Prudential Financial’s (PRU) product portfolio is dominated by protection-oriented products that rely more on underwriting as a profitability driver, rather than on investment income. These products include term life, accident, and health policies.
On the other hand, retirement and savings-oriented products dependent on investment margins as profit drivers. For more details on how an insurance company makes profits, please read our industry overview An investor’s guide to the insurance business.
Low interest rates
The low interest rate environment in Japan has existed for quite some time. Although low interest rates can hurt an insurer’s profitability, the majority of Prudential’s business was written in the low interest rate scenario and is priced accordingly.
Prudential Financial’s management noted that the company undertakes appropriate pricing of products that reflect changing scenarios in order to maintain profitability. For example, Prudential undertakes pricing updates on a biweekly basis for its fixed annuity products, which make profits from the spread between the guaranteed rate on the products and the rate of return from investments.
The size of claims and expenses, rather than investment yields, drive the profitability of protection products, which provide stability to the segment’s earnings.
Return on equity
As the chart above shows, Prudential’s International Insurance business saw improved profitability after the acquisition of AIG Star and AIG Edison in 2011. Return on equity remained around 20% in the last couple of years, which is even higher when excluding the more mature businesses.
Adjusted operating income
As shown in the chart above, the evolution of pre-tax adjusted operating income (or AOI) show consistent growth, with significant contribution from Life Planner operations. Strong organic growth in the segment and the company’s acquisitions drove earnings.
The International Insurance business remains a key growth area for Prudential. Other insurers operating in this market include Manulife (MFC), Aflac (AFL), and MetLife (MET). Investors interested in gaining exposure to the insurance sector can invest in funds like the iShares US Financials ETF (IYF) or the Financial Select Sector SPDR ETF (XLF).