“Insurance
Giant Hitting Small Markets”
By: Travis
Mantel, AIM student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
• Prudential Plc. (NYSE:PUK) operates as a holding company with units
that provide insurance and financial services.
Their products include life insurance, pensions and annuities, and a
collection of investment schemes. Their
international exposure includes the UK (39.3%), the United States (35.7%),
China (10.6%), Japan (4.7%), and many other smaller markets.
• Prudential has seen a lot of
growth over the past five years due to both organic and inorganic means. Most notably, PUK has grown profits by 12%
YoY for the past five years.
• Prudential is well positioned
to take advantage of the growing middle classes and high economic growth
potential in emerging markets.
• The EU has passed regulation
(Solvency II) that was implemented in 2016 that called for higher reserves for
insurance companies, and Prudential had no compliance issues with Solvency
II.
• Prudential has seen a
decrease in stock price in recent weeks due mostly to the volatility in the
financial markets and investor skepticism in Asia.
Key
points: Prudential Plc has experienced tremendous growth over the
past five years. They have grown profits
by 12% YoY during that period and have down so through both organic and
inorganic means. Even with this growth,
PUK has recently been under pressure due to their exposure to Asian markets. With 10.6% of their revenues coming from
China, they have been hurt by China’s plan to cap the use of UnionPay bankcards
for the purchase of overseas insurance products at $5,000 each time. That being said, they continue to show
potential for growth in emerging markets.
Prudential has been able to get
exposure to emerging markets through acquisitions. Most recently they have entered the Zambia
life insurance company by acquiring Professional Life Assurance (Zambia’s
fourth largest life insurance company).
Prudential is targeting emerging markets because these markets are
expected to grow at a more rapid rate than developed markets. Also, emerging markets have continued to grow
their middle classes, which is the target customer for PUK.
In 2009 the EU had been pushing
for a new regulatory framework for insurance companies. The Solvency II regulation was finally passed
and implemented in January 2016. This
regulation called for higher surpluses and better risk management for insurance
companies. Prudential Plc is compliant
with this and have enough liquidity to deal with debt obligations through
2019. The new regulation has not
affected Prudential like it has many other smaller insurance firms in the
EU. Management mentioned that they would
not be surprised if more regulation was passed for insurance companies, but
nothing is on the table at this point.
What
has the stock done lately?
Prudential Plc has been beaten
down in recent weeks due to their Asian exposure. The stock dropped about 10% on February 2,
2016, due to slowing growth and investor distrust in China. They currently are trading at two year lows
due to the volatility in the markets and troubles in China. Since the beginning of 2016 Prudential has
dropped 25%; however, once the markets stabilize, they are well positioned to
grow.
Past
Year Performance:
Prudential has decreased 31.7%
in value over the past year, but with their current market position, PUK is a
bargain. PUK has seen a 52-week high at
$52.60 and a low of $32.20. They
continue to pay a dividend that yields 3.5%.
Source: FactSet
My
Takeaway
Prudential has been beaten down
in 2016, but will experience a rebound once the markets stabilize. They are a very acquisition-heavy firm, but
that has set them up well to profit on under-penetrated markets. PUK is definitely a great buy right now
because of how cheap it is selling and will be selling closer to the 52-week
high once they have the opportunity to capitalize on their many recent
transactions.
Past
Month Performance
Source:
FactSet
