Legacy US Insurance And Volatile Rates Will Depress Prospects

Key Takeaways

• Shrinking core markets, competitive threats, and tightening regulation are putting pressure on Prudential's growth, revenue diversification, and capital efficiency.
  
• Prolonged low interest rates, climate-driven claims volatility, and rising reinsurance costs threaten profitability, margins, and the stability of long-term earnings.
  
• Strong growth in Asian markets, digital transformation, and diversified distribution drive profitability, operational efficiency, and resilient premium inflows, supporting robust long-term earnings momentum.

Catalysts

Through its subsidiaries, provides life and health insurance, and asset management solutions to individuals in Asia and Africa.

• As global birth rates decline and developed markets continue to age, Prudential faces long-term headwinds as its core life insurance and annuities addressable market contracts, limiting the ability to sustain premium growth and ultimately squeezing top-line revenue.
  
• Persistently low or volatile interest rates remain a structural threat, reducing investment yield on Prudential's significant fixed-income portfolio and pressuring spreads, thus putting ongoing downward pressure on net margins and long-term profitability.
  
• The legacy U.S. life and annuities business remains a drag on growth and earnings diversification, especially as insurtech and digital-first competitors accelerate customer acquisition in key markets, eroding Prudential's revenue share and jeopardizing its long-term earnings trajectory.
  
• Regulatory tightening-such as the risk of higher required capital ratios and evolving solvency standards-may force Prudential to allocate additional capital buffers, leading to constrained returns on equity, lower capital efficiency, and a potential drag on earnings growth.
  
• Exposure to increasing frequency of extreme weather events and rising health care costs, exacerbated by climate change and longevity trends, threatens to drive significant claims volatility and higher reinsurance costs, undermining Prudential's long-term underwriting profit and raising the risk of earnings shocks in its insurance book.

Prudential Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Prudential compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Prudential's revenue will grow by 11.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 25.9% today to 17.2% in 3 years time.
• The bearish analysts expect earnings to reach $3.2 billion (and earnings per share of $1.29) by about September 2028, down from $3.4 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.1x on those 2028 earnings, up from 9.7x today. This future PE is lower than the current PE for the US Insurance industry at 11.3x.
• Analysts expect the number of shares outstanding to decline by 1.27% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.82%, as per the Simply Wall St company report.

Prudential Future Earnings Per Share Growth

Risks

• Prudential's strong performance in Asian growth markets, especially Hong Kong and Indonesia, supports sustained double-digit growth in new business profit and operating profit per share, indicating revenue and earnings have robust long-term momentum.
  
• Significant ongoing investments in digital platforms, process modernization, and AI-driven analytics are leading to operational efficiencies and expense containment, which are likely to drive improved net margins and free surplus generation.
  
• The company's multichannel distribution strength, with agency and bancassurance delivering consistent premium growth and resilience to channel-specific headwinds, is enhancing revenue diversification and supporting persistent premium inflows.
  
• A disciplined capital management framework, including recurring buybacks and a commitment to return over $5 billion to shareholders between 2024 and 2027, demonstrates confidence in free surplus growth and the ability to sustain and grow dividends.
  
• Product repricing, improved underwriting, and strategic focus on higher-margin health and protection products are expanding new business margins and accelerating capital emergence, which bodes well for future profitability and earnings growth.

Valuation

• The assumed bearish price target for Prudential is £8.9, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Prudential's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £16.1, and the most bearish reporting a price target of just £8.9.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $18.6 billion, earnings will come to $3.2 billion, and it would be trading on a PE ratio of 11.1x, assuming you use a discount rate of 6.8%.
• Given the current share price of £9.72, the bearish analyst price target of £8.9 is 9.2% lower.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.