A Look At Prudential’s Key Sources Of Value

Prudential Financial (NYSE: PRU), one of the leading insurance companies in the world, is structured into four major segments – U.S. Individual Solutions, U.S. Workplace Solutions, International Insurance, and Investment Management. Below, we expand on these segments, their historical performance, and our expectations going forward.

• U.S. Individual Solutions conducts its operations via two businesses – Individual Annuities and Individual Life. Individual Annuities business provides variable and fixed annuity products to U.S. mass affluent and affluent markets. Individual Life offers universal life, term life, and variable life insurance products to U.S. mass middle and affluent markets. The business has remained fairly stable for the past few years, with 2017 experiencing just 0.6% revenue growth. The individual annuities business did well on account of higher average variable annuity account due to market appreciation, which drove up the asset-based fee income and policy fees. However, the growth was partially offset by the subdued performance of individual life business, which saw a 7.1% decline in revenue because of the high cost of reinsurance premiums.
• U.S. Workplace Solutions manages its operations via two businesses – Retirement and Group Insurance. Over the last few years, this division has been the standout performer for the company. The 6% revenue growth in 2017 was driven by new pension risk transfer transactions and growth in new business in both the group life and group disability business. Furthermore, higher income on non-coupon investments and higher AUM fueled the growth in net investment income.
• International Insurance, the company’s largest segment, covers individual life insurance, group life insurance, and retirement products. Driven by higher premiums and policy charges and fee income, revenue from its Life Planner operations increased $658 million in 2017. However, a net unfavorable impact of currency fluctuations meant that revenue from Gibraltar Life and Others decreased $107 million. Overall, revenue from the segment grew 2.6% year-over-year.
• Investment Management offers asset management services and mutual fund services for public and private fixed income, public equity, and real estate. Positive net inflows, market appreciation, and fee rate modification in real estate funds drove the 13.3% growth in revenue.

We have created an interactive dashboard analysis that shows Prudential’s key revenue sources and the expected 2018 performance. You can adjust the revenue drivers to see the impact on the overall revenues, EPS, and price estimate.

U.S. Workplace Solutions Segment May Not Reach The Levels Of 2017

Surprisingly, Prudential did not convert any Pension Risk Transfer (PRT) transactions in the first quarter of 2018. It is one of the leading companies in the PRT market, and has over $65 billion in funded pension account values. Also, the company has significant penetration in the U.K. PRT market. The company realized over $9 billion of positive net flows in 2017. Meanwhile, out of $6 billion of new funded pension risk transfer cases, $3.3 billion was  achieved in Q4’17 alone. While this level of success may not be repeatable in the coming quarters, we still expect that Prudential’s expertise in such transactions will fetch high-level deposits given that plan sponsors are getting increasingly interested in PRT transactions. That said, the company saw net outflows in investment-only stable value business, and this will likely continue in the near term. The Group business should continue to see positive growth on the back of solid sales of both group life and group disability products.

Soft Results Of Individual Life Insurance Will Be Offset By Solid Individual Annuity Results

The decline in guaranteed universal life sales has resulted in soft results for the Individual Life business, and we expect 2018 to be no different. However, efficient pricing will likely drive growth in HDI sales and should offset the aforementioned decline. Meanwhile, the company has been able to extract higher than expected returns from non-coupon investments. Given that PGIM, the company’s investment management division, has outperformed many of its peers of late, and that AUM for the division has been on an upward trajectory, we anticipate growth in net investment income and asset management fees for the U.S. Individual Solutions segment.

International Insurance To Experience Modest Growth

International Insurance Segment is Prudential’s largest segment, contributing about 36% of total revenue. Although sales in Japan, the largest market for Prudential in Asia, have saturated, the company’s efforts to increase sales of USD-denominated products have reduced the volatility. We expect this strategy to boost the sales of Gibraltar Life products. Also, the company continues to expand in China, Malaysia, and Brazil. With lower life insurance penetration in markets such as Malaysia, there is definite potential for growth.

We maintain our $118 price estimate for Prudential Financial, which is ahead of the current market price. Disagree? Detailed steps to arrive at Prudential’s price estimate are outlined in our interactive dashboard, and you can modify our assumptions to arrive at your own estimate for the company.

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