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Prudential loss widens on restructuring costs, reserves

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(Bloomberg) — Prudential Financial Inc., the second- largest U.S. life insurer, posted a fourth-quarter loss on costs tied to restructuring, currency fluctuations and reserves. The stock fell in extended trading.

The loss widened to $1.46 billion from $460 million a year earlier, the Newark, New Jersey-based insurer said today in a statement. Operating earnings, which exclude some investing results, were $2.12 a share, missing the $2.38 average estimate of 18 analysts surveyed by Bloomberg.

Chief Executive Officer John Strangfeld, 61, is working to keep return on equity at the company’s 13 percent to 14 percent target. Results have been pressured by a decline in foreign currencies like the yen relative to the dollar and by interest rates near record lows.

“Rates are lower, so there’s more pressure on investment income,” Randy Binner, an analyst at FBR Capital Markets, said by phone before results were announced. “The biggest thing that’s beyond their control that people worry about is the yen.”

Prudential slipped 4.3 percent to $76.44 in extended trading at 4:54 p.m. in New York, after results were announced. The stock had declined 12 percent this year in regular trading. Life insurers have slumped amid a plunge in interest rates that sent the yield on the 10-year Treasury to its lowest levels since 2013.

Losses fueled by swings in the yen relative to other currencies were $2.45 billion, the insurer said. Prudential said in December that it hedged 2015 earnings at 91 yen to the dollar. A year earlier, Prudential said results included $1.2 billion of pretax currency losses, mainly tied to the yen.

International expansion

Prudential gets about half its profit from units outside the U.S., mainly in Japan. The insurer struck a deal in October to buy as much as 40 percent of Chilean pension provider AFP Habitat SA. To expand in Japan, Prudential in 2011 acquired Star Life Insurance Co. and Edison Life Insurance Co. from American International Group Inc.

The international insurance operation posted operating profit of $686 million, up from $647 million a year earlier.

Prudential said it recorded about $143 million in pretax costs to set aside more funds to back future claims on some policies, weighing on results at the U.S. units. That figure includes adjustments tied to market performance, the insurer said.

U.S. results

Fourth-quarter pretax operating profit fell 17 percent to $823 million at the U.S. retirement solutions and investment management division. Earnings dropped 35 percent to $322 million at the individual annuities unit. Quarterly earnings slumped to $162 million from $215 million at the U.S. individual life and group insurance unit.

Life insurers invest in bonds to back future obligations to policyholders and generate income. Prudential assumed in its 2015 outlook in December that the 10-year Treasury yield would rise to 2.97 percent by the end of this year. A 1 percentage- point drop in interest rates would cut earnings by 20 cents a share, Prudential said at the time.

MetLife Inc., the largest U.S. life insurer, has declined 9.8 percent this year. The New York-based company is scheduled to report fourth-quarter results on Feb. 11.

Debt repayment

Prudential in December said it would record costs from a financial restructuring as the company repaid debt and repurchased shares tied to its 2001 switch from a mutual to a stockholder-owned firm. The moves were part of an effort to free up capital.

The results included costs of $448 million to redeem debt at the unit with policies from before the conversion.Book value at Prudential’s main business climbed to $88.80 a share on Dec. 31. The measure of assets minus liabilities stood at $86.76 three months earlier.

Prudential said it repurchased $250 million of stock in the quarter at an average price of $86.89 a share. The company has $500 million remaining under a repurchase authorization that expires at the end of June. For the full year, net income was $1.38 billion, compared with a loss of $667 million in 2013.

In the U.S., Prudential has agreed to take on pension obligations from companies including Bristol-Myers Squibb Co. and General Motors Co. It has also sold insurance to U.K. plans to guard against the risk that retirees will live longer than expected. The deals draw on Prudential’s strength in estimating lifespans and can add to funds the firm oversees.