RBC Research Comment: Prudential/GM

RBC Capital Markets appreciates yourconsideration in the All-America ResearchInstitutional Investor Survey.

PRICE TARGET REVISION | COMMENTJUNE 4, 2012

Prudential Financial, Inc. (NYSE: PRU)

GM Deal: Examining All the Angles – Bottom Line:Accretive to RoE and EPS

OutperformAverage RiskPrice: 44.74

Shares O/S (MM): 472.0Dividend: 1.45

Price Target: 79.00 ↑ 77.00Implied All-In Return: 80%Market Cap (MM): 21,117Yield: 3.2%

Event: Raising estimates and price target

Investment Opinion

We are raising our 2013 EPS estimate for Prudential, reiterating our Outperformrating, and increasing (from 13.1% to 13.3%) the ROE that we now believe Prucan achieve by year-end 2013. Our call: The huge pension-closeout transactionthat Prudential announced on Friday with General Motors – an historic deal underwhich GM will pay Prudential between $18 billion and $29 billion, andPrudential will make lifetime monthly pension payments to more than 76,000GM salaried retirees – is an unambiguous positive for Pru.

Lowering Pru's risk. The deal with GM will actually make Prudential in somerespects a less risky company since by taking on GM’s pension obligation Pru isadding longevity risk (the risk that people live too long). This new risk will act asa natural hedge to the mortality risk (the risk that people die young) that Pru hasaccumulated in large amounts because of its heritage as a traditional life insurer.

Putting Pru squarely in a growth market. The deal with GM positionsPrudential as an early leader in what could be the next great growth market forlife insurers: Helping major American corporations get out from under hugedefined-benefit pension obligations by purchasing large group annuity contracts.Depending on the circumstances, there could be scores of major corporationsthat, like GM, may decide to take the one-time earnings hit associated withbuying an annuity and in so doing put their entire pension problem behind them.Closer in time, Pru may be first in line to do more pension business with GM.That’s because the deal announced on Friday involves the pensions of GM’sretired salaried employees only; a second deal, involving GM’s hourly unionizedretirees and twice the size of Friday’s transaction, could be in the works.

No hit to Pru's buyback. Finally, based on financial analysis we’ve done for thisnote, we do not believe that the capital that will be absorbed at Prudential as aresult of the GM deal will materially impact an important element of Pru’sROE-improvement story, namely, share buyback.

Priced as of prior trading day's market close, EST (unless otherwise noted).

125 WEEKS 15JAN10 - 01JUN12

45.00

50.00

55.00

60.00

65.00

J F M A M J J A S O N2010

D J F M A M J J A S O N2011

D J F M A M J2012

HI-18FEB11 67.52HI/LO DIFF -37.13%

CLOSE 44.74

LO-07OCT11 42.45

10000

20000

30000

40000

PEAK VOL. 47081.0VOLUME 17419.8

80.00

90.00

100.00

110.00Rel. S&P 500 HI-23APR10 114.90

HI/LO DIFF -35.26%

CLOSE 74.39

LO-01JUN12 74.39

RBC Capital Markets, LLC

Eric N. Berg, CPA, CFA (Analyst)(212) 618-7593; [email protected]

Bulent Ozcan, CFA (Associate Analyst)(212) 863-4818; [email protected]

Kenneth S. Lee (Associate)(212) 905-5995; [email protected]

FY Dec 2010A 2011A 2012E 2013E

BVPS - FD 52.01 58.02 59.01 64.84

Prev. 59.00 64.64

P/BVPS 0.86x 0.77x 0.76x 0.69x

EPS (Op) - FD 5.74 5.84 6.49 8.00

Prev. 7.81

P/E 7.8x 7.7x 6.9x 5.6x

BVPS - FD Q1 Q2 Q3 Q4

2010 48.75A 50.65A 52.95A 52.01A

2011 53.17A 54.78A 58.35A 58.02A

2012 55.85A 57.41E 59.03E 59.01E

Prev. 59.00E

2013 60.85E 62.79E 64.82E 64.84E

Prev. 60.80E 62.69E 64.67E 64.64EEPS (Op) - FD

2010 1.36A 0.82A 1.91A 1.63A

2011 1.62A 1.57A 0.87A 1.79A

2012 1.56A 1.58E 1.64E 1.71E

2013 1.87E 1.96E 2.04E 2.14E

Prev. 1.82E 1.91E 1.99E 2.09E

All values in USD unless otherwise noted.

For Required Conflicts Disclosures, see Page 9.

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Details

During its recent investor day, Prudential’s management team emphasized the fact that the 13% to 14% RoE “aspiration” it had set

itself had turned into a “goal”, which led many investors to question what the difference was between the aspiration and the goal. Last

Friday, Prudential announced a deal that in our view makes the bottom of this range easily achievable and that might have been a

reason for management’s confidence boost. More importantly, pricing the deal in a low interest rate environment could make this

transaction even more profitable once rates start rising.

