保诚

Prudential Financial announced that Japan's insurance regulator, the Financial Services Agency, issued new business suspension orders and business improvement orders to the firm's Japan subsidiaries on Oct. 9.

Why it matters: The FSA's new sales suspension applies to Prudential of Japan and Gibraltar Life and will stay in effect until Jan. 31, 2027. Prudential had begun a voluntary sales halt at POJ in January, which was scheduled to end on Nov. 5. We were somewhat surprised to see FSA's new sales suspension on Gibraltar. Prudential's own internal third-party review of its Japan businesses, released Oct. 8, concluded that Gibraltar had no systemic issues. The business improvement orders apply to not only POJ and Gibraltar but also their Japanese parent company, Prudential Holdings of Japan. These new orders are ongoing and have no specified end date.

The bottom line: As we incorporate the impact of these regulatory actions, we are lowering our fair value estimate for no-moat-rated Prudential Financial to $111 per share from $112. We assess the shares as fairly valued. The decrease in our fair value estimate reflects lowered 2027 and 2028 earnings forecasts, partially offset by the time value of money. Prudential maintains its guidance that the total impact on 2026 and 2027 adjusted earnings for POJ would be around $1 billion. Management also guided the earnings impact for Gibraltar at around $275 million in 2026 and 2027. We think the gradual ramp-up of sales productivity will be a drag on 2028 earnings as well, since the new sales suspension has been extended for POJ.

Big picture: We think Prudential is on the right track to remedy its Japan employee misconduct issues, and so far we have not seen evidence of similar malpractice issues in the firm's businesses in the US or other countries.

Prudential's Japan remediation plan spans governance, risk control, and system control. The Oct. 8 press release about the internal third-party review included a voluntary 30% return of remuneration for three months by the president and two other executives of its Japan subsidiary.

Prudential will implement structural changes to ensure that PHJ can better oversee POJ and will separate control from the sales leadership at POJ. The sales model and compensation plan will also be modified.

The new sales suspension plan issued to Gibraltar applies to its life consultant channel, which is around 70% of its business. Prudential's customer reimbursement update on Oct. 8 shows that 57 Gibraltar customers are eligible for reimbursement for sales misconduct, totaling around $2.6 million after reaching out to over 2 million of its customers.

We are lowering our fair value estimate to $111 per share from $112 as we incorporate the regulatory actions taken by Japan's Financial Services Agency. The decline is driven primarily by lower 2027 and 2028 earnings forecasts, partially offset by a $2 contribution from the time value of money. Our fair value estimate equates to 1.1 times second-quarter 2026 adjusted book value, excluding accumulated other comprehensive income.

Prudential Financial generated 33% of its 2025 premium and policy fees from its US institutional retirement business, and it has a particularly large exposure to US PRT jumbo deals (insurance liabilities over $1 billion), which is a very lumpy business. For some perspective, the firm’s total revenue and policy fees declined by 22% in 2023, rebounded by 48% in 2024, and declined by 25% in 2025, mostly driven by its US institutional retirement business.

Looking through a rough 2025, we expect 1.8% average annual growth in premium and policy fee income between 2026 and 2030, which aligns with the mature profile of the US and Japanese life insurance industries. We forecast international premiums to decline by 2% in 2026 and 0.5% in 2027, driven by headwinds in the Japan business and the exit from some emerging markets. We also lower our 2028 international premium growth by 0.5% to 1.5%. We forecast a combined ratio (total expenses over premiums and policy fee income) of 165% between 2026 and 2030, compared with the average of 145% from 2011 to 2025. When investment income is included, the average combined ratio over the next five years is 102% versus 101% (average from 2011 to 2025).

For the firm’s investment management business, PGIM, we expect asset management fee revenue to grow at an average rate of 3.1% over the next five years. On the investment side of the ledger, we forecast a midcycle investment yield of 4.25% on the company's portfolio.

We project that Prudential’s adjusted return on equity excluding AOCI will be around 11.8%, suggesting that its adjusted ROE target of 13%-15% is too ambitious.

Due to the highly competitive, undifferentiated nature of the life insurance industry, we don't believe Prudential Financial has an economic moat. We project Prudential to earn around an 11.7% normalized adjusted return on equity (excluding accumulated other comprehensive income and realized gains or losses), just above our 10.5% cost of equity. We calculate adjusted ROE by excluding realized investment and derivative gains and losses from net income and adjusting the equity to exclude accumulated other comprehensive income.

