Prudential To Expand Its Asian Reach With Japan As The Fulcrum

Prudential Financial (NYSE:PRU) is looking to expand its international operations, focusing on growth in Japan. ^[1] 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. 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. In 2011, Prudential acquired Star Life Insurance Co., Ltd. and Edison Life Insurance Company from AIG (NYSE:AIG) which was looking to divest non-core businesses. These businesses were merged with Gibraltar Life, earlier this year and allowed Prudential to expand its market share in terms of new business face amount from 7.3%, per-acquisition to 10.4%, post-acquisition.

We have a price estimate of $56 on Prudential’s stock, in-line with the current market price.

See our full analysis of Prudential here

How Big Is The Opportunity For Growth

Japan is currently the world’s second largest life insurance market, with premiums worth $525 billion in 2011. The investable asset pool of currency and deposits, at $10.9 trillion, is the largest in the world about 50% higher than the U.S. However, the Japanese insurance market is quite mature and highly saturated, with intense competition from government supported life insurance cooperatives and postal insurance entities.

With intense competition, and the similar nature of products offered by various companies, distribution is the most important factor affecting penetration. Prudential primarily relies on 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.

Japan is currently the most important part of Prudential’s international business, as Gibraltar Life operations accounted for 56% of the net premiums, policy charges and fee income of the International Insurance segment in 2011. The growing demand for retirement and savings products as well an observed increase in perceived need for death protection following last year’s earthquake and tsunami provide potential for growth in the country. Prudential is targeting 19% return-on-equity in its international business, and we believe it is on the right track.

Growth Outside Japan

Apart from Japan, Prudential also operates in international markets like Taiwan, Italy, Korea, Brazil, Argentina, Poland and Mexico. The company has recently entered two of the fastest growing economies, India and China. In India, the company entered a joint venture as DLF Pramerica, with 26% interest, the maximum foreign investment currently allowed by the government. Regulations are expected to be eased in the future which would allow the company the expand into the high-growth market, which provides huge potential with a huge customer base and a rapidly growing middle class income sector. In China, Prudential holds a minority interest in China Pacific Insurance (Group) Co., Ltd., through a consortium of investors. With around one-third of the world’s population in these two economies, the growth potential in the future is quite high, but is still subject to government regulations. We will keep a close eye on developments in the future.

International insurance is the most important driver for Prudential’s stock, accounting for 62% of our price estimate.

You can gauge the effect of a change in Prudential’s share of the international market by modifying the interactive charts above.

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1. Prudential Targets 19% Returns Outside U.S in 2013 [↩]