The deal announced by Pru and GM involves the purchase by the auto maker of what in life insurance is known as a group annuity

contract, an arrangement whereby a life insurer gets a big check up front in return for which it agrees to assume the monthly pension

obligations of a corporate pension plan sponsor. These contracts are not new; group annuities have been sold by life insurers forever.

What makes the Pru/GM deal so noteworthy, however, are two things.

First, the transaction is enormous. AON, the insurance and benefits broker, said in a statement posted to its website on Friday that the

size of the transaction alone made it unique in the history of pensions. Not since the 1980s has a pension transaction exceeded $1

billion, AON noted, adding that since then the entire pension-closeout market has amounted to only $1 billion over the course of an

entire year. The GM transaction involves $29 billion of pension obligations.

Second, the transaction was widely regarded by pension experts as something that could not be done. That’s because low interest rates

have cut so deeply into life insurers’ investment returns that carriers have had no choice but to raise group-annuity pricing sharply,

choking off demand. Those same low rates, by increasing the present value of companies’ pension obligations, have also increased

pension plans’ underfundedness. Skeptics, calling that a hole that companies would have to plug before handing off their pension

plans to life insurers, have argued that corporate treasurers would be loathe to make such big up-front payments.

Nonetheless, despite the obstacles, interest in the type of deal announced by Prudential and GM Friday has been intensifying. And

that’s been happening at least two reasons.

One is the extraordinary volatility in the stock market and the bond market that has sent the value of pension assets gyrating.

Relatively new accounting rules have required U.S. corporations to reflect this volatility in their balance sheets. In a call with analysts

on Friday to go over the Pru deal, GM’s CFO, Dan Ammann, specifically cited balance-sheet and earnings volatility as one of the

main reasons that the car company chose to rid itself of its pension obligations.

The other issue causing companies to at least think of doing deals similar to the one announced by Pru and GM: major improvements

in lifespans. Advances in medicine, especially in the areas of cancer and cardiac care, have led to huge improvements in longevity.

These improvements, as much as 1 % to 2 % per year, according to experts in the area with whom we spoke over the weekend, have

surprised even the most bullish students of the topic and have created additional significant balance sheet and earnings problems for

companies, such as GM, that have old-fashioned, traditional defined-benefit plans. That’s because, under the accounting rules, every

time it becomes apparent that a group of employees enrolled in a defined-benefit pension plan is going to live materially longer than

the plan sponsor imagined—and that these individuals therefore will be receiving pension checks longer than the sponsor forecast—

the sponsor has to post an additional pension liability on its balance sheet and record a hit to earnings.

It should come as no surprise, then, that for many people involved in this corner of the pension world known as “pension closeouts,”

the question is not whether the deal announced by Pru and GM is a harbinger of more deals to come but when these deals will be

annnounced. It’s hard to say just how many companies are positioned similarly to GM—willing to take an upfront $3 billion earnings

hit in addition to paying as much as $29 billion to Prudential in order to get out from under its pension obligation and the associated

balance-sheet and earnings volatility.

To us, however, one thing seems certain: The Pru/GM deal will generate many questions in the minds of investors. And that’s why we

thought it would be helpful to provide (see below) a list of these questions and our answers to them, along with the specific financial

impact that we expect the GM deal will have on Prudential’s financial results.

How exactly will the Pru/GM deal work?

Under the deal announced jointly by Pru and GM, roughly 42,000 of GM’s 118,000 salaried retirees will be given the choice of

receiving a lump-sum pension payment from GM or continuing to receive the same monthly pension check they have been receiving,

only the check will no longer be paid by GM but instead will start coming out of Prudential’s pocket on January 1. The remaining

76,000 salaried retirees (118,000 minus 42,000) will have their monthly pension obligation also shifted to Prudential beginning

January 1.

In return for agreeing to assume these obligations, Prudential will receive a check from GM for somewhere between $18 billion and

$29 billion, with the final number being a function of how many of the 42,000 choose the lump sum from GM as opposed to moving

over to Prudential. Whatever the final amount, Pru and GM have agreed that it will set equal to 110 % of what the two companies say

is the present value of the pension obligations Pru will be assuming. The 10 % premium represents compensation to Prudential for the

risk that its projections of future investment returns and U.S. lifespans could prove wrong.

Prudential Financial, Inc.June 4, 2012

3

Why is the Pru/GM deal happening now?

It’s happening now (as opposed to at another time) because more than ever GM wants to be in the car- and truck-building business

only, and out of being in what its CFO, Mr. Ammann, called on Friday the “pension business.” That business, as shown in the exhibit

below from GM’s conference call with analysts on Friday, has experienced wide swings in the funding status of GM’s pension plan.

