Barron's Bets on Prudential

While major insurers like American International Group (AIG) struggle with profit margins and the credit crisis, Barron's bets on Prudential Financial's (PRU) stock, as the company pushes into new domestic and international markets and enjoys better loan spreads than it has in years.

Prudential, the second-largest life insurer in the U.S., left the investment banking business years ago and has minimal exposure to mortgage-backed securities (although July's quarterly reports did have $486M in liquidity-related losses). It's business as a life insurer and provider of retirement services has created $638B in assets, and excess capital is allowing the company to pour more money into its businesses.

Prudential has estimated that the five-year worst-case scenario would be credit losses up to $500M on high-grade securitized subprime holdings. Not bad, considering that AIG could face a $613M loss this year alone, and that Prudential's conservative accounting rules mean securities written off as a loss today may ultimately have some value that can be recovered in the future.

UBS (UBS) analyst Andrew Kligerman has a target price of $108 for the stock, around 40% higher than where it is trading today. According to Kligerman, "We think Pru will attain the upper end of its 16% to 18% return on equity target by 2010, helped by excess capital deployment and faster organic growth."

Anton Schutz of Burnham Financial Industries Fund expects the shares to reach at least $90, citing Prudential's efforts to wrest the distinction from AIG of being the premier global insurer.

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• Prudential's Q2 results, released in July, were solidly ahead of expectations: Q2 EPS of $2.02 beats by $0.17. Revenue of $6.89B (+3.4%) in-line.

Comments

[ryefool:]

When pension funds managed by Prudential had huge losses due to State Street Bond Fund mismanagement and losses, Prudential made good on the losses. That would indicate that Prudential has excellent liquidity as well as high ethical standards. Prudential handled the State Street Bond Fund losses correctly while State Street is making pensioners sue them.

2008 Aug 31 07:55 AM

[WEBISKING:]

Aig is a much better investment ,especially by using long term puts and collecting those juicy premiums

2008 Aug 31 11:57 AM

[Vegasjoe:]

AIG is now a wounded duck in the core life insurance business, where annuity and life insurance purchase decisions are heavily weighted on financial ratings. Pru, conversely, has the best VA on the strreet, with the best living benefits guaranteeing income for life. Hands down for PRU. AIG's big spin-off news on 09/25/08 make it an interesting speculation.

2008 Aug 31 03:33 PM