How Has Prudential Financial’s U.S. Retirement Business Fared Over The Years?

by Trefis Team
Prudential Financial
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Prudential Financial (NYSE:PRU) is a financial institution that 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 its clients. Notably, the company reported a 33% jump in U.S. Retirement Premiums & Policy Fees in 2018, which was 3x the average annual growth reported over the previous two years. Trefis has analyzed the growth in Prudential Financial’s U.S Retirement Premiums & Policy Fees over recent years in an interactive dashboard, parts of which are highlighted below.

U.S. Retirement is the second-highest contributing segment for the company and drives more than 20% of Prudential Financial’s revenues. This makes the segment’s Premiums & Policy Fees a very important metric to measure its growth. Trefis has a price estimate of $108 for Prudential Financial’s stock, which is 15% ahead of the current market price.

What Does U.S. Retirement Segment Offer?

  • U.S. Retirement Segment is a subdivision of U.S. Workspace solutions.
  • It offers retirement income products and services to employers who set up retirement plans like the 401(k) for the benefit of their employees. The end users include public, private and not-for-profit sectors.
  • It generates revenue from Premiums (associated with insurance, reinsurance contracts and payout annuities.), Policy Charge & Fee Income, and Investment Income.

Details about the individual revenue streams of Prudential Financial along with our forecast for the next three years are available in a separate interactive dashboard.

What Happened?

  • U.S Retirement Premiums and policy fees grew at an average annual rate of 10% over 2015-2017.
  • However, it recorded an increase of 33% from $9.4 billion in 2017 to $12.4 billion in 2018.
  • This was more than 3x the average annual growth rate recorded over 2015-2017

Why Did It Happen?

U.S Retirement Premiums & Policy Fees = (U.S Retirement account values)* (U.S Retirement Premiums & Fees as % of account values)

  • Premiums & Fees as % of account values have increased form 4.3% on 2015 to 5.1% in 2017 and averaged around 4.8% over the same period.
  • On the other hand, U.S Retirement account values have fluctuated between $173.5 billion and $183.6 billion over 2015-2017, with an average value of $178.9 billion.
  • In 2018, Prudential Financial took over the management of pensions for several entities from its competitors – boosting its retirement business substantially
  • The division’s account values don’t reflect this gain, though, as they decreased 4% y-o-y in 2018 due to a reduction in market valuation across asset classes.

So What?

  • Percentage share of U.S Retirement Premiums & Policy Fees in total revenues increased from 13.5% in 2015 to 15.7% in 2017.
  • This % share saw a jump of 410 bps in 2018 due to growth in segment premiums & policy fees.
  • As Prudential Financial generates part of its segment revenues by investing the segment insurance premiums in different securities, more premiums would mean higher corpus for investment and hence better investment income.
  • This is also evident from 350 bps increase in % share of U.S. Retirement in total revenues from 23.2% in 2017 to 26.7% in 2018, a trend we believe will continue over coming years.

Per Trefis, Prudential Financial’s Revenues (shows key revenue components) are expected to cross $62.1 billion in 2019 – leading to an EPS of $12.15 for the year. This EPS figure coupled with a P/E multiple of 8.9x, works out to a price estimate of $108 for Prudential Financial’s stock (shows cash and valuation analysis) which is 15% higher than the current market price. Our price estimate takes into account Prudential Financial’s earnings beat for the third quarter of 2019.


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