We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
Will Low Interest Rates Create a Headwind for Prudential?
Read MoreHide Full Article
Prudential Financial, Inc. (PRU - Free Report) has been gaining momentum on strong premiums earned from its life insurance business and high net investment income, which, in turn, has been boosting top-line growth.
However, given the coronavirus outbreak, the Federal Reserve in the United States slashed interest rates by 50 basis points on Mar 3. Following the rate cut, the recent announcement of the Fed to lower interest rates to zero-level comes as disappointing news for most life insurance companies in the United States. The rate cut is one of the measures to stimulate the U.S. economy, which has been sluggish due to the COVID-19 pandemic.
Such resortment to zero-interest rates can be traced back to the recession period in 2008.
With the economy being in jeopardy, the Fed also aimed at injecting liquidity into the U.S economy by purchasing Treasurys and mortgage-backed securities worth $700 billion.
Notably, most life insurance companies often suffer when interest rates get lowered. Life insurance companies mostly depend on premiums received from their members, which they invest to get higher returns. Hence, slashed interest rates often make life insurance products unattractive and result in lower receipt of premiums.
The pandemic, which is adversely impacting the U.S. economy, is also expected to dent top-line growth of most life insurance companies in the United States and Prudential is no exception.
Net premiums earned and net investment income act as two important drivers of Prudential’s top-line growth. While the company’s net premiums earned have witnessed a CAGR of 4.7% in the past four years (2015-2019), its net investment income has seen a CAGR of 4.4% over the same period. However, the current low interest rate environment is likely to keep investment yields under pressure, which would consequently weigh on its overall investment income.
Prudential’s exposure to products like annuities and universal life, which guarantee minimum return, is also likely to affect it. When interest rates are lowered, it increases the value of the guaranteed liabilities for the company.
Shares of this Zacks Rank #4 (Sell) company have lost 43.7% in a year compared with the industry’s decline of 34.1%.
Nevertheless, we believe that the company’s enhanced suite of retirement and life insurance products is likely to drive its shares going forward. Prudential’s vast distribution network and superior brand image are also expected to give it a competitive edge.
Stocks to Consider
Some better-ranked stocks in the insurance space are AXIS Capital Holdings Limited (AXS - Free Report) , First American Financial Corporation (FAF - Free Report) , and ProAssurance Corporation (PRA - Free Report) . While First American Financial currently sports a Zacks Rank #1 (Strong Buy), AXIS Capital and ProAssurance carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
AXIS Capital, First American Financial and ProAssurance surpassed estimates in the last reported quarters by 150%, 33.33% and 23.03%, respectively.
Just Released: Zacks’ 7 Best Stocks for Today
Experts extracted 7 stocks from the list of 220 Zacks Rank #1 Strong Buys that has beaten the market more than 2X over with a stunning average gain of +24.5% per year.
These 7 were selected because of their superior potential for immediate breakout.
Image: Bigstock
Will Low Interest Rates Create a Headwind for Prudential?
Prudential Financial, Inc. (PRU - Free Report) has been gaining momentum on strong premiums earned from its life insurance business and high net investment income, which, in turn, has been boosting top-line growth.
However, given the coronavirus outbreak, the Federal Reserve in the United States slashed interest rates by 50 basis points on Mar 3. Following the rate cut, the recent announcement of the Fed to lower interest rates to zero-level comes as disappointing news for most life insurance companies in the United States. The rate cut is one of the measures to stimulate the U.S. economy, which has been sluggish due to the COVID-19 pandemic.
Such resortment to zero-interest rates can be traced back to the recession period in 2008.
With the economy being in jeopardy, the Fed also aimed at injecting liquidity into the U.S economy by purchasing Treasurys and mortgage-backed securities worth $700 billion.
Notably, most life insurance companies often suffer when interest rates get lowered. Life insurance companies mostly depend on premiums received from their members, which they invest to get higher returns. Hence, slashed interest rates often make life insurance products unattractive and result in lower receipt of premiums.
The pandemic, which is adversely impacting the U.S. economy, is also expected to dent top-line growth of most life insurance companies in the United States and Prudential is no exception.
Net premiums earned and net investment income act as two important drivers of Prudential’s top-line growth. While the company’s net premiums earned have witnessed a CAGR of 4.7% in the past four years (2015-2019), its net investment income has seen a CAGR of 4.4% over the same period. However, the current low interest rate environment is likely to keep investment yields under pressure, which would consequently weigh on its overall investment income.
Prudential’s exposure to products like annuities and universal life, which guarantee minimum return, is also likely to affect it. When interest rates are lowered, it increases the value of the guaranteed liabilities for the company.
Shares of this Zacks Rank #4 (Sell) company have lost 43.7% in a year compared with the industry’s decline of 34.1%.
Nevertheless, we believe that the company’s enhanced suite of retirement and life insurance products is likely to drive its shares going forward. Prudential’s vast distribution network and superior brand image are also expected to give it a competitive edge.
Stocks to Consider
Some better-ranked stocks in the insurance space are AXIS Capital Holdings Limited (AXS - Free Report) , First American Financial Corporation (FAF - Free Report) , and ProAssurance Corporation (PRA - Free Report) . While First American Financial currently sports a Zacks Rank #1 (Strong Buy), AXIS Capital and ProAssurance carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
AXIS Capital, First American Financial and ProAssurance surpassed estimates in the last reported quarters by 150%, 33.33% and 23.03%, respectively.
Just Released: Zacks’ 7 Best Stocks for Today
Experts extracted 7 stocks from the list of 220 Zacks Rank #1 Strong Buys that has beaten the market more than 2X over with a stunning average gain of +24.5% per year.
These 7 were selected because of their superior potential for immediate breakout.
See these time-sensitive tickers now >>