Prudential Financial, Inc.

Covering Analyst: Christian Meuniermeunier@uoregon.edu

Company Overview

› Founded in 1875

› Became a mutual company in 1915, offering group life insurance

› Went public in 2001, splitting up the company into Closed Block and Financial Service Business

› Has since expanded internationally, offering a variety of products

› Manages over $1 trillion in assets

Product Offering

› Individual Life Insurance

› Group Life Insurance

› Asset Management

-Retirement Solutions

-Pension-Risk Transfers

-Opportunity to invest in mutual funds

Business Divisions

› U.S. Individual and Group Life Insurance (18%)

› International Insurance & Investments (41%)

› U.S. Retirement Solutions & Investment Management (22%)

› Closed Block Business (14%)

› Corporate and Other (5%)

Business Growth Strategies

› Domestic Growth Strategies

-Acquisitions (Hartford Individual Life Insurance)

-Organic Growth (Verizon and General Motors pension transfers)

› International Growth Strategies

-Growth in Asia through acquisitions

-Continued presence in South America and Eastern Europe

› Joint Ventures

-China and India

Industry Overview

› Life Insurance and Annuities

-Expected annual growth of 3.4%

-Highly regulated both internationally and domestically

-Recent low interest rates have halted growth

-Highly saturated U.S. industry has led to international growth

-No company in the U.S. has over a 4% share of the industry

-Ageing population in Japan and U.S. will improve sales

Macro Factors

› Prudential is highly dependent on economic conditions-Group Life Insurance sales

-Individual Life Insurance sales

-Annuity revenue is dependent on investment gains

› Interest Rates

-High percentage of investments are in bonds

Portfolio History

› Tall Firs

- 220 shares at $64.95. Purchased 10/02/2011

- 1.62% of portfolio, has returned -13.30%

› Svigals

- 40 shares at $63.46. Purchased 11/02/ 2011

Revenue Model› Split into 5 divisions

› U.S. Individual Life and Group Insurance

–Improving economy

-Acquisition of Hartford Life Insurance

› International Insurance

-Foreign acquisitions will increase sales

-Aging population in Japan and Korea

› U.S. Retirement Solutions and Investments–Pension transfers

-Recent growth has been slowed due to interest rate

Revenue Model Continued

› Closed Block Business

-Policies that were in place during demutualization

-Will expire

› Corporate and Other

-Averaged out the last five years to find fixed value

Working Capital Expenditure

› Very few current assets

- Included 50% of cash and cash equivalents in my model

› Trend of greater liabilities expected to continue

-Used up current assets for acquisitions

-Must have a positive working capital terminal year

› Company does not have capital expenditure

Discounted Cash Flow› Benefits

- Policy pricing from acquisitions cannot be changed by Prudential

› General and Administrative Costs

- Cost projected as % of revenue

› Dividends to Policyholders -Will increase in the future due to high competition

› Interest Expense on Policies

-Greater Investment income

-Set themselves apart from competition

Amortization and Depreciation

› Amortization of Deferred Policy Acquisitions-Costs that have to do with selling new and renewed policies (commission)

-Constant rate, lowers towards end due to efficient distribution channels

› Depreciation

-Flat rate due to Prudential not increasing equipment with revenue

Beta

Beta SD Weighting

3 Year Daily Regression 1.74 0.07 50.00%

5 Year Weekly Regression 2.24 0.06 10.00%

1 Year Daily Regression 1.69 0.02 20.00%

3 Year Weekly Regression 1.68 0.02 20.00%

Prudential Financial, Inc. Beta 1.768

Final DCF Valuation Discounted Free Cash Flow Assumptions Considerations Implied Price

Tax Rate 28.00% Terminal Growth Rate 3.00% Terminal Growth Rate

Risk Free Rate 1.89% Terminal Value 64525.60 Avg. Industry Debt / Equity 68.68%

Beta 1.768 PV of Terminal Value 40,924 Avg. Industry Tax Rate 26.75%

Market Risk Premium 7.00% Sum of PV Free Cash Flows 15,743 Current Reinvestment Rate 26.38%

% Equity 49.92% Firm Value 56,667 Reinvestment Rate in Year 2017E 7.59%

% Debt 50.08% Total Debt 26,858 Implied Return on Capital in Perpetuity 39.52%

Cost of Debt 5.38% Cash & Cash Equivalents 13,102 Terminal Value as a % of Total 72.2%

CAPM 14.27% Market Capitalization 29,809 Implied 2013E EBITDA Multiple 11.2x

WACC 9.06% Fully Diluted Shares 468 Implied Multiple in Year 2017E 5.2x

Implied Price 63.69 Free Cash Flow Growth Rate in Year 2017E 3%

Current Price 57.21

Undervalued 11.34%

Comparable Analysis

› Looked at market capitalization, product offering, beta, geographic sales and growth.

› MetLife (35%), Aflac (35%), Principal Financial Group (20%), Manulife (10%), AIG (0%)

Multiples

Multiple   Implied Price Weight

EV/Gross Profit   $79.05 40.00%

EV/EBITDA   $45.38 60.00%

Price Target   $58.85

Current Price   $57.21

Undervalued   2.86%

Final Valuation

Final Implied Price

DCF Analysis 65.00% 63.69

Comparable Analysis 35.00% 58.85

Current Price $57.21

Price Target $62.00

Undervalued 8.37%

Catalysts

› Upside

-Increase in interest rates

-Entry into China and India

-Decreased regulation

› Downside

-Continued high unemployment

-Interests remain at historical lows

Questions?

Recommendation

› Hold in both portfolios

› Withstood difficult economic conditions

› Strong global position

› Intelligent acquisitions