The plan has gone from being handily overfunded to badly underfunded and back to overfunded again. These swings in “fundedness”

have produced significant volatility in GM’s book value, since for several years the funded status of defined-benefit pension plans has

appeared on U.S. companies’ balance sheets. GM said on Friday that it expected to record a second-half expense of $3 billion and that

it expected its earnings to be lower by $200 million annually as a result of doing the deal with Pru. But it said that it would go forward

anyway in order to put the issue pension-related volatility permanently behind the company.

Exhibit 1: GM’s Pension Plan “Fundedness” Has Been Volatile

Source: Company presentation

How will Pru make money off this deal?

While the GM transaction is enormous, the economics, i.e., the way in which Pru hopes to make money off of the deal, is no different

from any other life insurance transaction. It’s a spread business. Specifically, Pru will immediately put the money it receives from GM

to work in the bond market. It fully anticipates earning over the course of time a spread over the rate of interest that was used to

discount GM’s pension obligations (we believe that number is 4%). In addition, Pru is hoping to earn longevity-related spread, that is,

profit stemming from the fact that GM’s retirees may not live as long as the presumably conservative lifespan assumptions that Pru

used in pricing the GM deal. Finally, Pru is probably anticipating generating expense-related spread. This is the profit that a life

insurance company earns by being able to administer a block of business at a lower cost than the expenses it built into its pricing

proposal.

Does the GM deal represent good business for Pru?

Probably, although we won’t know for certain for literally decades, when the last retiree in the GM retiree group has died. At that

point, Prudential will be able to look back and have a complete picture of how the GM business performed.

Still, it’s probable that the GM transaction will end up being a good use of Prudential’s capital and management time. Here’s why:

A Natural Hedge to Its Mortality Risk. Prudential has written millions of individual life insurance policies over many decades.

The risk to Pru on these policies is mortality risk, i.e., the risk that large numbers of these life insurance policyholders die young.

The risk from the GM deal is that retirees live too longexactly the opposite of the risk that Pru is facing in its life business.

Therefore, investors can think of the GM deal, as well as further deals like the GM transaction that we expect Pru to do, as a natural

hedge of Pru’s flagship mortality business.

A Less Risky Business than Life Insurance. The experts we spoke with over the weekend said that longevity deals such as the

one Pru struck with GM are on balance also less risky than life insurance since such deals are less likely than life transactions to

produce catastrophic losses.


4

If GM’s retirees live longer than Pru contemplated, that development would make the GM business less profitable than Pru imagined.

But it probably wouldn’t cause large losses for Pru. It would simply erode returns from the deal slowly and over time. Contrast this to

a traditional life insurance business in which events such as global diseasea flu, AIDS, or any pandemiccould bankrupt a life

insurer that lets its guard down by not having good medical underwriting. There’s just less volatility in the results of longevity

business than in mortality business.

Why is Pru able to handle the risk better than GM?

Part of the answer is specialization: By doing the deal with Pru, GM is in effect saying that Pru is probably better at managing a

portfolio of fixed-income assets to retire a bunch of lifespan-linked liabilities than GM is. GM, in short, is trying to stick to its knitting

and let Pru do what it does best: manage money and figure out how long people are going to live.

On the other hand, there are important accounting considerations that are also part of the story.

GM, like all publicly traded companies, is subject to U.S. Generally Accepted Accounting Principles, or GAAP, for pension

obligations. These accounting rules not only have companies record the extent of their pension plans’ underfundedness on their

balance sheets, but they also generate big benefits to and hits to earnings depending on swings in plan asset values. Put simply, the

resulting balance-sheet and earnings volatility from running a corporate pension plan can be enormous.

Prudential, by comparison, doesn’t face this same accounting-driven volatility, at least not when it sells a group annuity contract to

take over a company’s pension plan. Pru uses insurance accounting to record that group annuity’s results. And while under this

accounting the assets that Pru will receive from its pension-plan customers will get marked to market, most analysts tend to ignore

these “marks” in their analysis of Pru. Moreover, the liability that Pru sets up when it sells a group annuity does not move around

nearly as much under insurance accounting as that liability moves when it is on an industrial company’s balance sheet as a pension

liability.

Call it accounting arbitrage. It’s one more reason, in our view, that GM was willing to stomach a huge loss and to pay a 10 %

premium to Pru to get part of GM’s retire pension obligation to go away.

What is Prudential’s biggest risk?

