After Posting Net Loss for 2013, Prudential CEO Says Goal Is ROE of 13% to 14% ‘Over Full Cycle’
February 10, 2014 by Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com
NEWARK, NJ – As Prudential Financial Inc. recorded fourth-quarter and full-year 2013 net losses, its chief executive officer said the company is looking ahead and that Prudential’s results reflected strong organic growth coupled with pricing discipline and effective expense and risk management.
Fourth-quarter net loss widened sharply to $427 million, compared with a net loss of $185 million the same period in 2012. The 2013 quarter’s loss included $1.2 billion in pretax losses mostly on changes in value of the Japanese yen relative to other currencies.Net loss for the year amounted to $713 million, compared with net income of $479 million in 2012.
The year of 2013 “is behind us and we’re looking forward,” said John Strangfeld, chairman and CEO of Prudential Financial (NYSE: PRU) during the company’s earnings call, noting Prudential’s goal is to sustain a return on equity of 13% to 14% “over a full cycle.”
The “successful executions of the Starr and Edison acquisitions in Japan, the emerging success of the Hartford Life purchase and the addition of the large pension risk transfer deals we closed in late 2012 all contributed meaning fully to this year’s earnings,” Strangfeld said.
Prudential cracked the top 10 to rank as the eighth-largest insurance company in the world in 2012 based on net premiums written, according to A.M. Best Co. Driving the increase was more than $30 billion in premiums related to significant non-participating group annuity pension risk-transfer transactions with two unaffiliated pension plan sponsors (Best’s News Service, Jan. 8, 2014).
The pension deals were with Verizon Communications, which said it planned to reduce its pension plan obligations by about $7.5 billion, and U.S. automaker General Motors, which planned to reduce pension obligations by about $26 billion (Best’s News Service, July 10, 2012).
The fourth quarter’s results also were hurt by $342 million in pretax losses from market value declines in derivatives used in risk management, including managing the duration of its assets and liabilities. General investment portfolio activities also resulted in $573 million in pretax losses driven by changes in interest rates subsequent to acquiring securities that were sold during the quarter.
“The quality of our investment portfolio has never been better,” Strangfeld said, who noted that diversification of the company’s risk profile has been a priority. The pension risk transfer transactions added significant longevity risk Prudential’s profile, he said.
In January 2013, Prudential Financial acquired Hartford Financial’s individual life insurance business through a reinsurance transaction.
Its U.S. individual life insurance business’s adjusted operating income increased to $157 million for the current quarter from $99 million a year ago. Excluding items, adjusted operating income increased $51 million, driven by by the contribution from the acquired in-force business.
Its U.S. retirement and investment management division’s adjusted operating income jumped to $996 million in the fourth quarter from $714 million a year ago. Individual annuities included a benefit of $108 million, reflecting an updated estimate of profitability for the business. Excluding items, adjusted operating income increased $128 million from the year-ago fourth quarter, primarily reflecting higher asset-based fees on the growth in account values of its stock-market- linked variable annuities.
Last month, the Financial Stability Oversight Council received a presentation from the Federal Reserve Board about enhanced prudential standards for systemically important financial institutions during a Jan. 9 closed meeting, a Treasury Department spokeswoman said (Best’s News Service, Jan. 10, 2014).
Two insurance companies, American International Group Inc. and Prudential Financial have already accepted SIFI designations, which will require them to meet additional regulatory requirements laid out by the Fed. Dodd-Frank financial reform act charged the FSOC with identifying financial institutions that could pose a threat to the U.S. economy should they collapse.
The insurance industry “is at least being listened to and we continue to believe that when the dust settles, we will have a capital regime that works,” said Mark Grier, vice chairman, during the call.
When asked what conversations Prudential has had with the Federal Reserve prior to executing share repurchase this quarter, Grier said the company isn’t commenting on its relationship with the Fed.
On the afternoon of Feb. 6, Prudential Financial’s stock was trading at $82.25 a share, down 0.57% from the previous close.
Prudential Insurance Company of America currently has a Best’s Financial Strength Rating of A+ (Superior).
(By Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com)