There are two major sources of earnings for life insurers: underwriting profit (earned premiums minus claims and operating costs) and investment income (yield on the investment portfolio). We view underwriting profit as the ultimate source of any economic moat since investment income tends to reflect higher risk-taking or luck rather than durable advantage, and investment losses can erode underwriting earnings. Most life insurance policies are long-duration and are backed by long-duration assets, making life insurers more exposed to the capital markets than property and casualty insurers.

We see little sign of brand-driven intangible assets in the life insurance industry, with consumers largely buying on price. Scale advantages are limited too, since variable commissions make up a material portion of operating costs. Underwriting advantages are hard to maintain, as morbidity, mortality, and lapse rates are highly predictable. Technology-driven data analysis offers only marginal claims improvements before being competed away or passed to consumers through lower pricing.

Poorly structured life insurance policies (products with generous guarantees) can expose life insurers to heavy losses in a severe market downturn, and poor underwriting can pressure companies for many years and even result in bankruptcy. Because insurers do not know their cost of goods sold for many years, they can underprice policies unknowingly, and managers chasing growth over profitability can force competitors to match low prices or lose business.

Prudential’s US operations consist of four main areas—institutional retirement strategies, individual retirement strategies (annuities), group insurance (disability and life), and individual life insurance—and we don't view them as moaty, given the intense competition in each business.

The US life, health, and annuities market includes public, mutual, and private insurers. Within institutional retirement, Prudential offers pension risk transfer (using annuities to assume a defined-benefit plan's liabilities), international longevity reinsurance (mostly UK), and stable value products for defined contribution platforms. US pension risk transfer grew rapidly in recent years, and Prudential leads the jumbo market (over $1 billion in liabilities). Life insurers compete aggressively on pricing for PRT deals. Jumbo PRT draws fewer bidders (under three, versus five for smaller deals), but Prudential, MetLife, and others compete head-to-head, and we don't view that business as moaty. In individual retirement, the firm has cut risk exposure via reinsurance and natural runoff over the past decade, though it retains material exposure to variable annuities and guaranteed living benefits products. These should keep running off the balance sheet, and further reinsurance deals remain possible. The firm is also selling more market-insensitive products to improve its risk profile. In group insurance (around 20% of US revenue), Prudential holds a strong position in national accounts (corporations with over 5,000 employees) but trails MetLife in share. Group insurance carries a better risk profile than individual life, given its shorter duration and annual repricing, though pricing competition is fierce. Prudential's US individual life business contributed around 17% of US revenue in 2025.

Prudential derived around 39% of its earnings in 2025 from its international life insurance businesses. The firm has a strong presence in Japan. Prudential also has a smaller footprint in emerging markets like Brazil, China, and India and intends to exit some of its international businesses. The Japanese life insurance market is very mature, and the growth potential is quite limited. The firm competes with Japanese life insurers like Nippon Life, Japan Post, and Dai-Ichi Life as well as US competitors like MetLife and Aflac. Prudential distributes its products through captive agents (life planners and life consultants) as well as third-party channels like banks and other independent agencies. Similar to the US business, we view competitive pricing, anemic returns, and risks of material value destruction as precluding the firm from carving out an economic moat in its international life insurance segment.

Prudential’s investment management business contributed around 11% of the firm’s adjusted earnings in 2025. We do not believe it has an economic moat. PGIM's brand and investment capabilities help generate flows from insurers and pension plans outsourcing investment management, and its third-party flows have outpaced some independent asset managers we cover. Still, its operating margin trails theirs. Even if PGIM can meet its operating margin target of 25%-30%, PGIM would remain below the 35% average operating margin (over the next five years) of the US asset managers that we cover. On average, PGIM's adjusted operating margin was 22.4% from 2022 to 2025. Its scale also lags the largest managers like Vanguard, BlackRock, and Fidelity. Of its $1.49 trillion in assets under management at the end of the second quarter of 2026, around 44% comes from third-party institutional clients, 19% from retail third-party clients, and 37% from its affiliated business.

Overall, Prudential Financial lacks a competitive advantage in either its life insurance or investment management sectors.

Prudential has reduced exposure to riskier products like variable annuities with minimum guarantees and has increased investments in segments with steadier cash flows like the investment management and institutional retirement businesses.

The firm’s investment management business is set to be unified on a single platform from six independent businesses, which could unlock expense savings and meaningfully improve its return profile.

Prudential's lower-return US individual products should continue to roll off, which could improve its business profile and return profile.

Prudential could suffer from elevated credit costs in the current private credit cycle, reducing profitability.

Advancements in artificial intelligence and healthcare might significantly increase people’s life expectancy, leading to underpricing and destroying shareholder value.

The employee misconduct issues in the Japan business could damage Prudential's brand, which could slow new business growth for the overall company.