Prudential 2016 Review: Earnings & Investment Income In Focus

Prudential Financial‘s (NYSE:PRU) stock is up about 30% year-to-date (YTD) driven by robust third quarter earnings which followed mixed first and second quarter results. In the first nine months of 2016, the company’s revenues increased by 8% year-over-year (y-o-y) owing to a 15% increase in premiums earned and higher income from asset management services, partially offset by lower policy charges and fee income.

Despite the top line gains, Prudential’s post-tax adjusted operating income declined by about 20% y-o-y to $3 billion or $6.67 a share in the first three quarters of 2016, driven by lower margins in the Life Insurance and International insurance divisions.

Net Investment Income

In the first nine months of 2016, Prudential’s net investment income grew by 4.5%, even though its net investment income yield declined by 11 basis points to 3.72%. This was due to a slight decline in investment yield on both the fixed maturity securities as well as mortgage loans.
Prudential has considerable exposure to fixed maturity securities in the U.S., U.K as well as the rest of Europe. Post-Brexit, the yield on the 10-year U.S. treasury note fell below 1.5% for the first time since 2012, yields on U.K. benchmark government bonds fell below 1% for the first time on record and 10-year government bond yields in Germany ended below 0%. Other developed economies such as France, Sweden, Switzerland and Japan all touched all-time lows.

The fall in investment yields is likely to have a considerable impact on Prudential’s valuation, considering that investments contribute over 20% of the company’s valuation, per our estimates. We expect Prudential’s yield on U.S. retirement assets to decline to around 0.8% by the end of our forecast period. Owing to persistent low interest rates and falling government bond yields, there could be a downside of about 10% to the company’s valuation if its yield on U.S. retirement assets declines to about 0.7%.

Please refer to our complete analysis for Prudential Financial here.

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