Prudential Posts Record Loss as Investments Decline (Update2)

By Andrew Frye
Bloomberg News
February 4, 2009

Feb. 4 (Bloomberg) -- Prudential Financial Inc., the second-largest U.S. life insurer, posted its worst loss as a publicly traded firm after investments in subprime securities and stocks declined in value.

The fourth-quarter net loss was $1.57 billion, compared with a profit of $871 million in the year-earlier period, the Newark, New Jersey-based company said today in a statement. The operating loss, which excludes some investment returns and results from policies sold before the company went public, was $2.04 a share, 85 cents worse than the average estimate in a Bloomberg survey of analysts.

Chief Executive Officer John Strangfeld is seeking to replace capital lost on stock market slumps and bond defaults by cutting the dividend, selling a stake in a securities brokerage and applying for government aid. Life insurers lost $77 billion in surplus last year, and Prudential's stock has declined 69 percent in the last 12 months.

Prudential's "capital position has been deteriorating," Donald Thomas, senior analyst at Grandient Analyst Inc., said in an interview before results were announced. "There are a lot of people holding their breath as to what is the next chapter."

The stock declined 24 cents to $26.10 at 5:53 p.m. in New York in extended trading. Prudential had its initial share sale in 2001.

Prudential and smaller competitors Lincoln National Corp. and Hartford Financial Services Group Inc. applied last year for capital injections from the government after stock drops made raising cash from private investors more expensive.

Strangfeld 'Disappointed'

Fitch downgraded Prudential's credit on Dec. 1 on losses tied to the subprime meltdown. Strangfeld, promoted to CEO in January, suspended share buybacks and cut the dividend in half after Prudential's $166 million net loss in the third quarter.

"We have ample liquidity to fulfill our commitments," Strangfeld said in the statement. "We are very disappointed in our current quarter results."

Book value per share, a measure of assets minus liabilities at the financial services business, fell 23 percent over three months to $33.66 on declines in fixed-maturity holdings. The fourth-quarter loss includes $1.19 billion of declines in bonds and stocks. About $214 million of the losses are on securities backed by subprime home loans. The declines were cushioned by $894 million in gains on derivatives, including bets on interest rates.

Subprime Loans

Gross unrealized losses from the financial services business almost doubled in the three months ended Dec. 31 to $11.3 billion, including $1.78 billion tied to subprime. Unrealized losses, which don't count against earnings, are watched by investors, analysts and regulators to monitor claims- paying ability.

North American insurers have posted about $130 billion in writedowns and unrealized losses tied to the housing slump. MetLife Inc., the biggest life insurer, sold $2.3 billion in shares in October to boost finances, while Hartford, based in the Connecticut city of the same name, cut its dividend and raised $2.5 billion by selling debt and equity to Allianz SE.

MetLife said yesterday that fourth-quarter profit fell 12 percent to $985 million on losses tied to hedge funds. New York- based MetLife's results included a gain of about $1.6 billion on derivatives, some of them tied to interest rates and currency fluctuations. MetLife's book value per share fell 23 percent in the quarter.

Individual Annuities

Prudential lost about $1.04 billion on its individual annuities business on higher costs to guarantee investments for clients. That compares with operating income of $171 million from the segment in the year-earlier period.

Prudential had a $209 million pretax loss on its Wachovia Securities brokerage joint venture as the unit booked $120 million in costs tied to the settlement of an auction-rate securities investigation.

Prudential announced plans in December to sell its minority stake in the venture, which the insurer valued at about $5 billion, to the unit's majority owner Wells Fargo & Co. Prudential, which created the venture with Wachovia Corp. in 2003, may have to wait until Jan. 1, 2010, to exercise its previously granted right to sell and exit the investment.

Wachovia almost collapsed last year, and then agreed to be bought by Wells Fargo.

Prudential had a $117 million charge writing off goodwill at its real estate and relocation business. The company said in December the operations, which lost $42 million in the quarter, would be combined to help restore profitability.

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