Experts in the pensions area with whom we spoke over the weekend said that by far the No. 1 risk Prudential is taking in the GM deal

is longevity risk, i.e., the risk that GM’s salaried retirees will live longer than Prudential contemplated when it priced the deal. That’s

because Pru is agreeing to pay these retirees a monthly check for the remainder of the retirees’ lives. If they live longer than Pru

forecast, that negative surprise from the company’s perspective will cut into the company’s profit on the GM transaction. The pension

experts we spoke with told us that without question Pru assumed in negotiating terms with GM that lifespans of the retirees will

continue to improve. So all else being the same, for Pru to achieve its targeted ROE, which we’re estimating is 13%, the improvement

in lifespans will need to be equal to or less than what Pru forecast. But if lifespans expand faster than Pru forecast, Pru will take a hit.

But if Pru has been such a dominant player in life insurance, doesn’t it naturally follow that Pru understands

longevity trends?

Not necessarily. For one thing, life insurance companies get the benefit of medically underwritinggetting the medical records of

each person who applies for life insurance coverage. With detailed information on that person’s health, life insurers can make an

informed judgment as to how much to charge.

Not the case for liftetime annuities or for longevity deals like the one Pru entered into with GM: There’s generally no medical

underwriting. Pru likely was given some demographic information about the GM retirees whose lifetime income Pru will now be

providing. But Pru certainly didn’t get a chance to send out a paramedic to do a physical exam on these individuals, something it

would most likely do if it were writing a large life insurance policy on any one of these individual’s lives. Bottom line: Pru certainly is

not as familiar with the medical condition and therefore the expected life span of these retirees as would be the case if it were

underwriting them for life insurance.

What other risks is Prudential taking?

In addition to taking longevity risk, Pru is likely taking some interest-rate risk. That’s because it is probable that the duration of some

of the liabilities Pru is adding to its balance sheet through the GM deal will exceed the duration of the assets that Pru is able to invest

in to retire these liabilities. But Pru will almost assuredly overlay, on top of these investments, a derivative strategy to in effect lock in

reinvestment rates on bonds coupons it receives. This will reduce but not eliminate any rate risk that Pru faces.

And Pru will face basis riskthe risk that any mortality-related losses on the GM deal won’t be fully offset by mortality-related gains

in its life business. The average age of Pru’s life insurance policyholders is probably somewhere between 35 and 45. The average age

of the retirees from GM is probably around 65. So it’s quite possible that any errors Pru suffers on the life insurance side of its


5

business will not be fully offset on the longevity side. Errors in predicting death rates in one age cohort don’t necessary appear as

offsetting benefits in another cohort.

What about credit risk? Won’t there be that, too?

Absolutely. The more than $20 billion that Pru will likely be receiving from GM will be invested in the company’s general investment

portfolio, known as the general account. That portfolio has a heavy component of corporate bonds, both public and private placement.

So, to the extent that Prudential is not hedging these bonds through the use of, say, credit-default swaps, Prudential will face credit

risk. As in any other deal of this type, Pru is assuming a certain level of credit losses on the bonds it plans to invest in with proceeds

from the GM deal. Any losses in excess of that level would erode Pru’s profit margin on the transaction.

Does the Pru/GM deal represent a one-off transaction, or should investors expect more deals like it and for Prudential to be at the center of them?

We think more deals are coming. Maybe not immediately. And maybe the next deal won’t be as large as the GM deal announced on

Friday. But we wouldn’t be surprised to see big, similarly structured deals reach the market in coming quarters, including at GM,

where Mr. Ammann told the analysts Friday, “We see additional opportunities down the road.” That may have been a reference to

plans to offload the company’s unionized employee pension plan, which actually would be a bigger deal than the one GM announced

on Friday.

Prudential executives, meanwhile, have said repeatedly, including at the company’s recent investor day, that the company is homing in

on the pension-closeout market as a key growth area for the company in coming years.

At a minimum, we would expect that CFOs across America will be looking at the GM/Prudential partnership to see if a similar deal

now makes sense for their companies.

On the other hand, it’s important to note that there were unusual, if not unique, circumstances in GM’s case that led the auto maker to

Prudential. GM had an enormous pension obligation relative to its market capitalization, it is going through a restructuring in which it

is trying to focus exclusively on its core auto- and truck-building business, and the plan that GM chose to defease in partnership with

Prudential was very well funded (92 %). GM, in short, didn’t have to plug a big pension hole before offloading the white-collar

pension obligation to Prudential.

Having said that, we still think more deals like the Pru/GM transaction are coming and that Pru will likely be involved with many of

them, although such transactions take months to negotiate and therefore might not come immediately. Moreover, to the extent that

other global players in the pensions business, such as MetLife, have expressed an interest to move heavily into the pension-closeout

area, returns on the business could erode, causing Pru to not be as aggressive in pursuing future business.

One thing is for sure: Prudential wants to do more transactions similar to the deal it announced with GM. Pru’s management made this

exact point during the company’s investor day the week before last in New York. And by doing the huge GM deal as well as a series

of similar but smaller deals in the last 18 months, including reinsuring some longevity risk from a U.K.-based affiliate of Goldman

Sachs & Company, Prudential has made it clear to the marketplace its interest in pursuing these types of transactions. With the GM

deal notched on its belt, Prudential clearly has a lead in them.

