Asset Class: US Stock (Sector: Financials / Industry: Insurance)
Original Investment Thesis (7/2018): Insurance companies were abundant in my screening tools and I looked at several before settling on this company. My biggest issue (or is it opportunity) is why a company that uses the Rock of Gibraltar for advertising doesn’t use The Rock (movie star) in their advertising. I have lots of million/billion-dollar ideas (just ask)!!! The biggest thing that made me select this one ultimately was the transformation in the balance sheet since the financial crisis. They have reduced their debt substantially over the past decade (while also decreasing their shares outstanding). Pretty amazing transition in my opinion.
Current Thoughts (9/26/2019): Long term holding…maybe. I may regret those words! Let me explain. They say you are not supposed to invest in things you don’t understand. I’m pretty sure no one really understands derivatives and word on the street is insurance companies have large derivative portfolios. The more I’ve thought about it since my original purchase the more I think there is no reason for me to be taking individual company risk on this particular company (or any financial company dealing in derivatives). I’m still mulling it over and I am comforted by two things that I do know about this company: 1) they did survive the financial crisis (and likely had a large derivative portfolio then too), and 2) they have reduced risk throughout their balance sheet and business (which is easily seen)…so perhaps they’ve done the same in their derivative portfolio. But I don’t know and my childhood hero, GI Joe, says ‘knowing is half the battle’. I owned AIG during the financial crisis and it was decimated (by its derivative portfolio) so this risk is weighing on my mind and causing me to second guess this purchase. I might close out this position…but then insiders recently started purchasing shares. This makes me second guess my second guess…third guess?!?! So confused!
PRU (Prudential Financial Inc) – Annual Reassessment
I’ve held this position (PRU – Prudential Financial Inc) for a while and am reassessing it using my updated tools. I thought I’d share my assessment (you can download and review the PDF here:pru_annual-reassessmentDownload
I originally purchased these shares in July 2018 for $100.44.
Insurance companies were abundant in my screening tools and I looked at several before settling on this company. My biggest issue (or is it opportunity) is why a company that uses the Rock of Gibraltar for advertising doesn’t use The Rock (movie star) in their advertising. I have lots of million/billion dollar ideas (just ask)!!!
I really had trouble deciding which one I’d invest in. I wound up choosing the very large PRU it looked like it would produce similar returns to others but I saw a few things I really liked with this one. When reviewing the 10K, Annual Report and Proxy for the most recent year I was impressed with their focus on culture and being a good company to work for. The biggest reason was the transformation the company has made in its balance sheet. The debt to equity ratio was 151% in 2008 and now stands at 35% (in 2013 it was 76%). They’ve also removed 16% of their outstanding shares while making this transition. To me, this is a behemoth that is focused on being a great company and is ready for whatever comes. I think other companies could learn from them post 2008 financial crisis…I think they have done exactly what companies should have done.
Notes from my initial purchase analysis
- PRO #1 – Debt to Equity – 35% and has been decreasing (off high of 76% in 2013). Debt was 151% in 2008?!?! Amazing transformation. I love to see a company seemingly heed lessons of the past (like the 2008 financial crisis) and decrease risks. They have.
- PRO #2 – 5th largest insurance co in the US. 2nd largest life insurance co in US (right behind MetLife). 15% market share. Life is the biggest market behind accident/hazard (slightly bigger).
- PRO #3 – Shares outstanding have decreased 16% while the debt ratio has been cut in half (both since 2011). While making acquisitions?!?!
- PRO #4 – Diversifying into annuities…this will be attractive to people who do not want financial market risks. They will pay to diversify their risks…BET!
- CON #1 – At the mercy of the economy. Sales aren’t growing so the performance of the business and investment portfolio will drive results.
- CON #2 – Derivative risks…these guys have huge derivative portfolios that can produce wild unexpected swings in earnings at times when things don’t go as expected (on a quarterly basis). But over time these should even out. But any big insurance company and/or major bank is going to have this exposure…so…
On the derivative front, I’ll add…What do I like least about big insurance companies?!?! Let me count the ways! Seriously I hate that they do all kinds of trading using derivative portfolios and there is very little way to dive into/understand the risks in those. That said it is the nature of the beast with insurance companies. I don’t know what lies within Prudential but they survived the 2008 crisis and have moved directionally in the direction of decreasing their risks substantially since then in many ways. I feel like many companies in the world have totally forgotten what happens when bad things happen. Prudential seems to have taken heed to lessons of the past and positioned themselves accordingly. I like that and would imagine with that information they would take similar measures in their derivative portfolio. I’d imagine they don’t want to end up like their big brother AIG (who they have been buying businesses from since the crisis). But…we’ll see!
Schwab gives this a B rating, Morningstar gives it a 4-star rating with no moat, and S&P gives it a 5-star rating. I don’t place a ton of weight on analyst but I do trust these reports more than most and generally view high rankings from them as good shows of support to all my other analysis.
The stock is down from where I bought it and has been down pretty substantially in recent months. That said I have no intention of selling this stock. as I think it will be a good long-term holding and is a compelling value based on the current price. I believe a good intrinsic value on the stock is right around $101 dollars right now so even with the recent drawdown I think my $100 purchase price is not out of whack. I don’t expect to earn the expected return kicked out by this model but even the worst-case scenarios I expect to do at least twice as good as the overall stock market and expect a minimum of 7% annualized returns from this investment (but could see it being better). At a 91% certainty I could allocate more money than I currently have in this investment. I still own TPRE which I would sell and consolidate into this position but it is pretty beaten up (er…down) right now so I’m going to hold it until it trades back up a bit. Standing pat in both these investments for now. Once I get through relooking at all my current positions I might buy a small amount more of this stock (maybe).
I’m sharing my analysis here. If you have thoughts on it I’d love to hear them hit me up on Twitter @joeydean72