Prudential is a financial services company, with operations in the United States, Asia, Europe and Latin America. Through its subsidiaries and affiliates, the insurer offers an array of financial products and services, including life insurance, annuities, retirement-related services, mutual funds and investment management.
Its 1Q EPS came in at $2.28, exceeding consensus of $1.89 and prior-year quarter EPS of $1.16. Prudential's top segment is its international insurance and investments business, accounting for some 50% of revenues. This segment offers international individual life insurance products in Japan, Korea and other countries. Other major Prudential segments include U.S. retirement and investment management, accounting for 27% of revenues, and U.S. insurance which was 23% of revenues.
One of the key long-term benefits for Prudential, as well as some of the other insurance operators, should be an aging American population. The U.S. Census Bureau projects that nearly 25% of the population will be 65 years or more by 2050.
Prudential management expects to be generating returns on equity between 13% and 14% by the end 2013. This should be driven by divesting less profitable businesses. In late 2012, Prudential acquired the individual life insurance business of The Hartford Financial Services Group, which is part of the company's long-term plan to secure a leadership positions in universal, term and variable life insurance.
Prudential also pays investors a 2.4% dividend yield. Back in 3Q 2012, the company increased its annual dividend by 10%. However, from a valuation standpoint, Prudential trades in the mid-range of some of its peers with a 0.77 P/B and 7.5 forward P/E. Prudential has been superior at growing book value for investors--over the last five years, the company has grown its book value by an annualized 9.6%, well above any of the other insurers below.
Finding hidden value in other insurers
Lincoln National (NYSE: LNC) operates multiple insurance and retirement businesses through various subsidiary companies. Lincoln's 1Q EPS results came in at $1.02, beating consensus of $0.99. Life Insurance is Lincoln's staple; this segment focuses on an array of life insurance products, such as term insurance and linked-benefit product (UL policy linked with riders that provide for long-term care costs). This segment accounted for 44% of the total revenues in 2012.
At the end of the first quarter, Lincoln's book value per share came in at $55.33, up 20% on a year-over-year basis. Excluding accumulated other comprehensive income (AOCI), book value climbed 14% year over year to $42.00 per share. The big initiative for Lincoln is its move toward small- to mid-corporate clients, which should help it capture a big part of the employee benefit market on the back of a rebounding economy.
Manulife Financial (NYSE: MFC) is one of the three dominant life insurers within its domestic Canadian market and possesses rapidly growing operations in the U.S. and several Asian countries. Its U.S. wealth management segment is its top revenue generator, accounting for some 44% of revenues. This segment offers a range of personal and family oriented wealth management products and services. The segment also encompasses three core business lines: John Hancock Wealth Asset Management, John Hancock Variable Annuities and John Hancock Fixed Products.
Manulife is also looking to strengthen its position in Asia. The insurer has had a presence in the Asian for over a century, and now the company is further penetrating the Asian market. This includes securing distribution agreements with key partners in Japan and Indonesia. Worth noting is that Manulife is the most expensive of the insurers listed, trading at 1.27 times book value and 10.1 times forward earnings.
Genworth Financial (NYSE: GNW) is a financial security company providing insurance, wealth management, investment and financial solutions. Genworth was spun out of General Electric's life and mortgage insurance operations in May 2004. Its biggest segment is U.S. life insurance, making up 60% of revenues. This segment focuses on life and long-term care insurance.
Genworth is looking to diversify some non-key assets in an effort to better focus on its wealth management business. This should be a big positive with the upcoming need for retirement solutions by the baby boomer population.
One of the key draws for Genworth investors is the fact that the stock is the cheapest on a price to book basis among the other insurers listed. Genworth trades at a 0.32 P/B ratio and a 7.7 forward P/E. However, Genworth's return on equity is relatively unimpressive at only 2.4%.
Hedge fund trade
Going into 2013, Manulife had the lowest interest among hedge funds, with only 8 hedgies long the stock. This includes Tetrem Capital with the largest position, worth close to $64.6 million, comprising 1.9% of its total 13F portfolio. However, billionaire Steve Cohen's SAC Capital did take a new stake in Manulife during the fourth quarter (check out Cohen's top five).
Lincoln had solid hedge fund interest at the end of 2012, with 25 hedge funds long the stock. These include top hedge fund owner East Side Capital with a $172 million position in the stock, comprising 9.7% of its 13F portfolio, and in second was AQR Capital with a $49 million position (check out AQR's small cap picks).
Prudential had some of the top interest, with 30 hedge funds owning the stock, a 15% increase form the third quarter. Billionaire Ken Griffin's Citadel Investment Group had the top position, with a $286 million position (see Griffin's dividend picks).
Don't be fooled
With the recent positive performance by Prudential, it's worth taking a look at the insurance companies to see if there's value to be had. I like Prudential despite the run up, as the company has a solid international presence and has shown an impressive ability to grow book value. Meanwhile, another solid pick that I like is Lincoln, which is one of the cheapest insurers from a P/B and forward P/E basis, but what's more is that Lincoln has an 8.6% return on equity, well above the second place company Manulife's 4.3%.