Potential upside & downside to trefis price
Prudential Financial Company
- International Insurance constitutes 38% of the Trefis price estimate for Prudential Financial's stock.
- U.S. Individual Solutions (U.S. Life Insurance, U.S. Individual Annuities) constitute 23% of the Trefis price estimate for Prudential Financial's stock.
- Investment Management constitutes 21% of the Trefis price estimate for Prudential Financial's stock.
WHAT HAS CHANGED?
Latest EarningIn Q2 2021, Prudential Financial reported Total Revenues of $15.9 billion, which is 31% more than Q2 2020. This could be attributed to a 7% y-o-y gain in the net investment income and a 21% increase in asset management fees, partially offset by lower total premiums and policy fees. Notably, Net Realized investment gains (losses) increased from -$3.75 billion in Q2 2020 to $635 million in the quarter.
Impact of coronavirus outbreakPrudential Financial has suffered as states and countries were on lockdown due to Coronavirus pandemic. This resulted in lower premium revenues for the company as business and individuals were more focused on the short term. In addition to this, the insurance companies are heavily dependent on income from investment of insurance premiums for their profitability, which slightly suffered in 2020 due to lower interest rate environment driven by the economic slowdown. While, the FY2020 revenues were down 12% y-o-y, we believe the company’s results for full year 2021 will see some improvement due to recovery in the economy.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICEBelow 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.
- We expect the company to maintain a high single-digit growth rate through the decade. There is a near 10% downside, should currency fluctuations deter growth, keeping the growth rate at around 2-3%. However, there is a near 10% upside to our estimate if the company posts high annual growth of over 13-15%.
- 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 issued a group annuity contract worth approximately $29 billion to General Motors in June and followed it up with another agreement with Verizon covering approximately 41,000 members of Verizon’s pension plan and about $7.5 billion in pension liabilities. Between 2014 and 2017, Prudential entered more such deals, although not as big taking its revenues from this division to $9.4 billion in 2017.
- The U.S. 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. This will be over 20% by 2023.
- 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 less than $7 billion by 2023.
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.
SOURCES OF VALUEPrudential’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% between 2006 and 2012. Pension transfer agreements with G.M. and Verizon drove growth in 2012 and 2013. The company was also able to bag a few small deals between 2014 and 2017. The company might be able to further drive revenues through such deals in the 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 boosting the premiums of insurance companies. The long-term prospects for life insurance remain favorable, given 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 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, the 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.