Our take on how the GM deal will affect Pru’s financial statements

As a result of the transaction that Pru announced with GM, we are raising our 2013 EPS estimate for Pru from $7.81 to $8.00. The

new figure is now 25 cents above the $7.75 consensus estimate. At the same time, we are raising our projection for the ROE that we

believe Prudential will be able to achieve by the end of next year. Having thought that this number would come in at 13.1 %, we now

believe Pru will be able to post a 13.3 % ROE by 2013’s fourth quarter.

The changes, simply put, involved our adding additional earnings into our forecast for Pru’s profits for 2013 stemming from the GM

deal, without much in the way of reduction in share buyback. Pru said at its investor day the week before last that it expected

between dividends, acquisitions, organic growth such as the GM deal, and share buybacksto deploy $3 billion in capital over the

four quarters beginning with 3Q12. Our analysis of the GM deal leads us to conclude it will absorb about $1.2 billion in capital,

leaving Prudential with the same roughly $250 million a quarter in share repurchase that we had been forecasting. Accordingly, in

order to account for the GM deal, all we had to do in order to adjust our earnings model was to add in the expected earnings from the

deal, which we peg at roughly $25 million after tax per quarter.


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Exhibit 2: Assumed Capital Deployment ($ mn)

Capital available to deploy over 4 quarters $3,000

Less: Capital used for dividends $884

Less: Capital used for buybacks (3Q12 - 2Q13) 940

Less: Capital used to back GM deal 1,176

Capital surplus/(shortage) $0 Source: PRU 2012 investor day; RBC Capital Markets Research

We understand that the ultimate impact of the GM deal on Pru’s earnings and ROE will depend on exactly how much capital the

Newark-based company gets to put to work, which in turn is a function of how many of GM’s 118,000 salaried retirees ultimately see

their pension payments shifted over to Pru. The impact will also depend on what level of return Pru can ultimately earn on the GM

business. We have assumed a 13 % ROE.

The table below provides sensitivity analysis that we hope investors will find interesting and helpful.

Along the vertical axis, we show different “take” rates: our term for the percentage of the 42,000 GM retirees who are eligible for a

lump sum from GM but who instead choose to go with Prudential. Along the horizontal axis, we show different levels of assumed

incremental return above the 5 % that we assume Prudential is currently earning on its capital.

And in the body of the table we show the various ROE’s that Prudential would post by 2013 year-end under different take-

rate/incremental return scenarios.

The story is an encouraging one: Under virtually every scenario we looked at, Pru came out posting a 13% ROE.

Exhibit 3: 2013 ROE Sensitivity Analysis for Prudential Based on Different Assumptions for the GM Deal

Pickup in Returns

5% 6% 7% 8% 9% 10% 11% 12%

20% 13.26% 13.29% 13.32% 13.35% 13.38% 13.42% 13.45% 13.48%

30% 13.24% 13.28% 13.31% 13.34% 13.37% 13.41% 13.44% 13.47%

40% 13.23% 13.26% 13.30% 13.33% 13.37% 13.40% 13.43% 13.47%

50% 13.21% 13.25% 13.28% 13.32% 13.36% 13.39% 13.43% 13.46%

60% 13.20% 13.24% 13.27% 13.31% 13.35% 13.38% 13.42% 13.46%

70% 13.18% 13.22% 13.26% 13.30% 13.34% 13.38% 13.41% 13.45%

80% 13.17% 13.21% 13.25% 13.29% 13.33% 13.37% 13.41% 13.45%

90% 13.15% 13.19% 13.24% 13.28% 13.32% 13.36% 13.40% 13.44%

100% 13.14% 13.18% 13.22% 13.27% 13.31% 13.35% 13.40% 13.44%

Take R

ate

Source: Company reports, RBC Capital Markets analysis


7

Valuation

We arrive at our $79 price target by assigning a weight to the price targets based on our approaches to valuation.• Our residual income model yielded an intrinsic value one year from now of $96. For the residual income model, we are calculating a

cost of equity using a beta of 1.66, an equity risk premium of 4%, and a 10-year Treasury yield of 2.5%. Our five-year earningscompounded annual earnings growth rate is 16%. We are assuming a long-term payout ratio of 25%.

• Our regression-based approach resulted in a price target of $62. Our price target is based on a next 12 months ROE of 12.6%, a bookvalue per share excluding AOCI of $55.85, and the following regression equation: Implied P/BV excluding AOCI = 7.8405 x ROE+ 0.0307. We grew the resulting price target by the cost of equity of 9.5% to obtain a one-year price target of $62.

