Prudential Posts $460 Million Loss as International Unit Stalls

Feb 05, 2014 6:13 pm ET

Feb. 6 (Bloomberg) -- Prudential Financial Inc., the No. 2 U.S. life insurer, posted fourth-quarter results that missed analysts’ estimates as growth stalled at the international operation.

The net loss widened to $460 million from $203 million a year earlier, Newark, New Jersey-based Prudential said yesterday in a statement. Operating profit, which excludes the results of policies sold before the firm went public and some investments, was $2.20 a share, missing the $2.23 average estimate of 20 analysts surveyed by Bloomberg.

Prudential, led by Chief Executive Officer John Strangfeld, gets about half its profit from units outside the U.S., mainly in Japan. Costs to bolster reserves weighed on results at the international business, which reported that profit was unchanged from a year earlier. Annualized new business premiums, a measure of sales, fell 38 percent.

“The problem with the Japanese insurance market is that it’s just as mature as the U.S. market,” Vincent Lui, an analyst at Morningstar Inc., said in an interview before results were announced. “The valuation is pretty rich right now.”

Prudential recorded $1.2 billion in costs tied to foreign exchange fluctuations, fueled by swings in the yen. The Japanese currency weakened 18 percent last year against the dollar. The insurer said the loss was cushioned by adjustments to other accounts that aren’t reflected in the net income figure.

Prudential fell 0.9 percent to $81.95 in extended trading at 4:25 p.m. in New York, after results were announced yesterday. The shares advanced 41 percent in the past 12 months through the close of regular trading, compared with the 27 percent rally of MetLife Inc., the largest U.S. life insurer.

International Reserves

Adjusted operating profit was $647 million at Prudential’s international insurance segment, as the Life Planner business recorded costs of $78 million to increase reserves. Results were also hurt by $11 million of costs to integrate units bought from American International Group Inc.

Annualized new business premiums at the international units were $683 million, compared with $1.1 billion a year earlier. Prudential has raised prices for some products and stopped selling one form of life insurance in Japan.

“We expect growth to be challenged into early 2014 due to tough comps and sales caps,” Jimmy Bhullar, an analyst at JPMorgan Chase & Co., said in a research note before results were announced. “A greater than expected slowdown in Japan sales would raise concerns about the growth potential of the international business.”

Prudential expanded in Japan in 2011 with the acquisition of two life insurers from AIG.

Strangfeld’s Target

Strangfeld posted adjusted operating return on equity of 15.2 percent in 2013, exceeding his profitability target of 13 percent to 14 percent, according to a presentation on the insurer’s website. Prudential has said using capital for deals and buybacks can help it meet the ROE goal. The insurer repurchased $250 million of shares in the fourth quarter.

At the U.S. retirement solutions and investment management business, operating profit increased about 39 percent to $996 million. Prudential purchased Hartford Financial Services Group Inc.’s individual-life business for $615 million in a reinsurance deal completed in January of last year, adding about 700,000 policies.

The group insurance segment reported a $58 million profit, compared with a loss of $12 million a year earlier, as claims costs declined. The year-earlier period also included legal costs of $20 million.

Verizon, GM

The insurer agreed in 2012 to assume pension obligations from Verizon Communications Inc. and General Motors Co. GM shifted more than $25 billion in obligations to Prudential and Verizon offloaded about $7.5 billion. The deals added to assets Prudential manages, benefiting the insurer as stocks rallied and interest rates rose.

Fixed-income yields climbed last year and stocks gained as the economy improved and the Federal Reserve began scaling back its bond-buying efforts. The Standard & Poor’s 500 Index advanced 30 percent and the payout on the 10-year Treasury climbed to 3.03 percent on Dec. 31. Prudential primarily invests in bonds to back future obligations to policyholders.

Net investment income at Prudential’s main business rose 8.2 percent to $2.9 billion in the quarter.

The full-year loss was $667 million, compared with net income of $520 million in 2012. Results as measured by generally accepted accounting principles have been hurt by costs tied to derivatives and fluctuations in the yen.

--Editors: Dan Reichl, Dan Kraut