Prudential 2016 Review: Earnings & Investment Income In Focus

by Trefis Team
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PRU
Prudential Financial
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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.

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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.
pru-18Prudential 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. pru-14We 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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