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Analysts eye Prudential LTCI charges

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Prudential Financial Inc. (NYSE:PRU) will be taking about $700 million in charges related to its long-term care insurance (LTCI) business.

John Nadel and other analysts at Sterne, Agee & Leach have discussed the charges in a comment on Prudential’s latest earnings report.

When Prudential demutualized, it began to report separate results for a closed block of pre-demutualization business and for the company’s Financial Services Businesses. The Financial Services Businesses section of the financial reports includes a section on the performance of divested businesses. The divested businesses results affect the company’s net income and book value but not the company’s adjusted operating results.

Prudential decided to discontinue individual LTCI sales earlier this year and then decided to discontinue group LTCI sales. When Prudential dropped LTCI sales, it moved LTCI results into a category for divested businesses, the analysts said.

The Prudential Financial Services Businesses are reporting $722 million in after-tax adjusted operating income for the third quarter on $13 billion in revenue, up from $406 million in after-tax adjusted operating income on $9.8 billion in revenue for the third quarter of 2011.

The company as a whole is reporting a $661 million net loss for the quarter on $13 billion in revenue, compared with $1.6 billion in net income on $15 billion in revenue for the comparable quarter in 2011.

Prudential is taking $200 million in charges in connection with an actuarial review that will lead to a write-off of the value of “deferred acquisition costs” (DAC) associated with the LTCI business, the analysts said.

The company also is adding about $500 million to LTCI reserves as measured by Generally Accepted Accounting Principles (GAAP) because of the effects of low interest rates on investment returns and because of other factors, the analysts said.

For the same reasons, Prudential added $40 million to the statutory reserves tracked by insurance regulators.

Prudential now has about $2 billion in total LTCI reserves, with about $400 million helping to cushion the business against interest rate shocks and other worrisome scenarios, the analysts said.

“Management will complete its review of cash flow testing in [the fourth quarter], and it would appear given the somewhat dramatic move lower in long-term rates and long-term investment yields that further strengthening of cash flow testing reserves could be required,” the analysts said. 

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