MET MetLife Inc

Last week, credit rating agency Moody’s Investors’ Service, a subsidiary of Moody’s Corp. (MCO), affirmed the debt rating of Prudential Financial Inc. (PRU) at “Baa2” and upgraded its outlook to positive from stable. 

Prudential has one of the best collections of businesses in the U.S. life insurance sector, with strong positions in high margin businesses and a significant diversification. Although the persistently volatile economic environment created a drag on revenues, the company recovered from it and consistently grew its revenues over the past several quarters. The right mix of business, along with strong fundamentals, has helped it garner market share from weakened competitors. Prudential is poised to improve its earnings faster than its peers in the upcoming years.

Prudential has a strong international presence that provides it with better organic growth opportunities than its peers. Revenue from its international business (mainly from Japan and Korea) accounted for 53% of total revenue in 2010. Prudential has a strong footprint in Japan, with operations in the region for over thirty years. About 85% of the 2010 sales in international insurance came from Japan. Japan is a market that continues to present attractive opportunities for Prudential to build on success in protection products and increasingly address retirement needs.

The acquisition of Star Edison, which closed on February 2011, will expectedly broaden the company’s distribution, increase the scale of its operations, and expand the client base by roughly 50%. Management anticipates this acquisition to be accretive to return on equity (ROE) and EPS based on the value of the in-force acquired and the expense synergies expected to be achieved after the integration period. The acquisition will likely pull the group’s ROE to above 12% in 2012 and above 15% in 2015. Following the integration, Prudential would be the largest foreign life insurance company in Japan based on in-force life insurance. Moreover, a successful track record of integrating acquisitions in Japan would minimize integration and execution risks.

Prudential has substantial financial flexibility. It had balance sheet capital of approximately $1.8 billion to $2.3 billion at 2010 end. Further, it expects excess capital of $1 billion in 2011. We think the company is in a position to participate in the consolidation of the global life insurance and retirement market. Moreover, with so much cash available for transactions, we believe Prudential has the capacity to execute an accretive acquisition, leading to inorganic growth.

Prudential, the fourth leading life insurer only after American International Group Inc. (AIG), MetLife Inc. (MET) and New York Life Insurance Co., carries a Zacks Rank # 3, which translates into a Hold recommendation over the short term (1-3 months). Also, considering Prudential’s fundamentals, we rate the stock Neutral over the long term.

 
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