Our weighted average price target is $79. We have assigned a weight of 50% to the price target obtained using the residual incomemodel and a weight of 50% to the price target obtained using the regression analysis.

Price Target ImpedimentThere are several factors that could impede the company's ability to meet our price target:

• Prolonged low interest rates and currency volatility could be a risk to earnings.

• Ineffective hedging of variable annuity guarantees.

• Potential integration risks associated with recent Star and Edison acquisitions.

Company DescriptionPrudential Financial, Inc. and its subsidiaries provide a wide range of insurance, investment management, and other financial productsand services to both individual and institutional customers throughout the United States and in many other countries. Principalproducts and services provided include life insurance, annuities, retirement-related services, mutual funds, investment management,and real estate services. The company has organized its principal operations into the Financial Services Businesses and the ClosedBlock Business. The Financial Services Businesses operate through three operating divisions: U.S. Retirement Solutions andInvestment Management, U.S. Individual Life and Group Insurance, and International Insurance. The company’s real estate andrelocation services business as well as businesses that are immaterial to overall earnings are included in Corporate and Otheroperations within the Financial Services Businesses. The Closed Block Business is managed separately from the Financial ServicesBusinesses and was established on the date of demutualization. It includes Prudential’s in force participating insurance and annuityproducts and assets that are used for the payment of benefits and policyholders’ dividends on these products, as well as other assetsand equity that support these products and related liabilities.


8

($ in millions)

Earnings Model - Prudential Financial, Inc. 1QA 2QE 3QE 4QE 1QE 2QE 3QE 4QE 2010A 2011A 2012E 2013E

Pre-tax adjusted operating income (loss) by division

US Retirement Solutions and Investment Mgmt Division $698 $533 $551 $569 $606 $625 $645 $666 $2,002 $1,915 $2,350 $2,542

US Individual Life and Group Insurance Division 74 165 162 168 182 185 181 188 694 687 569 736

International Insurance Division $606 $678 $696 $715 $730 $759 $789 $820 $1,915 $2,383 $2,695 $3,097

Corporate and Other operations ($363) ($341) ($347) ($354) ($358) ($361) ($368) ($375) ($949) ($1,139) ($1,405) ($1,462)

Total pre-tax adjusted operating income $1,015 $1,036 $1,061 $1,097 $1,160 $1,207 $1,247 $1,299 $3,662 $3,846 $4,210 $4,914

Income taxes, applicable to adjusted operating income 274 287 294 304 321 334 345 360 961 994 1,159 1,361

Financial Services Businesses after tax adjusted op. inc. $741 $749 $767 $793 $862 $896 $925 $963 $2,701 $2,852 $3,051 $3,647

Effective tax rate 27.0% 27.7% 27.7% 27.7% 27.7% 27.7% 27.7% 27.7% 26.2% 25.8% 27.5% 27.7%

Adjustments to operating income $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

Direct equity adjustments for EPS calculation $8 $5 $5 $5 $6 $6 $6 $6 $36 $24 $23 $23

Earnings related to interest, net of tax, on exchangeable surplus notes 4 4 4 4 4 4 4 4 17 17 16 16

Earnings allocated to participating unvested share-based payment awards 8 8 8 8 8 8 8 8 35 38 32 32

Weighted diluted average shares outstanding 477.5 473.3 469.5 465.7 462.0 458.4 454.6 450.9 474.1 488.8 471.5 456.5

Share repurchases as % of weighted diluted avg. shares outstanding 0.00% 0.88% 0.82% 0.81% 0.80% 0.79% 0.83% 0.82% 0.00% 0.00% 2.50% 3.24%

Per share information

Diluted operating EPS $1.56 $1.58 $1.64 $1.71 $1.87 $1.96 $2.04 $2.14 $5.74 $5.84 $6.49 $8.00

Growth in operating EPS (12.8%) 1.6% 3.3% 4.2% 9.6% 4.8% 4.0% 4.9% 5.2% 1.9% 11.0% 23.4%

Dividends per share 0.00 0.00 0.00 1.75 0.00 0.00 0.00 2.15 $1.15 $1.45 $1.75 $2.15

Diluted BV per share, excl. AOCI $55.85 $57.41 $59.03 $59.01 $60.85 $62.79 $64.82 $64.84 $52.01 $58.02 $59.01 $64.84

Operating ROE 11.1% 11.3% 11.4% 11.7% 12.6% 12.8% 12.9% 13.3% 10.9% 10.8% 11.2% 13.1%

Share count roll forward

Basic weighted avg. common shr - beginning balance - 469.2 465.0 461.2 457.4 453.7 450.1 446.3 348.9 451.9

Treasury stock, net - (4.2) (3.8) (3.8) (3.7) (3.6) (3.8) (3.7) (2.9) (3.7)

