Zacks Investment Research



| Prudential Financial, Inc. | (PRU - NYSE) |$100.84 |

Note: This report contains substantially new material. Subsequent reports will have changes highlighted.

Reason for Report: 1Q18 Earnings Results

Previous Edition: 4Q17 Earnings Results; Feb 15, 2018

Brokers’ Recommendations: Positive: 63.6% (7 firms); Neutral: 36.4% (4); Negative: 0% (0) Prev. Ed.: 5; 4; 0

Brokers’ Target Price: $120.67 (↓$6.33 from the last edition; 6 firms) Brokers’ Avg. Expected Return: 19.7%

A Flash Update on 1Q18 Earnings was done on May 3, 2018

Portfolio Manager Executive Summary

Prudential Financial, Inc. headquartered in Newark, NJ, is a leading, diversified insurance company offering a variety of products and services including life insurance, pension and retirement-related services, asset management and securities brokerage among others. The company operates through its Financial Services Businesses consisting of its U.S. Retirement Solutions and Investment Management, U.S. Individual Life and Group Insurance, International Insurance and Investments divisions as well as its Corporate and Other operations.

Nearly 36.4% of the firms in the Zacks Digest group covering the stock provided neutral ratings while 63.6% provided a positive one. None of the firms rated the stock negatively. Of the 11 firms covering the stock, six provided target price ranging from $111.00 (10.1% upside from the current price) to $129.00 (27.9% upside from the current price).

Buy or equivalent outlook – 7/11 firms or 63.6%: The firms note that Prudential generates close to half of its earnings from international businesses (primarily Japan), where the company should continue to earn high-teen returns due to its strong franchise and favorable market dynamics.

In particular, sales at PRU, Japan should benefit from higher average policy face amounts and a mix shift from pure protection to retirement products as the population ages. Outside Japan, Prudential’s business in Brazil continues to gain scale and is expected to become an important driver of earnings growth over the next few years.

Moreover, the firms are optimistic about the company’s position in the U.S. where its business mix is tilted toward less capital-intensive product lines such as asset management and retirement, and it has a smaller footprint than its peers in the low-return individual life product.

The firms view Prudential’s growth momentum across a number of retirement oriented businesses – both retail and institutional in U.S. market – as a positive. Driven by a growing base of assets under management, the company has seen a spike in its asset management fees.

The firms also foresee the company’s U.S. business generating strong flows in the annuity, asset management, and stable value products. Prudential has gained share in the annuity and stable value markets by maintaining a consistent presence amid competitors who retrenched in recent years.

Prudential’s vast distribution channels and a strong relation with third-party distributors is an important feature, which has enabled it to expand its market share.

The firms consider Prudential to be an attractive risk-return pick, given sturdy organic growth and capital deployment initiatives. These, coupled with prudent business mix, position Prudential well enough to deliver more than 13% return on equity. The firms also remain optimistic on Prudential’s solid market position in the U.S., potential growth opportunities in Japan and Latin America, and its ability to generate ample capital. 8

Neutral or equivalent outlook – 4/11 firms or 36.4%: The cautious firms are concerned about the earnings from the U.S. insurance segment, which may suffer due to still low interest rates and depressed disability margins. Prudential now estimates near term ROE to be between 12% and 13% in the near to intermediate-term.

These firms forecast revenue growth in the group business to remain challenged in the short term. For the longer term, they expect the group division to generate healthy returns and grow at a mid-to-high single-digit pace, as economic conditions improve and the impact of price hikes in the disability book eases. Prudential has a leading group life franchise and should benefit from a greater scale than its competitors. In contrast, the company’s disability business is not as well positioned, and firms expect its market share to decline.

However, firms are of the opinion that the company’s valuation will likely remain pressed owing to uncertainty associated with non-bank SIFI liquidity and capital rules, as well as capital market risks.

May 10, 2018

Overview

Prudential Financial is one of the largest diversified financial services providers in the United States. It includes the Prudential Insurance Company of America, one of the largest life insurance companies in the country. Prudential Financial is a large-cap insurer with a broad product line, strong market share, vast distribution system, large and uniquely successful international operation and an enviable capital position.

