A Potential Pru-Cigna Deal Gets Positive Reviews

By

Analysts generally were positive about reports that Prudential Financial is in negotiations to buy CIGNAs retirement services business for about $2 billion.

At press time, Prudential, Newark, N.J., and CIGNA, Philadelphia, declined comment on the reports.

The retirement businesses of both insurers serve the qualified and nonqualified markets. Prudentials defined contribution offerings include the 401(a), 401(k), 403(b), 457 and Taft-Hartley markets. It also offers GICs, funding agreements and group annuities.

In 2002 net sales were $610 million and adjusted operating income, $141 million.

CIGNA offers both defined benefit and defined contribution pension plans, profit-sharing plans and retirement savings plans.

At year-end 2002, CIGNAs retirement operations had total deposits of $8.77 billion, which included $5.58 billion from defined contribution plans, $1.99 billion from defined benefit plans and $61 million from other products including GICs. Total operating earnings in 2002 were $231 million.

In a written report, Andrew Kligerman of UBS, New York, says the combination would complement Prudentials existing retirement operations, adding not only greater scale but also CIGNAs “defined benefit outsourcing capabilities.”

A $2 billion price tag for CIGNAs retirement business would enhance Prudentials ability to achieve a 12% ROE, Kligerman adds.

Colin Devine, an analyst with Citigroups Smith Barney, New York, writes that at a price in the $2.25 billion range, and assuming an estimated $200 million in earnings from the CIGNA business and expense savings, the deal could add 20-25 cents per share immediately to Prudentials earnings on a full-year run rate basis.

Doug Meyer, a senior director at Fitch Ratings, Chicago, declined specific comment on the acquisition reports but did note theoretically, it would be a good fit for Prudential.

However, he continued, shedding its retirement business could have a negative impact on CIGNA because it would be selling a “stable, consistent profit area.”

The elimination of a source of earnings and diversification would increase the companys share of participation in the health market, an area that is more volatile, Meyer added.

Looking more generally at the retirement services market, Ann Perry, vice president and senior credit officer with Moodys Investors Service, New York, says companies with less than $2 billion to $3 billion in assets under management will find it difficult to stay in that market, encouraging consolidation in the financial services field.

Ultimately, there could be 25-30 retirement services providers from all segments of the financial services industry, says Thomas Upton, a director with Standard & Poors, New York, citing the recent merger announcement of Bank of America Corp. and FleetBoston Financial Corp.


Reproduced from National Underwriter Life & Health/Financial Services Edition, October 31, 2003. Copyright 2003 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.