Prudential: A Resilient Insurer Paying High Dividends
Prudential Financial was founded amid a deep depression in 1875, set off by the Panic of 1873 when nearly a quarter of businesses in the railroad industry failed as capital markets crashed. Bank failures ensued, and many life insurers experienced solvency issues and went out of business.
Despite an opportunity to fill the void left by failing insurers, John F. Dryden, Prudential's founder, decided to create a firm that targeted an already underserved market – the working class. Until then, life insurance was solely available to the affluent.
In its infancy, Prudential only offered burial insurance, a type of life insurance, but one that just covers funeral and burial expenses. Because this type of product paid out less in claims, the company could charge lower premiums making the insurance affordable for the masses.
Since then, Prudential has grown into one of the nation's most prominent life insurance companies. The firm also offers annuities, mutual funds, and investment management.
The company operates primarily in the U.S. and Japan, with a small but expanding exposure to high-growth international markets.
Prudential has been around a long time, and its longevity is, in part, attributed to its conservative approach to running the business. The A rated company keeps a healthy balance sheet and maintains capital levels in its insurance business that substantially exceed those mandated by regulators to ensure it remains solvent across industry cycles.
This conservative approach has helped the insurance giant navigate a host of financial and economic crises over the years and become an industry leader. But, despite its rich history, the firm by its nature remains susceptible to fluctuations in the capital markets.
Life insurers and annuity providers like Prudential promise benefits that can extend far into the future depending on how long a policyholder lives. When pricing policies, management must make a number of assumptions about future stock market returns, interest rates, and other variables.
Unfavorable deviations from these forecasts can pressure life insurers to invest in riskier securities or increase leverage to try and improve returns. And should a severe downturn in capital markets occur, life insurers can incur credit losses that negatively impact their capital levels monitored by regulators.
For example, during the 2007-09 financial crisis, Prudential cut its dividend to help maintain its investment-grade credit rating in the face of major losses across the mortgage-backed securities it held.
Despite an opportunity to fill the void left by failing insurers, John F. Dryden, Prudential's founder, decided to create a firm that targeted an already underserved market – the working class. Until then, life insurance was solely available to the affluent.
In its infancy, Prudential only offered burial insurance, a type of life insurance, but one that just covers funeral and burial expenses. Because this type of product paid out less in claims, the company could charge lower premiums making the insurance affordable for the masses.
Since then, Prudential has grown into one of the nation's most prominent life insurance companies. The firm also offers annuities, mutual funds, and investment management.
The company operates primarily in the U.S. and Japan, with a small but expanding exposure to high-growth international markets.
Prudential has been around a long time, and its longevity is, in part, attributed to its conservative approach to running the business. The A rated company keeps a healthy balance sheet and maintains capital levels in its insurance business that substantially exceed those mandated by regulators to ensure it remains solvent across industry cycles.
This conservative approach has helped the insurance giant navigate a host of financial and economic crises over the years and become an industry leader. But, despite its rich history, the firm by its nature remains susceptible to fluctuations in the capital markets.
Life insurers and annuity providers like Prudential promise benefits that can extend far into the future depending on how long a policyholder lives. When pricing policies, management must make a number of assumptions about future stock market returns, interest rates, and other variables.
Unfavorable deviations from these forecasts can pressure life insurers to invest in riskier securities or increase leverage to try and improve returns. And should a severe downturn in capital markets occur, life insurers can incur credit losses that negatively impact their capital levels monitored by regulators.
For example, during the 2007-09 financial crisis, Prudential cut its dividend to help maintain its investment-grade credit rating in the face of major losses across the mortgage-backed securities it held.
Prudential has been working to reduce these sensitivities to capital markets and interest rates to improve its overall stability. It has done so by essentially eliminating the "living benefit" from annuity products, which replaced fixed payouts to policyholders with variable payouts, and by selling more straightforward life insurance policies with fewer guarantees.
The goal is to become a less market-sensitive firm to smooth earnings and allow the business to continue its streak of paying uninterrupted dividends for over a decade.
Furthermore, the firm is looking to grow its investment management business, which has less sensitivity to rate fluctuations, and accelerate its global expansion plans into high-growth developing markets in Asia and Latin America.
Overall, Prudential is a well-established company with a strong balance sheet and the financial flexibility to adapt to industry cycles. The firm is likely to remain an industry leader as it continues improving its mix of services and expands globally.
The goal is to become a less market-sensitive firm to smooth earnings and allow the business to continue its streak of paying uninterrupted dividends for over a decade.
Furthermore, the firm is looking to grow its investment management business, which has less sensitivity to rate fluctuations, and accelerate its global expansion plans into high-growth developing markets in Asia and Latin America.
Overall, Prudential is a well-established company with a strong balance sheet and the financial flexibility to adapt to industry cycles. The firm is likely to remain an industry leader as it continues improving its mix of services and expands globally.
