Prudential’s Valuations Are Weak on 2Q16 Operating Performance



Weak performance

Prudential Financial’s (PRU) stock has risen by 16% in the past six months, mainly due to expectations of improved fundamentals and higher investment and underwriting income.

Prudential’s operating income was impacted by higher reserve development, losses in Individual annuities, and lower US insurance revenue in 2Q16. Its International Insurance business was boosted by strong underwriting margins in the quarter.

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Prudential saw inflows rise in Asset Management and Retirement for 2Q16. The company made structural changes to manage the risks in its individual annuities business, which reduced complexity, enhanced overall capital flexibility, and facilitated an increase in 2016 share repurchase authorization as a result of capital released.


Prudential Financial is an insurance organization with an emphasis on generating risk-adjusted returns for shareholders. Insurance businesses are generally valued on the basis of their book values. Prudential Financial is currently trading at a one-year forward price-to-book multiple of 0.7x. Its peers are trading at an average of 1.0x.

At its current price-to-book multiple of ~0.9x, Prudential Financial is trading cheaper than other insurers such as Allstate (ALL), ACE (ACE), and Chubb (CB). However, Prudential is trading at a premium compared to major players such as AIG (AIG) and Metlife (MET). Both are trading at ~0.8x.

Prudential Financial is trading at 7.3x on a one-year forward price-to-earnings basis, compared to the industry average of 8.8x for the same period. The stock is currently trading even lower than its book value.

The company’s diversified line of business, prudent capital management, deleveraging, multiyear high liquidity and cash flows, capital returns to shareholders, and aggressive buyback programs have instilled confidence and suggest that the stock is undervalued. Prudential’s focus on the Retirement segment will be beneficial as more Baby Boomers enter retirement. The expected rise in interest rates could also boost the company’s investment management revenue.

Investors can gain exposure to insurance companies by investing in financial sector ETFs such as the Financial Select Sector SPDR ETF (XLF).


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