Prudential Financial's (
PRU
) stock has fallen by nearly 10% since the company reported a net
loss of net loss of $593 million for the third quarter of 2012 in
early November. Keeping in mind that the top-line was mostly
influenced by a $1.3 billion pre-tax net realized investment loss
which included a loss of $684 million from derivatives and hedging
activities, a currency fluctuation driven $521 million loss and
impairments and credit losses of $107 million, we believe that the
correction was overdone. Our price estimate of
$56 for Prudential's stock
implies a premium of nearly 10% to the current market price. Below
we take a look at some factors influencing our valuation for the
company.
See our full analysis of Prudential here
Business As Usual
Despite what the headlines read, Prudential actually had a solid
third quarter with a 50% year-on-year increase in premium income,
complemented by a 28% increase in policy fees. For the first nine
months of 2012, premium income increased by around 30% over the
same period in 2011.
Prudential primarily earns income from its international
operations in Japan, Taiwan, Italy, Korea, Brazil, Argentina,
Poland and Mexico under the name "Pramerica". The international
insurance division accounts for a third of the company's $50
billion revenues. Japan is currently the biggest bread-winner for
Prudential, accounting for 56% of the net premiums, policy charges
and fee income (see
Prudential To Expand Its Asian Reach With Japan As
The Fulcrum
for more details).
Prudential acquired Star Life Insurance Co., Ltd. and Edison
Life Insurance Company from AIG (
AIG
) last year, expanding its market share, in terms of new business
face amount, in the country from 7.3 to 10.4%. In the third
quarter, the popularity of the Single Premium Yen-based whole life
bank channel product led to a 20% increase in sales.
The company recently launched a life insurance joint venture -
Pramerica Fosun Life Insurance Company Ltd. - with Chinese
conglomerate Fosun International Limited. This seems like a wise
move: insurance penetration in China measured in terms of premium
income as a share of GDP is below 4%. In comparison, the insurance
penetration in a mature market like the U.K. is around 14%. Coupled
with the country's vast population of over 1 billion, this presents
significant potential for future growth. For more details see
our article Prudential Financial Ready To Enter China.
India also presents a huge opportunity for growth. The Indian
government has increased the limit for foreign direct investment in
insurance from 26% to 49%. The Union Cabinet recently approved the
proposal, and the bill is being taken up by the country's
Parliament. Life insurance penetration in India is around 4.4%. The
country's population is second only to China and its economy has
performed well despite the economic uncertainty in the U.S. and
Europe. Given these conditions, we believe it is only a matter of
time before Prudential looks to expand its joint venture with DLF
Group, DLF Pramerica Life Insurance Company Ltd. (DPLI).
We expect a steady increase in Prudential's share of the
international market on the back of expansion in emerging markets
like India and China and its reputation in more mature markets like
Japan.
Verizon A Done Deal
Group insurance is Prudential's second biggest insurance
division, accounting for about 10% of the company's net revenues.
The insurer recently completed a pension risk transfer agreement
with Verizon (
VZ
), covering approximately 41,000 members of Verizon's pension plan
and about $7.5 billion in pension liabilities. The agreement
follows the $29 billion deal with General Motors (
GM
) earlier this year. We expect more companies to follow the example
set by the two and transfer obligations to insurers. The Russell
1000 Index of large U.S. companies revealed a $435 billion gap
between pension liabilities and assets leaving a big hole for
insurance companies to fill.
Individual Life Helped By Hartford
Prudential is also expected to complete $615 million reinsurance
deal with Hartford Financial Services Group (
HIG
) in early 2013 whereby the later will transfer more than 700,000
life policies investment assets with a statutory book value of
around $7 billion, reserved for future claims on these policies to
Prudential. See our article How Does Prudential's Acquisition Of
Hartford's Life Insurance Business Affect Both Companies? for more
details.
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