Can Prudential’s International Premiums Contribute 30% To Its Top Line By 2021?

Prudential Financial (NYSE: PRU) 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 individual and institutional customers with operations in the United States, Asia, Europe and Latin America. In the last three years, International Insurance Premiums have contributed around 27% of its top line – a figure that we believe will reach 30% in the next three years. Trefis has analyzed trends in Prudential’s International Insurance Premiums over recent years in an interactive dashboard, and also highlighted how these premiums for Prudential compare with those for peers Manulife and MetLife.

Trefis estimates Prudential’s valuation to be $112 per share (35% more than the current market price) after incorporating changes based on Prudential’s earnings release earlier this month. Additionally, you can see more Trefis data for Insurance companies here.

A Quick Look At Prudential’s Revenues:

Prudential Financial reported $63 billion in Total Revenues in FY 2018. This included 5 revenue streams

• U.S Workspace Solutions: $22.5 billion in FY 2018 (36% of Total Revenues) – This could be divided into two units –
  • U.S Group Insurance: Provides a full range of group life, long-term and short-term group disability, long-term care, and group corporate, bank- and trust-owned life insurance in the U.S
  • U.S Retirement Solutions: Offers retirement income products and services to employers who set up retirement plans like the 401(k) for the benefit of their employees.
• U.S Individual Solutions: $10.8 billion in FY 2018 (17% of Total Revenues) – This could be further divided into two sub-divisions –
  • U.S Individual Annuities: Offers variable and fixed annuity products to individual customers across the U.S
  • U.S Life Insurance: It provides individual variable life, term life and universal life insurance products
• International Insurance: $22.2 billion in FY 2018 (35% of Total Revenues) – Provides individual life insurance, retirement and related products to the mass affluent and affluent markets in Japan, Korea and other countries outside the U.S. This segment includes premiums & policy fees, along with the income generated from investment of segment premiums in bonds, equities and other products.
• Global Investment Management: $3.3 billion in FY 2018 (5% of Total Revenues) – This segment provides asset management services related to public and private fixed income, equity, real estate, commercial mortgage, and mutual funds.
• Corporate & Closed Block: $4.2 billion in FY 2018 (7% of Total Revenues) – The Closed Block business represents assets from participating individual life insurance and annuity products. Similarly, corporate operations consist of investment returns on capital not deployed in any business segments.

How Much Can Prudential’s International Insurance Premiums Grow Over The Next 3 Years?

• International Insurance Premiums should increase at an average annual rate of 2.5% to cross $18.3 billion by 2021. The growth would be driven by increased emphasis on global markets, especially in Asia-Pacific.
• We expect growth rate to be 6% y-o-y in 2019, before dropping to 0.7-0.8% for the next two as the deteriorating economic scenario would hamper growth in subsequent years.

What could impact International Insurance Premiums?

International Insurance Premiums are dependent on two drivers –

• International Insurance account balance: This driver has seen steady growth over the last three years. We expect the annual growth rate to be 7% for the current year, before dropping to 1.5% for the next two. Overall, it is expected to increase from $222.6 billion in 2018 to $245.8 billion by 2021.
• International Insurance Premiums as a % of account balance: We expect it to continue its declining trend and fall to 7.4% over the next three years from 7.6% in 2018.

A slight reduction in Total Revenues will result in the segment’s share of the top line increasing to almost 30% in the next three years

• We expect Total Revenues to witness a slight decrease over the next three years
• This would imply an increase in revenue share for the International Insurance segment from 27% in 2018 to almost 30% by 2021.

How Do Prudential’s International Insurance Premiums Compare With Peers Manulife and MetLife?

International Insurance Premiums:

• International Insurance Premiums are on a growth trajectory for all 3 companies, which is expected to continue over the next three years for Prudential as well as its main competitors
• The upward trend across the companies can be attributed to increased focus on emerging markets driven by low insurance penetration and improvement in per capital income.
• Although Prudential Financial topped the revenue chart in 2016-2017, Manulife overtook its position in 2018 with $21.3 billion in International Insurance Premiums
• We expect Manulife to continue its dominance over the next three years.

Segment’s share of the total Revenues

• Manulife is the most dependent on International Insurance premiums & fees revenue and its revenue share is expected to remain around 46% over the next three years. It must be remembered here that as Manulife is based out of Canada (unlike Prudential and MetLife, which are based out of U.S.), its International business includes its home market – explaining the higher contribution of the International (non-U.S.) business.
• Prudential Financial is expected to drive close to 30% of total revenues from international insurance premiums & policy fees over the same period.

Although Prudential Financial is expected to drive highest growth in 2019 due to increased focus on expansion in Asia-Pacific region, MetLife would lead on the growth parameter over the next two years.

Per Trefis, Prudential’s Revenues (shows key revenue components) are expected to cross $61.5 billion in 2019 – leading to an EPS of $12.47 for the year. This EPS figure coupled with a P/E multiple of 9.0x, works out to a price estimate of $112 for Prudential’s stock (shows cash and valuation analysis), which is 35% higher than the current market price.

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