Prudential's Profit Declines Amid Investment Losses (Update3)

By Andrew Frye
Bloomberg News
May 6, 2009

May 6 (Bloomberg) -- Prudential Financial Inc., the second- biggest U.S. life insurer, cut its full-year earnings forecast and said first-quarter profit fell 77 percent amid losses from investments.

Net income declined to $14 million from $60 million in the year-earlier period, the Newark, New Jersey-based company said today in a statement distributed by Business Wire. Excluding some results from investments and policies sold before the company went public, the insurer made $1.05 a share, beating the 91-cent estimate of 13 analysts surveyed by Bloomberg.

Chief Executive Officer John Strangfeld, promoted to the top spot last year, has slashed the dividend and applied for U.S. bailout funds to guard against further declines in stocks, corporate bonds and mortgage debt. Prudential said it expects operating earnings per share this year to be $4.80 to $5.20, lower than the guidance of $5.25 to $5.65 given in February.

"Our current-quarter results continue to reflect unfavorable market and economic conditions," Strangfeld said in the statement.

The stock rose 3.5 percent to $36.80 at 6:41 p.m. New York time following the announcement, after surging about 15 percent in regular trading. It has fallen 53 percent in the past 12 months on the New York Stock Exchange, compared with the 52 percent slide in the Standard and Poor's Supercomposite Life & Health Insurance Index. MetLife Inc., the biggest U.S. life insurer, has declined 48 percent over the same period.

Investment Losses

Prudential returned to profitability after accumulating $1.7 billion in losses in the final two quarters last year. That compares with New York-based MetLife, which slipped to a loss of $544 million in the first quarter after remaining profitable through 2008.

Net realized investment losses were $666 million in the quarter, a 1.8 percent decline from $678 million in the year- earlier period. Prudential reported $240 million of losses tied to subprime investments.

The recession and falling property prices have pinched borrowers and fueled credit losses at life insurers, which invest premiums in corporate and household debt. North American insurers have reported more than $190 billion in writedowns and unrealized losses tied to the subprime meltdown since 2007, according to Bloomberg data.

Prudential is "focused on maintaining and bolstering the financial strength" of the insurer, Strangfeld said.

Stock Market

The slumping stock market has also increased the cost of guarantees that life insurers granted to customers on retirement products called variable annuities. A decline in the S&P 500 Index, which is down 35 percent over the past year, contributed to Prudential's $1.1 billion loss in 2008.

Prudential took a charge of $215 million in the first quarter to boost reserves on variable annuity guarantees. The products themselves will probably be less profitable after the equity market drop, and Prudential took a further charge of $112 million to reflect reduced earnings expectations.

Moody's Investors Service downgraded Prudential by two levels in March and said it may make further rating cuts if investments continue to slip.

The deterioration in credit ratings allowed Prudential to book a gain of $236 million in the first quarter on liabilities it has with customers, said Bob DeFillippo, a spokesman for the company. The gain comes under generally accepted accounting principals and reflects the market's view that Prudential's debts are less secure than they were before the downgrade, DeFillippo said.

"We're not going to not pay our liabilities," DeFillippo said. "What we owe the customer, he's not going to get less."

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