Will Low Interest Rates Create A Headwind For Prudential?

Prudential Financial, Inc. (NYSE:PRU) 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 (LON:PRU) 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 (NYSE:AXS) , First American Financial Corporation (NYSE:FAF) , and ProAssurance Corporation (NYSE:PRA) . 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.

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