EUR 850.00 For Business Accounts Only

Morningstar | Prudential Financial Is Operationally Leveraged to the Capital Markets

Prudential Financial, like other life insurers, is operationally leveraged to the capital markets. Low interest rates have been an ongoing headwind in the postcrisis environment, and while this situation looks set to improve, it may take some time to actually flow into results. Prudential also has significant international operations, which accounted for about half of its adjusted operating income in recent years. But its international operations are dominated by Japan, which represents roughly 90% of international revenue. Prudential has carved out a solid franchise in Japan by steadily building out its agent network. However, structural conditions in the country represent a more extreme version of the firm's domestic situation, with low interest rates as a headwind to profitability and unfavorable demographic trends limiting long-term growth prospects.We are pleased to see Prudential continue to expand its investment management operations. Returns in this segment are much higher than in the rest of the business, and we see this segment as potentially moaty. Further, the performance of Prudential's funds have been good, which could put some momentum behind its operations.However, with investment management only accounting for about 15% of operating income, we think the competitive dynamics of the life insurance industry will dominate Prudential’s overall results. Prudential recently took a $1.5 billion pretax charge to boost reserves in its long-term care business. The company ceased writing new policies in this business in 2012. The charge was not a major surprise to us, as this line historically has been characterized by reserve increases for participants, which was the prompt for Prudential and others to exit the business. With only $6.6 billion in GAAP reserves related to the business, Prudential's exposure looks quite manageable to us. However, charges such as this, and the uncertainty around long-tail liabilities, fundamentally contribute to the lack of transparency in the life insurance industry, which is a key contributor to our generally cautious view of the space and our high uncertainty rating for Prudential.