The company offers a wide variety of products and services including life insurance, mutual funds, annuities, pension and retirement-related services and administration, securities brokerage, banking and trust services, real estate brokerage franchises, and relocation services. Prudential also manufactures, distributes and services retirement plans, provides retail and institutional asset management services, and engages in equity sales, trading and research. It sells to a variety of markets through specialized distribution channels. Additional information on the company is available on its website:

Key investment considerations identified by the firms are as follows:

|Key Positive Arguments |Key Negative Arguments |

|Prudential has a strong balance sheet with substantial cash, which will be |Prudential operates in a highly challenging and regulatory environment. |

|utilized for acquisitions and/or buybacks, thereby adding to the earnings |The company’s operational sensitivity to equity market makes it vulnerable |

|per share outlook. |to price declines. |

|Prudential has a diverse business mix, solid earnings and a strong |Prudential’s investment portfolio includes exposure to some higher risk |

|management team committed to enhance shareholder value. |assets within its investment portfolio, including subprime RMBS, CMBS and |

|Superior franchise, expanding distribution and penetration and attractive |commercial mortgage loans. |

|growth opportunities enhance Prudential’s capacity to gain market share. |Potentially onerous capital requirements of systemically important financial|

|Prudential scores strongly with leading rating agencies with investment |institution (SIFI) are concerns for the company. SIFI insurers would be |

|grade rating. |subject to more onerous measures such as bank-based standards. This in turn |

|Prudential is well positioned to serve the graying baby boomers, which is |is likely to hamper the pace of capital deployment. |

|going to be one of the most attractive markets. | |

|About 40% of Prudential’s earnings come from the international segment, | |

|mainly Japan and Korea. Given the demographic characteristic of these | |

|regions, this segment will contribute to increased growth. | |

NOTE: The company’s fiscal year coincides with the calendar year.

May 10, 2018

L Long-Term Growth

The firms believe that international expansion and growth in Retirement products, which will witness heavy demand from the baby boomers, will aid in the achievement of the long-term target. While these will drive top-line growth, the company’s strong capital management policies will boost the bottom line. The firms also believe that the U.S. market will not be a significant contributor to the near to mid-term growth as the market remains plagued by high unemployment levels and economic instability. Prudential has a strong international presence that gives it more organic growth opportunities than its peers. Expanding its international business (mainly in Japan, Korea and China) is vital for long-term growth. The company’s long-term growth will be driven by:

• Favorable long-term trends to fuel growth in U.S. businesses – With an attractive mix of businesses in the U.S., Prudential is focused on achieving a sustainable financial performance. Given its longstanding size, brand name, network and market presence, Prudential is among the best positioned in the industry to capitalize on a number of favorable long-term trends such as an aging population with a growing pool of assets, increasing consumer expenditures on healthcare, rapid growth of target date funds, and the movement toward de-risking in large defined-benefit markets.

• Penetration in Pension Risk Transfer Market – The firms favorably view Prudential’s efforts to position itself as a leader in the pension closeout market with the General Motors and Verizon deals, which offer major long-term opportunities. The firms believe that business win from General Motors and Verizon makes Prudential a top player in the market. The pension risk transfer market provides long-term growth opportunity, reflecting expectations for a rise in interest rate as well as modest competition. Continuous favorable underwriting results from the pension risk transfer market have encouraged the firms to predict positive long-term growth opportunities for the insurer. However, no large pension transfer transaction was executed by Prudential in this quarter.

• Growing Asset Management Business – Prudential is a leading global asset manager with a distinct multi-manager model providing diversified product offerings for clients. The firms hold a constructive outlook on the company’s asset management business, reflecting expectations of healthy sales/flows and strong growth in asset under management (AUM) and fee income. The firms feel that Prudential has a leading platform for fixed income and real estate investments, which should drive healthy growth in the business over time. The company’s strong fixed-income and real estate investment platforms should lead to robust performance. The company’s expansion in retail asset management with the help of warehouse and broker-dealer channels is also viewed positively by the firms.

• International Business Growth – The firms favorably view the company’s top market position in Japan from where it generates nearly half of its earnings. The acquisition of Star/Edison has further strengthened the company’s position in the region. Favorable market dynamics such as an aging Japanese population will fuel demand for the company’s retirement products, consequently generating sales growth. The firms are also upbeat on Prudential’s international business outside Japan. Prudential’s business in Brazil and Korea has achieved sufficient scale and the firms expect it to contribute meaningfully to the international division over the next few years. The company has also entered markets like India, China and Malaysia, which offer future potential opportunities.

• Vast Agent Network – Prudential has a large distribution network, which maintains underwriting discipline. This deep agent network and strong relationship with third-party agent distributors will bring more business for the company.

• Capital Management – The firms note that Prudential has sufficient capital flexibility to supplement organic growth with modest share buybacks. Finally, these firms believe that Prudential will indulge in massive share repurchases in order to meet its ROE target.

The company’s long-term growth will, however, be checked by the following factors:

• Regulatory Constraints – With new regulatory constraints on the horizon related to its designation as a SIFI, the firms expect the company's capital flexibility to decline marginally.

