Despite often being seen as a safe haven by investors, Prudential Plc (LSE:PRU) shares have been anything but in 2022. After all, in the last 12 months, the insurance stock has suffered a double-digit hit of around 39%.

What’s going on? Is this tumble in market capitalisation actually a buying opportunity? Or is there something more severe brewing under the surface? Let’s take a closer look.

What does Prudential do?

As a quick reminder, Prudential provides life and health insurance products as well as asset management services. Its mission is to help improve the affordability and accessibility of healthcare while simultaneously assisting clients in growing their assets. That’s why the stock is often found within ESG and Socially Responsible investment funds.

Its headquarters are located in London, and the stock is listed on the London Stock Exchange. But its activities actually primarily reside within Asia and Africa.

Today it serves around 19.3 million customers worldwide across 23 markets, 170 bank partners, and 27,000 branches.

Prudential half yearly performance

Looking at its latest interim results, the company seems to be delivering a bit of a mixed bag of results. While the core business appears to remain robust, the Covid-19 policies in China are having quite a tangible impact on after-tax profits and cash flow.

Looking specifically at activities within Hong Kong reveals that new business profits have tumbled by 31%, primarily thanks to the near-zero contributions coming from China as the borders between the two regions remain closed. Needless to say, that’s bad news for Prudential shares.

Rising interest rates are also adding more pressure to the bottom line, with its bond and equity index asset valuations suffering. On the plus side, Prudential’s $2.25bn debt reduction programme, which ended in January 2022, has helped reduce central costs by an impressive 32%. Unfortunately, the fall in liabilities didn’t translate into an immediate financial benefit so far, as the group’s investment asset values have fallen even faster.

As a consequence of these adverse macroeconomic impacts, after-tax profits for the first six months of 2022 landed at a measly $106m. That’s a 90% crash versus $1.07bn a year before.

However, ignoring the movements in investment values, operating profits were actually up by around 6%, landing at $1.66bn versus $1.57bn.

The performance of Prudential shares

The recent lacklustre performance of the Prudential share price isn’t hard to understand, given the trajectory of its investment assets on the balance sheet. However, it’s worth pointing out that between 2020 and the end of 2021, the stock did have quite an impressive run rising by over 55% – that’s quite odd for a blue-chip style insurance business.

In 2021 alone, the stock kicked off the year at 1,341.75p before reaching a peak at 1,572.84p in May. By the end of the year, when the effects of inflation began to materialise, the devaluation of the group’s investment asset portfolio began. And with it, the bearish trend in Prudential shares started to emerge, which has continued throughout 2022.

Today, the share price stands at 906.8p, translating to a market capitalisation of £24.65bn.

What are the biggest threats right now?

As 2022 has perfectly demonstrated, Prudential shares and the underlying business are inherently susceptible to market fluctuations as well as general economic conditions. While we’ve seen some improvement in recent months here in the United Kingdom, the same can’t be said about Asia.

Zero-tolerance Covid-19 policies in China could remain in place for a considerable period of time. As such, performance out of its Hong Kong office will likely stay depressed until restrictions are lifted. And if other macroeconomic conditions, such as inflation, continue to worsen, it’s possible that further downward adjustments to investment values could be in order.

Another risk factor that’s become more prevalent for almost all international businesses this year is the threat of foreign currency exchange rates. With the US dollar remaining strong versus other currencies, the exchange rates aren’t currently in Prudential’s favour. And that’s adding even more pressure to profitability.

Should I buy Prudential shares?

Despite the volatility in its balance sheet and share price, Prudential continues to be focused on developing new and improved financial products for customers. For example, its Pulse digital platform offers a new distribution channel to reach and take care of customers.

This long-term-minded strategy is definitely a good thing in my eyes. And with an ageing population seeking health and life insurance products, maximising channel distribution options is likely a wise move to capitalise on this trend.

Having said that, I’m not personally tempted to add Prudential shares to my portfolio today. While I don’t deny that this business looks financially sound, it appears overly reliant on factors within Chinese policy beyond management’s control.

Other investment analysts seem to be more optimistic about the future performance of the Prudential share price. And looking at broker forecasts, the average 12-month price target is 1,433.9p. If accurate, then there could be some significant upside potential to unlock by shareholders.

However, there’s just too much external uncertainty at the moment. Therefore, I’m keeping Prudential on my watch list for now.

Saima Naveed does not own shares in any of the companies mentioned in this article. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.