Prudential Financial To Buy American Skandia

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Prudential Financial Inc., Newark, N.J., has signed an agreement with Skandia Insurance Company Ltd., Stockholm, to acquire its U.S. division, American Skandia, Inc., for almost $1.3 billion, the companies announced Dec. 20.

The companies expect to close the deal during the second quarter 2003.

The deal would make Prudential a major player in the VA market and increase its visibility in mutual funds as well.

Based on current data, the acquisition would propel Prudential from 22nd to sixth place in sales in the U.S. variable annuity market and from 14th to fourth in terms of VA assets under management, Prudential notes.

Skandia Insurance says it is selling the subsidiary because it expects the U.S. VA market to show lower sales growth and profitability due to the impact of a slumping stock market.

“This has decreased the probability that American Skandia will reach Skandias return targets,” the company says. “This transaction will therefore enable American Skandia to improve its future development with a U.S. financial institution that has diversified U.S product lines and complementary distribution channels.”

In contrast, Prudential sees ample opportunities in the purchase. “This acquisition presents us with attractive growth possibilities,” says Art Ryan, chairman and CEO of Prudential. “And it is consistent with our strategy to acquire businesses that complement and enhance our existing businesses that grow and protect our customers wealth.”

Analysts have been expecting American Skandia to sell its U.S. unit, and rumors to that effect had appeared in the New York Times and Wall Street Journal in September.

Because American Skandia is the largest distributor of VAs through independent financial planners in the U.S., the deal will significantly grow Prudentials third-party distribution capabilities in the U.S., a company spokeswoman points out.

It has VA assets under management of $21.5 billion and mutual fund assets under management of $4.1 billion.

In addition to paying Skandia $1.15 billion, Prudential will assume a $115 million tax liability in the deal.

Ryan says he expects the acquisition will generate an attractive percentage return on equity in the mid-teens, adding 10 cents to 15 cents to company earnings per common share. This would put earnings in the range of $2.50 to $2.65 per share for 2003, based on after-tax adjusted operating income.

In addition to VAs, Prudential would also be able to sell American Skandias fixed annuity, mutual funds and life products through independent financial planners in American Skandias distribution channel.

American Skandia has placed its products with about 10.5% of U.S. independent financial planners, Prudential reports.

Mary Flowers, the Prudential spokeswoman, says the company is certain VAs will bounce back from their current doldrums. “We maintain the future is very attractive in the variable annuity industry. Were committed to it in the long term,” Flowers says.

For the time being at least, Prudential plans to co-brand the acquired business as Prudential-American Skandia products, says Flowers.

The acquisition will also give Prudential an increased presence in banks, although American Skandia VA sales in that channel have been declining of late.

The company had been among the top five VA vendors in banks until 2001 but had dropped to 15th place in the first half of 2002, according to Kenneth Kehrer Associates, Princeton, N.J.

Skandia says that selling its U.S. unit will give it increased flexibility by significantly reducing its debt and cash consumption.

The company says it plans to focus on developing its European business and to expand into new markets with attractive growth possibilities.

In response to the announcement, Moodys Investors Service downgraded Prudentials outlook from stable to negative, while Standard & Poors Ratings Services affirmed its existing rating of stable for the firm.

S&P says it believes Prudential has ample financial stability to handle the acquisitions without adverse affects on its existing business.

Moodys, on the other hand, says it thinks the addition of American Skandia would modestly increase Prudentials leverage and its equity market exposure.

American Skandias in-force VA business currently carries $6 billion in guaranteed death benefits and has a partial-withdrawal feature that, Moodys notes, “Prudential will have to manage carefully in the event the equity markets remain volatile or decline further.”

It adds, however, that Prudential is well positioned to withstand downside risks.

Moodys also notes that the acquisition carries strategic benefits for Prudential, including access to independent financial planners.

Andrew Kligerman, an analyst with Bear Stearns, Inc., New York, says the deal looks good for Prudential.

American Skandias purchase price “appears compelling at nearly a 40% discount to current book value of roughly $2 billion and Prus fair value assumption of around $2 billion,” Kligerman says.


Reproduced from National Underwriter Life & Health/Financial Services Edition, December 30, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.