Unlike the property/casualty and reinsurance sectors, the life insurance and investment management markets have largely avoided deterioration. As companies like ING (NYSE:ING), AXA (NYSE:AXA), and MetLife (NYSE:MET) have shown, business is actually pretty good.
So too for Prudential Financial (NYSE:PRU). With particular strength in its international and investment businesses, Prudential saw operating earnings climb 59% to $1.18. Even after stripping out $0.10 of EPS because of various "one-time" items, the year-over-year performance remains quite laudable.
For the quarter, the domestic insurance and annuity business was soft. Universal and group life showed strength, but the variable life and annuities division faltered. International and investment more than made up the difference, though, with strong performance in both groups.
Continuing recent practice, Prudential executives further announced that they planned about $1.5 billion of share repurchases for 2005. I would expect them to continue significant repurchases into 2006 and 2007 unless they make a major acquisition.
With considerable capital available, further acquisitions might be a good idea. The acquisition of CIGNA's (NYSE:CI) retirement assets already looks like a savvy move. I would assume that management is seeking well-priced opportunities to make a move internationally or return to the retirement business.
Still, with the stock near its 52-week high, I'm not sure I'd be an enthusiastic buyer today. By and large, Prudential has an above-average valuation (according to Market Guide data, P/E is 14.5 vs. an industry average of 12.7) but a below-average return on equity (10.3% for Prudential vs. 11.3% for the industry). You could argue that a high-quality company growing at a healthy clip deserves a premium, but I'd prefer to look for opportunities with above-average return on equity and below-average valuation.
It's good policy to learn more about the insurance industry:
- Marsh & McLennan Still Stuck in Muck
- GEICO's Lean, Green Machine
- ING's Dutch Treat
- Snoopy Is Smiling
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
