Insurance companies like Prudential Financial (NYSE:PRU) might be good investments for investors who want to ride the recovery cycle in both the economy and in insurance earnings. At only a slight premium to book value, Prudential Financial is still making an attractive investment proposition.
The case for insurance companies
The U.S. economy is still far away from normalized growth rates. The expansion of the balance sheet of the Federal Reserve and ultra-accommodating monetary policies highlight, that the U.S. economy still has an uphill battle to fight.
With an unemployment rate in the United States still hovering above the 6% mark and interest rates still near zero, the U.S. economy has a lot more room to improve. However, improving fundamentals on the macro economic side regarding key variables such as interest rates, GDP growth and employment, should have insurers see a surge in their underlying earnings prospects over the coming years.
First quarter operating results were robust
Prudential Financial reported solid first quarter results with higher adjusted operating income and higher assets under management, resulting in earnings improving from $2.27 in Q1 2013 to $2.40 in Q1 2014, a year-over-year increase of 6%.
Another positive development has been that Prudential Financial's account balances increased strongly year-over-year as well: account values in individual annuities, for instance, increased by 9% year-over year to $155.3 billion and retirement account values also by 9% to $327.8 billion.
Solid adjusted operating income growth and robust increases in account balances are a strong indicator of a resilient insurance business.
As a result of its robust financial results, Prudential Financial was able to increase its book value per share for the financial services business to $78.87 at the end of the first quarter which compares to $72.30 at the end of December 2013: a whopping increase of 9% in a single quarter.
At a current share price of approximately $84, Prudential Financial trades at a 7% premium to book value.
What the future holds
Shares of Prudential Financial returned almost 21% over the course of the last twelve month, the same percentage gain that investors in American International Group could book. Shares of MetLife returned 17%.
Since interest rates are still near zero, interest rates can go nowhere but up, providing substantial boosts to the net investment income of insurance businesses. Higher interest rates are also often accompanied by higher cyclical earnings, which should both help Prudential Financial's earnings outlook as well as its valuation multiples.