Newly issued shares - - - - - - - - - -

Weighted average common shares outstanding - ending balance 469.2 465.0 461.2 457.4 453.7 450.1 446.3 442.6 466.8 480.3 463.2 448.2

Diluted weighted avg. common shr - beginning balance - 477.5 473.3 469.5 465.7 462.0 458.4 454.6 355.1 460.2



Diluted weighted average common shares outstanding - ending balance 477.5 473.3 469.5 465.7 462.0 458.4 454.6 450.9 474.1 488.8 471.5 456.5

Previous period's diluted ending shares - 473.3 469.1 465.3 461.5 457.8 454.2 450.4 351.9 456.0



Ending number of diluted shares at the end of period 473.3 469.1 465.3 461.5 457.8 454.2 450.4 446.7 476.4 485.1 467.3 452.3

Assumed dilution - 8.3 8.3 8.3 8.3 8.3 8.3 8.3 7.3 8.4 8.3 8.3

Share buybacks and issuances

Assumed share price $0.00 $60.00 $61.20 $62.42 $63.67 $64.95 $66.24 $67.57 - - 61.2 65.6

Sequential increase in Prudential's share price 0% 2% 2% 2% 2% 2% 2% 2% - - 0.0% 7.2%

Funds allocated to repurchases ($ in million) $0 $250 $235 $235 $235 $235 $250 $250 - $0 $720 $970

Assumed share price 0.00 60.00 61.20 62.42 63.67 64.95 66.24 67.57 - - 61.21 65.61

Shares repurchased in the period (million shares) - 4.17 3.84 3.77 3.69 3.62 3.77 3.70 - - 11.8 14.8

Number of shares issued (million shares) - - - - - - - - - - - -

Assumed Share price $0.00 $60.00 $61.20 $62.42 $63.67 $64.95 $66.24 $67.57 $0.00 $0.00 $61.21 $65.61

Gross proceeds from issuance ($ in million) - - - - - - - - - - - -

Attributed equity (for ROE calculation)

Including accumulated other comprehensive income $33,509 $34,008 $34,540 $34,305 $34,933 $35,594 $36,269 $36,039 $28,310 $32,817 $34,305 $36,039

Excl. AOCI relating to gains/losses on investment & postretirement benefits n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

Excluding total accumulated other comprehensive income 26,436 26,935 27,467 27,232 27,860 28,521 29,196 28,966 25,571 27,567 27,232 28,966

Other items affecting capital account during the period

Operating earnings for the period $741 $749 $767 $793 $862 $896 $925 $963 $2,701 $2,852 $3,051 $3,647

Dividends declared - - - 793 - - - 943 539 691 803 955

Share buybacks during the period ($ in million) - 250 235 235 235 235 250 250 - - 720 970

Share issuance during the period ($ in million) - - - - - - - - - - - -

Other metrics

Operating ROE as reported per supplement n/a n/a n/a n/a n/a n/a n/a n/a n/m n/m n/m n/m

Operating ROE based on attributed equity ex. AOCI 11.10% 11.30% 11.36% 11.68% 12.61% 12.80% 12.90% 13.32% 10.88% 10.82% 11.22% 13.06%

Diluted book value per share including AOCI $70.80 $72.49 $74.23 $74.33 $76.30 $78.36 $80.52 $80.67 $57.58 $69.07 $74.33 $80.67

Diluted book value excl. AOCI relating to losses on inv. & postretirement benefits n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

Diluted book value per share excluding AOCI 55.85 57.41 59.03 59.01 60.85 62.79 64.82 64.84 52.01 58.02 59.01 64.84

Leverage ratio calculation

Capital debt (see pg. 9/10 of supplement) $10,692 $10,692 $10,692 $10,692 $10,692 $10,692 $10,692 $10,692 $8,763 $11,224 $10,692 $10,692

Junior subordinated debt (hybrid) 1,519 1,519 1,519 1,519 1,519 1,519 1,519 1,519 1,519 1,519 1,519 1,519

Capital debt excluding hybrid 9,173 9,173 9,173 9,173 9,173 9,173 9,173 9,173 7,244 9,705 9,173 9,173

Debt used for calculating leverage 10,312 10,312 10,312 10,312 10,312 10,312 10,312 10,312 7,624 10,844 10,312 10,312

Stockholders' equity 26,436 26,935 27,467 27,232 27,860 28,521 29,196 28,966 25,571 27,567 27,232 28,966

Total capital 37,128 37,627 38,159 37,924 38,552 39,213 39,888 39,658 34,334 38,791 37,924 39,658

Leverage ratio 27.8% 27.4% 27.0% 27.2% 26.7% 26.3% 25.9% 26.0% 22.2% 28.0% 27.2% 26.0%

Equity treatment of hybrid 25% 25% 25% 25% 25% 25% 25% 25% 75% 25% 25% 25%

RBC score - Prudential Insurance Co of America n/a n/a n/a n/a n/a n/a n/a n/a 533.0% n/a n/a n/a

Source: Financial Supplements; RBC Capital Markets

20132012


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Required Disclosures

Conflicts Disclosures

The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including totalrevenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generated byinvestment banking activities of the member companies of RBC Capital Markets and its affiliates.

