A Look At Prudential's U.S. Life Insurance Business

| About: Prudential Financial, (PRU)

Prudential Financial (NYSE:PRU) is the third-largest life insurance company in the U.S., behind MetLife (NYSE:MET) and Aflac Group. The company has a market share of around 6.14% in the U.S. life insurance market. Although Prudential has shown solid international growth in the past few years, particularly with the acquisition of Star Life Insurance Co. Ltd. and Edison Life Insurance Company from AIG (NYSE:AIG), the U.S. is still an important market for the company. Prudential's U.S. life insurance units account for a quarter of the company's premiums and policy fees.

The company offers insurance policies to individuals as well as group contracts to companies. Individual insurance accounts for 30% of the company's U.S. insurance premiums while group insurance accounts for nearly 70%.

Institutional Insurance

Prudential has around 22,500 group institutional clients. The company earns average monthly premiums of $18,574 per client. The operating margin for the division was around 6% during the pre-recession period, but low interest rates prevalent in the U.S. have had a detrimental effect on investment income as bond yields have declined. The operating margin for the group insurance division in 2012 was just 0.4%.

The U.S. economy is still recovering from the financial downturn of 2008. Following negative GDP growth in 2008-09, the recovery has been sluggish at best. The unemployment rate recently hit a four-year low at 7.5%, but is still a long way off the 4.7% mark that the country maintained before 2008. The Open Market Committee met last week and decided to maintain its $85 billion monthly asset repurchase program. Federal Reserve Chairman Ben Bernanke has indicated that the program might be scaled back later this year and wrapped up in 2014 if economic conditions improve but has not provided a firm time table. The Fed has kept a threshold of 6.5% unemployment rate as a target for the economic recovery before it might start increasing interest rates.

An improving job market will lead to a bigger customer base for Prudential; however, the company will look for profitability before expansion. We expect moderate long-term expansion from Prudential as interest rates increase along with improving employment conditions, leading to greater demand and higher yields from fixed-maturity investments.

Individual Policies

Prudential's individual insurance division has around 7 million policies in force earning around $32 in average monthly premiums. The operating margin for the division is around 20%. Prudential has a market share of 2.7% in the U.S. individual life insurance market. Like the group insurance division, the performance of the individual insurance division is closely linked to the macroeconomic conditions in the U.S.

The per capita real disposable income is one of the figures that can be used to gauge the income available to U.S. citizens for personal spending. The figure fell by 3% from 2008 to 2009, as the U.S. economy was affected by the global financial crisis, but has since been growing at an annual rate of 0.7%, reaching $32,570 in January 2013. With improving economic conditions, we expect the individual life insurance market to grow from $75 billion in 2012 to around $86 billion by the end of the decade. Should Prudential maintain a market share of around 3.5%, it can earn $3 billion in premiums by 2019.

For more on the U.S. life insurance market, please refer to our article titled "A Closer Look At The U.S. Life Insurance Market." You can modify the interactive charts in this article to gauge the effect a change in forecast would have on our price estimate.

Prudential had a market share of around 2.7% in the individual life insurance market in 2011. In 2012, it acquired Hartford Financial Services Group's (NYSE:HIG) individual life insurance business for $615 million in cash. Hartford was the 14th largest life insurer in 2012 with a market share of 2.01%, its market share in the individual life insurance market was around 1%. We expect the deal to boost Prudential's market share to around 3.5%, allowing the company to earn $3 billion in premiums by 2019.

Disclosure: No positions.

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