Prudential Financial Inc.PRU

Morningstar Rating

Stock Research and Analysis

by Alan Rambaldini

As one of the largest life insurers in the United States, with large operations in attractive international markets like Japan and Korea, Prudential Financial has size and diversity as its main advantages. Although we don't believe this is enough to endow the firm with an economic moat, it does allow management to allocate capital to the best opportunities. Read more

Bulls Say

Prudential has a well-recognized brand and large salesforce in the U.S. and Asia. Its Life Planners--the sales agents in Japan who are focused on affluent customers--are particularly valuable. They are generally college-educated, have sales experience, and tend to stick with the company.

The 2007 privatization of Japan Post and Kampo (postal insurance) eliminated key competitive advantages for the government-owned behemoth and presents a growth opportunity for Prudential.

The integration of troubled Japanese life insurer Kyoei, which Prudential acquired in April 2001 and renamed Gibraltar, is going well. Gibraltar doubled the size of Prudential's Japanese franchise.

Prudential has exercised its put option on a brokerage joint venture with Wachovia, but under GAAP it can't include that in its balance sheet until January 2010. The firm's financial strength would be much improved if it could monetize the investment before the realization date next year. Read more

Bears Say

Prudential has established a closed block of assets and liabilities that segregates many of its older, traditional life insurance policies. Only the Class B stock is meant to reflect the value of this business, but the lower-margin policies of the closed block will drag on the combined firm's operating profit for years.

Prudential could lose a large number of its best sales agents--people in whom it has invested a lot of time and money--to competing financial services firms or independent financial advisory practices.

Because of its acquisitive nature, the firm takes on additional risks every time it buys another business, such as overpaying or an integration that goes sour.

Prudential's management has not proved to be the best capital allocator, as it purchased billions of dollars' worth of stock at prices above book value only to find itself without the cash to make repurchases while the shares were trading at a discount to book value. Read more

Strategy

Management intends to reinvest capital in its higher-return international and retirement businesses to drive earnings growth. In Asia, Prudential focuses on recruiting the most promising candidates for its Life Planner salesforce. Read more

Management

After 30 years with Prudential, John Strangfeld took over as CEO in 2008 from Arthur Ryan, who had been at the helm since 1994. Strangfeld also took over as chairman of the board, a practice we frown upon, as we would prefer to see those roles separated to ensure objectivity. Read more

Profile

Prudential Financial sells insurance and asset-management products to individuals and institutions. The firm has a large international insurance division that operates in more than 30 countries, though primarily in Japan and Korea, as well as a domestic individual life and annuity business. Read more

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