetration, measured by taking premiums as a percentage of GDP, is quite high in Japan, close to 10%. ^[5] In comparison, the U.S. has a penetration of just 4%. Premium growth, measured in U.S. dollar equivalents, was close to 15% in 2010 and 2011. However, the weakening of the Yen has dampened growth in the last two years.

There are only 43 life insurance companies in Japan, a very small number for a mature market. In comparison, the U.S. has more than 800 life insurers while France has more than 250. Japan Post Insurance (JPI) dominates the Japanese life insurance market with more than 20% market share. ^[6] Nearly half of the insurers in the country are foreign-owned, operating as subsidiaries. Foreign-owned companies have a combined market share of close to 20% in the life insurance market in Japan.

Prudential primarily relies on its retail banking network for distribution activity, with sales made via insurance agents. This strategy is termed as “bancassurance” or The Bank Insurance Model (BIM), and has been quite successful in rapidly penetrating the market. The company has around 3,137 life planners in Japan and is expanding its bancassurance model to mega and regional banks, which currently encompasses over a hundred distributors across the country.

FX headwinds have affected Prudential’s earnings from Asian operations. For the December 2013 quarter premiums, policy charges and fee income from Japan were $1.5 billion on a constant currency basis, but just $1.2 billion on an actual exchange rate basis. Prudential employs a currency hedging program to counter the effects of FX fluctuations and reported a bottom line gain of $11 million due to this. For Asian operations, Prudential reported premiums of $4.3 billion on a constant currency basis but on an actual exchange rate basis, the figure was just $3.8 billion.

While Japan is the main focus of its international operations, Prudential is also looking to expand in other emerging markets including China, Argentina, Poland and Mexico. In China, Prudential holds a minority interest in China Pacific Insurance (Group) Co., Ltd., through a consortium of investors. The Chinese industry consists of 30 domestic companies and around 28 foreign joint ventures ^[7] including Manulife (NYSE:MFC) – Sinochem Life Insurance, MetLife (NYSE:MET) Insurance, American International Insurance, AEGON-CNOOC Life Insurance and CIGNA CMC. However, foreign ownership in insurance companies is limited to 50%. Companies with foreign ownership above 25% are considered joint ventures and are subject to special restrictions and regulations.  ((Foreign Insurance Companies In China, PWC, December 2012)) The market share of foreign life insurance companies peaked at 8.9% in 2005 but dropped to just 4.3% in 2012. However, insurance penetration is still quite low, below 2%. ^[5] The expanding middle class and huge customer base of over 1 billion provide potential for expansion in the country. However, regulatory hurdles might deter growth.

We believe Prudential is well positioned in key international markets. You can modify the interactive chart below to gauge the effect a change in forecast would have on our price estimate.

See More at Trefis | View Interactive Institutional Research (Powered by Trefis)
Get Trefis Technology

1. Top investment managers’ assets close to record levels, Towers Watson [↩]
2. NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS LIFE AND FRATERNAL INSURANCE INDUSTRY 2012 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM [↩]
3. Prudential Targets 19% Returns Outside U.S in 2013 [↩]
4. Swiss Re’s World Insurance [↩]
5. Swiss Re’s World Insurance and figures for GDP growth are taken from the World Bank’s website. [↩] [↩]
6. Life Insurance Business in Japan 2011-2012, The Life Insurance Association of Japan [↩]
7. Life Insurance In China, Forbes [↩]