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Prudential Financial, Inc.

Prudential Financial, Inc.

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Prudential Financial, Inc.

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  1. Prudential Financial, Inc. Covering Analyst: Christian Meunier meunier@uoregon.edu

  2. 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

  3. Product Offering • Individual Life Insurance • Group Life Insurance • Asset Management -Retirement Solutions -Pension-Risk Transfers -Opportunity to invest in mutual funds

  4. 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%)

  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

  6. 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

  7. 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

  8. 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

  9. 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

  10. 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

  11. 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

  12. 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

  13. 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

  14. Beta

  15. Final DCF Valuation

  16. 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%)

  17. Multiples

  18. Final Valuation

  19. Catalysts • Upside -Increase in interest rates -Entry into China and India -Decreased regulation • Downside -Continued high unemployment -Interests remain at historical lows

  20. Questions?

  21. Recommendation • Hold in both portfolios • Withstood difficult economic conditions • Strong global position • Intelligent acquisitions