EUR 850.00 For Business Accounts Only

Morningstar | Prudential Financial Holds Steady in 3Q

Prudential Financial generated an annualized operating return on equity of 13.6% in the third quarter, a level that is in line with recent quarters. We will maintain our $118 fair value estimate and no-moat rating.

Results across Prudential's segments were somewhat mixed, but the company generally saw some mild weakness domestically, which was offset by earnings growth internationally. International results were buoyed by fairly strong top-line growth.

The investment management business has been a bright spot for Prudential, but reported results took a turn for the worse in the third quarter. Given that this business is the only area within Prudential that we believe might benefit from an economic moat, we think it is a key segment to watch. Adjusted operating income fell 11% year over year, but this appears to be driven largely by quarterly noise, and the underlying trend, in our view, remains quite positive. During the quarter, net inflows were $8.7 billion, with strong flows on the institutional side slightly offset by some minor retail outflows. The inflow level marks a strong acceleration from recent results, and with 90% of assets under management outperforming the five-year benchmark, Prudential looks poised to maintain its momentum, although markets have become a bit more volatile recently.

During the quarter, Prudential announced a succession plan for CEO John Strangfeld, who has led the company since 2008. Charles Lowrey, who currently serves as COO of the international businesses, will take over as CEO at the start of December and is expected to take the chairman role in 2019. We like that the succession appears planned, and though we think the history of stewardship at Prudential has been mixed, we like that the company is maintaining continuity with an internal promotion. We think Prudential’s performance in international markets has been solid for the most part, and its franchise in Japan has performed reasonably well. We also appreciate the fact that Prudential has largely avoided the temptation to follow its peers and aggressively expand in higher-growth markets, as we are skeptical that this growth will be value-creative in the long run. We are hopeful that Lowrey will maintain this discipline when he is in charge.

Last month, Prudential became the last insurer to see its tag as a nonbank systemically important financial institution get removed. While this has appeared to be a foregone conclusion for some time, we do think that a successful conclusion to this matter lowers regulatory uncertainty for Prudential and the industry.