Despite confronting an uncertain market, regulatory and rate outlook in the coming year, Prudential Financial Inc. remains confident in its ability to generate strong cash flow and return on equity as the insurer heads into 2017.
Addressing investors and analysts at the company's 2017 financial outlook conference call, Prudential Chairman and CEO John Strangfeld noted that the company will enter the new year in good shape due mostly to a diverse business mix and strong capital position. Strangfeld's comments came in light of a continued sell-off in government bonds since the U.S. presidential election, which has sent yields soaring more than 75 basis points since President-elect Donald Trump's victory on Nov. 9.
Even as yields on the benchmark U.S. 10-year Treasury hovered near one-year highs around 2.60% on Dec. 15, Strangfeld acknowledged that Prudential is not immune to the long-term, ultra-low-rate environment prevalent in its two primary markets, the U.S. and Japan. When Prudential developed a long-term ROE objective in 2011, Treasury yields rose above 3.75% in the first quarter of the year, surging considerably above the five-year average yield. Benefiting from tailwinds from a strong equity market and solid performance among a number of its fee-based products, Prudential eclipsed its ROE objective of 13% to 14% in each of 2013, 2014 and 2015. Though Prudential has lowered its 2017 ROE expectations to a range between 12% and 13%, Strangfeld said the outlook could return to an upper range of 14% if interest rates gravitate to more typical levels.
While taking market factors into account, Prudential estimates that it will incur a negative impact of 5 cents per share from a potential change in foreign exchange rates stemming from a less favorable hedging exchange rate for the Japanese yen. As a result, some delays could ensue in how Prudential harvests and redeploys the gains related to the yen equity hedge, Prudential CFO Robert Falzon said.
Prudential offered 2017 EPS guidance in the range of $10.15 to $10.65 per share, based on a number of key assumptions, including an effective U.S. corporate tax rate of 25% and a Treasury yield of 2.50% at the end of 2017.
Prudential's review of an investigation regarding the distribution of its term-life insurance products through Wells Fargo & Co. is ongoing, said Steve Pelletier, Prudential's head of domestic business. The company declined to provide any additional information related to the investigation, citing pending litigation.