Prudential Chief: New Leaders to Make Needed Changes After Poor Result
May 7, 2012 by Fran Matso Lysiak
Best’s News Service – May 03, 2012 03:15 PM
NEWARK, N.J. – Prudential Financial Inc.’s chief executive officer says the company’s first-quarter earnings reflected a “poor result” in group insurance but new leadership will be “comprehensively reviewing” all aspects of this business.
The company’s U.S. group insurance business swung to a $38 million adjusted operating income loss, compared with $39 million in adjusted operating income in last year’s first quarter, reflecting adverse fluctuation in group life claims experience, less favorable group disability claims experience and higher expenses.
Prudential posted a net loss of $988 million, which reflected charges of about $1.5 billion pretax from changes in value on foreign currency exchange rates and the market value of derivatives resulting from the weakening of the Japanese yen relative to the U.S. dollar and some other currencies (Best’s News Service, May 2, 2012). Prudential posted net income of $539 million in last year’s first quarter.
The quarter “reflected a poor result in group insurance,” said John Strangfeld, chairman and CEO of Prudential Financial (NYSE: PRU), during the company’s conference call, referring to life and disability operations. “With that important exception, underlying performance of our businesses…continues to be favorable.”
In group disability, the company has “clear performance issues and we are moving aggressively to address and correct them,” he said. Although group life had an unfavorable underwriting result, “we believe this result is an adverse fluctuation, not an indication of fundamental deterioration in the business.”
Last month, Stephen Pelletier, president of Prudential’s U.S. annuities business, was named president of the group insurance business, succeeding Lori High, who resigned. Robert O’Donnell, a senior vice president, and head of product, investment management and marketing for the annuities business, replaced Pelletier as president of U.S. annuities (Best’s News Service, April 20, 2012).
“Under Steve’s leadership, you could be sure that we will be comprehensively reviewing all facets of group insurance and will make all needed changes,” Strangfeld said
Prudential’s other businesses are doing well, he said. Sales of annuities were just below $5 billion while individual life delivered solid earnings, and “a healthy increase in sales as our competitors have raised prices making our products more competitive,” Strangfeld said.
Rich Carbone, Prudential’s chief financial officer, said driving the net loss was $1.5 billion in asset and liability value changes due to currency fluctuations driven by the U.S. dollar and other non-yen liabilities on the books of its Japanese companies. For example, Prudential has “significant” U.S. dollar denominated products in its Japanese businesses, he said. The assets and liabilities associated with these products are both denominated in U.S. dollars, Carbone said.
When the value of the yen changes against the U.S. dollar, the change in the U.S. dollar liabilities on the Japanese books runs through the yen income statement, Carbone said, noting this is “not economic” because Prudential’s liability is in U.S. dollars and is matched to U.S. dollar assets.
In consolidation to U.S. dollars, the income statement impact is offset by an adjustment made to accumulated other comprehensive income, a component of equity, not through the income statement, Carbone said. The result is that Prudential’s GAAP equity, which includes AOCI, “is essentially neutral” despite the volatility in reported net income, he said.
The accounting impact is greater than in the past due to the Star and Edison acquisitions, Carbone said. In February 2011, Prudential completed its $4.8 billion acquisition of AIG Star Life Insurance Co. and AIG Edison Life Insurance Co., the Japanese life insurance subsidiaries of American International Group (NYSE: AIG).
Prudential Insurance Company of America currently has a Best’s Financial Strength Rating of A+ (Superior).
On the afternoon of May 3, Prudential Financial’s stock was trading at $54.75 a share, down 10.16% from the previous close.
(By Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com) BN-NJ-05-03-2012 1515 ET #