• Continued Poor Group Disability Margins – Prudential’s disability claims rose in 2010 and have remained elevated since then due to mispricing. Prudential has re-priced about 60% of the disability blocks and expects to finish the rest by early 2015. Given the ongoing re-pricing, the firms expect Prudential to lose market share in the disability market, which in turn, should challenge revenue growth.

May 10, 2018

Target Price/Valuation

|Rating Distribution |

|Positive Ratings |63.6%↑ |

|Neutral Ratings |36.4%↓ |

|Negative Ratings |0% |

|Maximum Target Price |$129.00↓ |

|Minimum Target Price |$111.00 |

|Average Target Price |$120.67↓ |

|Number of Analysts with Target Price/Total |6/11↑ |

Per the firms, risks to target price include spread compression, credit loss, weak equity markets, volatility in forex and equity capital issuance.

Recent Events

On May 9, 2018, the board of directors of Prudential Financial approved a quarterly dividend of 90 cents per share. The dividend will be paid on Jun 14, 2018, to the shareholders on record as of May 22, 2018.

On May 2, 2018, Prudential Financial reported 1Q18 earnings results. Adjusted net income of $3.08 per share beat the Zacks Consensus Estimate of $2.99 by 3%. The bottom line also improved 10.4% year over year.

Total revenues rose 7.2% year over year to $12.9 billion on the back of 15% growth in premiums and a 1.3% increase in policy charges and fee income, partially offset by 0.5% lower net investment income.

Financial Update

Cash and cash equivalents of $15.7 billion at first-quarter end increased 17.8% year over year.

As of Mar 31, 2018, Prudential Financial’s assets under management increased 6.9% to $1.4 trillion year over year. Adjusted book value, a measure of the company’s net worth, was $93.55 per share as of Mar 31, 2018, up 15.3% year over year.

Operating return on average equity was 13.7%, having contracted 40 basis points year over year.

Debt balance totaled $15.5 billion as of Mar 31, 2018, down from $18.6 billion as of Dec 31, 2017.

Revenues

Total revenues rose 7.2% year over year to $12.9 billion on the back of 15% growth in premiums and a 1.3% increase in policy charges and fee income, partially offset by 0.5% lower net investment income.

Quarterly Segment Update

Prudential operates through its financial services businesses, which consists of its U.S. Retirement Solutions and Investment Management, U.S. Individual Life and Group Insurance and International Insurance and Investment divisions as well as its Corporate and Other operations.

Prudential's Class B Stock, which is not traded on any exchange, reflects the performance of its Closed Block Business.

Total U.S. Individual Solutions division recorded 1Q18 revenues of $2.7 billion, up 0.6% from the year-ago quarter.

Total U.S. Workplace Solutions division recorded 1Q18 revenues of $3.5 billion, up 5.6% from the prior-year quarter.

Total Investment Management Division recorded 1Q18 revenues of $0.8 billion, up 9.3% from the year-ago quarter.

Total International Insurance division recorded 1Q18 revenues of $6 billion, up 11.7% from the year-earlier period.

Corporate and Other Operations division recorded revenues of ($173 million), noticeably wider than ($138 million) in the comparable quarter last year.

Margins/Operating Income by Segment

Total benefits and expenses of nearly $11.2 billion increased 7.8% year over year in the quarter under review. This increase in expenses is mainly attributable to higher insurance and annuity benefits, interest expense, amortization of acquisition costs and general and administrative expenses.

Segment Update

Total U.S. Individual Solutions reported adjusted operating income of $555 million, down 5.3% year over year. This downside was attributable to a nearly 67% drop in contribution from Individual Life.

Total U.S. Workplace Solutions adjusted operating income was $375 million, down 13.7% from the year-ago quarter, attributable to lower contribution from Retirement.

Total Investment Management Division’s adjusted operating income improved 18.4% to $232 million, driven by higher asset management fees.

Total International Insurance reported adjusted operating income of $856 million, up 7.1% year over year, driven by a higher contribution from Life Planner and Gibraltar Life and Other operations.

Corporate and Other Operations reported adjusted operating loss of $294 million, narrower than the loss of $352 million in the year-ago quarter.

Earnings per Share

Prudential Financial’s 1Q18 adjusted net income of $3.08 per share beat the Zacks Consensus Estimate of $2.99 by 3%. The bottom line also improved 10.4% year over year.

Improved performances at Investment Management Division and International Insurance aided the above upside.

Outlook

One firm with a neutral outlook raised the Zacks Consensus Estimate for 2018 to take into account the better-than-expected earnings performance in Q1.

|Research Analyst |Trina Mukherjee |

|Copy Editor |Pramita Bose |

|Content Ed. | |

|Lead Analyst |Tanuka De |

|QCA |Tanuka De |

|No. of brokers reported / Total |6/11 |

|Reason for Update |1Q18 Earnings |

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