RBC Capital Markets, LLC makes a market in the securities of Prudential Financial, Inc. and may act as principal with regard to salesor purchases of this security.

A member company of RBC Capital Markets or one of its affiliates received compensation for products or services other thaninvestment banking services from Prudential Financial, Inc. during the past 12 months. During this time, a member company of RBCCapital Markets or one of its affiliates provided non-investment banking securities-related services to Prudential Financial, Inc..

A member company of RBC Capital Markets or one of its affiliates received compensation for products or services other thaninvestment banking services from Prudential Financial, Inc. during the past 12 months. During this time, a member company of RBCCapital Markets or one of its affiliates provided non-securities services to Prudential Financial, Inc..

RBC Capital Markets is currently providing Prudential Financial, Inc. with non-investment banking securities-related services.

RBC Capital Markets has provided Prudential Financial, Inc. with non-investment banking securities-related services in the past 12months.

RBC Capital Markets has provided Prudential Financial, Inc. with non-securities services in the past 12 months.

The author is employed by RBC Capital Markets, LLC, a securities broker-dealer with principal offices located in New York, USA.

Explanation of RBC Capital Markets Equity Rating System

An analyst's 'sector' is the universe of companies for which the analyst provides research coverage. Accordingly, the rating assigned toa particular stock represents solely the analyst's view of how that stock will perform over the next 12 months relative to the analyst'ssector average.RatingsTop Pick (TP): Represents analyst's best idea in the sector; expected to provide significant absolute total return over 12 months with afavorable risk-reward ratio.Outperform (O): Expected to materially outperform sector average over 12 months.Sector Perform (SP): Returns expected to be in line with sector average over 12 months.Underperform (U): Returns expected to be materially below sector average over 12 months.Risk Qualifiers (any of the following criteria may be present):Average Risk (Avg): Volatility and risk expected to be comparable to sector; average revenue and earnings predictability; nosignificant cash flow/financing concerns over coming 12-24 months; fairly liquid.Above Average Risk (AA): Volatility and risk expected to be above sector; below average revenue and earnings predictability; maynot be suitable for a significant class of individual equity investors; may have negative cash flow; low market cap or float.Speculative (Spec): Risk consistent with venture capital; low public float; potential balance sheet concerns; risk of being delisted.

Distribution of Ratings

For the purpose of ratings distributions, regulatory rules require member firms to assign ratings to one of three rating categories - Buy,Hold/Neutral, or Sell - regardless of a firm's own rating categories. Although RBC Capital Markets' ratings of Top Pick/Outperform,Sector Perform and Underperform most closely correspond to Buy, Hold/Neutral and Sell, respectively, the meanings are not the samebecause our ratings are determined on a relative basis (as described above).

Distribution of RatingsRBC Capital Markets, Equity Research

Investment BankingServ./Past 12 Mos.

Rating Count Percent Count Percent

BUY[TP/O] 777 51.94 221 28.44HOLD[SP] 652 43.58 161 24.69SELL[U] 67 4.48 2 2.99


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Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q220

30

40

50

60

70

2010 2011 2012

09/27/11I:OP:73

11/03/11OP:78

11/11/11OP:73

02/21/12OP:80

05/03/12OP:77

Rating and Price Target History for: Prudential Financial, Inc. as of 06-01-2012 (in USD)

Legend:

TP: Top Pick; O: Outperform; SP: Sector Perform; U: Underperform; I: Initiation of Research Coverage; D: Discontinuation of Research Coverage; NR: Not Rated; NA: Not Available;

RL: Recommended List - RL: On: Refers to date a security was placed on a recommended list, while RL Off: Refers to date a security was removed from a recommended list.

Created by BlueMatrix

References to a Recommended List in the recommendation history chart may include one or more recommended lists or modelportfolios maintained by a business unit of the Wealth Management Division of RBC Capital Markets, LLC. These RecommendedLists include a former list called the Prime Opportunity List (RL 3), the Guided Portfolio: Prime Income (RL 6), the Guided Portfolio:Large Cap (RL 7), Guided Portfolio: Dividend Growth (RL 8), the Guided Portfolio: Midcap 111 (RL9), and the Guided Portfolio:ADR (RL 10). The abbreviation 'RL On' means the date a security was placed on a Recommended List. The abbreviation 'RL Off'means the date a security was removed from a Recommended List.

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RBC Research Comment: Prudential/GM

Economy & Finance

Transcript of RBC Research Comment: Prudential/GM