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Prudential Financial (PRU) |
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WIKI ANALYSIS
This article is about the US insurer. For the British insurance company, see Prudential (LON:PRU).
Prudential Financial Inc. (Public NYSE: PRU) is one of the largest group and individual life insurance providers and variable annuity distributors in the United States. Prudential makes money through fees charged to its customers whom are insured by Prudential and through extra returns it generates above its liabilities. The company has three main business segments: Individual Annuities, Retirement, and Asset Management. Prudential recorded a total revenue of $38.4B and net income of $3.2B for the full year 2010.[1]
In order to expand beyond the US, Prudential has developed a "life planner" model. This system is active in Korea and Japan, and Prudential is cautiously exploring expansion to Mexico, China, and India.[2]
Business Segments
Prudential Financial operates a highly diversified business platform within the insurance industry. The company earns revenue through product sales of life insurance and annuities as well as asset management. It operates both domestically and in Korean and Japan, targeting both individual households and groups. Its product offerings, geographic footprint and customer mix allows Prudential to spread exposure across a wide base of operations.
For the fiscal year 2010 ended in December 2010, Prudential Financial reported a total revenue of $38.4B and net income of $3.2B for the full year 2010.[1]
US Retirement and Investment Management (33% of Revenue, 50% of Net Income in 2010)[3]
Prudential’s US Retirement a nd Investment Management division is made up of three segments: Individual Annuities, Retirement, and Asset Management. Although not the largest in terms of revenue, the division contributes the largest percentage of net income in 2009.
- Individual Annuities: [4] [3] This segment creates and sells individual variable and fixed annuity products. It differentiates itself from others by offering innovative and less expensive products.[5]
- Retirement:The Retirement sub-segment provides retirement-plan products and services such as record keeping, plan administration, actuarial advisory services, tailored participant education institutional and retail investment funds to public, private, and nonprofit organizations. Management has positioned Prudential to benefit from aiding baby boomers transition from the workforce to retirement. To close the gap between retirees and inefficiencies in pension plans provided by the government and corporations, Prudential will be able to provide annuities and other payout options.[6]
- Asset Management: The products provided by the Asset Management sub-segment include private individual and mutual fund investment management and financial advisory through structured distribution. In addition to private individual and mutual fund clients, Prudential markets its products in public and private marketplaces, utilizing the Financial Advisory and Retirement sub-segments in addition to the Insurance, and International Investment and Insurance segments as cross selling opportunities. Other products that Prudential’s Asset Management sub-segment deals in are public and private fixed income, public and private equity, commercial mortgage origination, servicing and securitization, and proprietary investments.[7]
US Individual Life and Group Insurance (27% of Revenue, 14% of Net Income in 2010)[3]
The Insurance division is divided into two sub-segments: individual life and group insurance.
- Individual Life: This segment makes and sells individual variable life, term life and universal life insurance products for middle and upper class Americans. These products are sold either by Prudential agents or through third party avenues such as various financial planners, brokers, and banks.[8]
- Group Insurance: The Group Insurance segment provides products to institutional clients such as group life, long and short term group disability, long-term care, and corporate/trust owned life insurance for use with employee and membership benefits. Because the industry in which this segment competes is mature, there is a high degree of price competition in addition to brand recognition, customer service and product offerings.[9]
International Investment and Insurance (40% of Revenue, 36% of Net Income in 2010)[3]
The International Investment and Insurance division operates in many non-US countries, but focuses on Japan and Korea as well as other South East and East Asian Countries. This division is broken down into two segments: International Insurance and International Investment. Because it is based outside the US, the financial crisis has largely unaffected this division as revenue and net income have continued to rise.[10]
- International Insurance: Prudential’s International Insurance sub-segment runs similarly to the individual insurance sub-segment in the United States, providing much of the same services through agents called “life planners” to Korea and Japan.[11]
- International Investment: This segment offers both proprietary and non-proprietary asset management, financial advice and financial services to institutional and retail clients. In addition to South and East Asia, this segment has expanded its operations through acquisitions and joint ventures with organizations in countries such as Brazil and Italy.[12]
Trends and Forces
Robustness and Accuracy of Insurance Models
Perhaps more so than other industries, the insurance industry is extremely sensitive to how accurately a model can forecast risk. Insurance itself is a premium that an individual pays to guard against risks and potentially unfavorable outcomes. Companies create models to determine a particular client's or scenario’s level of risk. However, it is difficult to build parameters in these risk models for natural disasters, terrorist attacks, spread of disease, and other events are not always able to be predicted accurately and as a result, insurance companies will always run the risk of defaulting on its claims. Additionally, how accurately a company is able to profile a client’s risk to the company through the modeling will determine the financial health of the company; for instance, if low premiums are offered to a high risk life insurance clients, the mortality rate will cause more claims to be made than the income of premiums can support. Therefore, as long as the companies can identify high risk clients from low risk clients and assign sliding menu costs accordingly, the company will receive efficient net revenue from its premium payments.
Interest Rates
Generally speaking, interest rates will affect any firm involved in any type of investment or firm that issues corporate debt or equity. Changes in the interest rate will invariably change the fundamental values of both equity and debt, since the fundamental value of debt is determined by the time weighted average of payments discounted by current short or long interest rates, and the fundamental value of equity is determined by the value of a firm today along with any projects in the future discounted by some factor over the risk free interest rate. Prudential's large assets makes it particularly effected by the interest rate.
Aging Baby Boomers
As the first of the baby boomers are set to retire within the next few years, financial and insurance firms remain pitted in a battle to provide them with financial funds to fuel their retirement. The traditional methods of retirement finance such as social security, 401ks, and corporate pension plans are becoming increasingly riskier as government legislature struggles to find a solution to social security deficits and companies find it harder and harder to meet the promises of current pension plans.
To compete with the corporate pensions plans provided by the company, insurance companies are offering annuities to retirees. Annuities come in many, often complex, forms and packages. However, the underlying concept remains the same: purchase of the annuity is made with an upfront lump sum, with the promise of a steady periodic income as long as the contract requires.
Competition
Prudential operates primarily within the insurance industry. The company operates an extremely diverse business platform to abate risks inherent in the insurance market. Prudential offers primarily group and individual life insurance polices within the United States and abroad.
Prudential’s main competitors within the Insurance industry in the United States are :
- American International Group (AIG)
- MetLife (MET)
- Northwestern Mutual
- ING America INS Holdings
Prudential distinguishes itself within the life insurance industry’s top five companies by maintaining the most diversified business platform. Maintaining nearly equal positions in asset management, life insurance origination, and annuity sales. Northwestern Mutual has been primarily focused on providing life insurance and has just now begun to integrate itself within the annuities market. AIG, MetLife, and ING all handle life insurance heavy business platforms with segments in asset management and annuity sales proportionally smaller, exposing themselves more so to mortality rate risk than Prudential.[13]
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