Prudential Financial Inc., the second-biggest U.S. life insurer, said 2011 earnings may fall short of analysts’ estimates as the company incurs costs on the acquisition of two American International Group Inc. businesses.
Next year’s profit, excluding the results of policies sold before the company went public and some investments, will probably be $5.60 to $6 a share, the Newark, New Jersey-based company said today in a regulatory filing. The average estimate of 18 analysts surveyed by Bloomberg was $6.53.
Chief Executive Officer John Strangfeld is using the capital he accumulated after the financial crisis to add clients outside the U.S. With the September deal to buy AIG’s Star Life Insurance Co. and Edison Life Insurance Co., Prudential will boost a Japanese business it has built over two decades and face “integration and transaction costs” next year, the company said, without providing specifics.
The deal is “adding earnings growth” in the future, said Randy Binner, an analyst the FBR Capital Markets, who recommends buying Prudential stock. “This insurance business is tough. A low-risk acquisition is a good acquisition.”
Prudential gained $1.48, or 2.7 percent, to $55.59 at 4:15 p.m. in New York Stock Exchange composite trading. The stock has fallen 1.7 percent since Sept. 29, the day before it announced the AIG transaction.
MetLife Rivalry
Prudential is extending its rivalry with MetLife Inc., the biggest U.S. life insurer, as the two firms expand abroad and take market share from bailed-out rivals in their home market. New York-based MetLife completed the $16.2 billion acquisition of AIG’s American Life Insurance Co. this week, giving the firm more clients from Russia to Chile and a business in Japan that Chief Financial Officer William Wheeler called “a cash machine.”
Japan, the world’s second-largest life insurance market, already contributes more than a fifth of Prudential’s revenue. Operating profit in the country was $1.6 billion last year, Prudential has said. The $4.8 billion AIG deal is Strangfeld’s second purchase in Japan since taking over as CEO in 2008.
Prudential said its 2011 profit estimate would be $6.15 to $6.55 a share if it excluded costs tied to the AIG deal and the integration of the new businesses.
Annuities Gain
Prudential’s third-quarter net income climbed 15 percent to $1.24 billion, the company said yesterday. The insurer booked a gain in its annuities business as the rising stock market allowed Strangfeld to lower reserves against minimum-return guarantees to clients.
Profit for 2010 will be $5.80 to $5.90, the company said, compared with its previous forecast of $5.40 to $5.70. The average estimate is $5.93 a share.
Strangfeld, 56, will issue less debt and equity for the AIG deal than previously planned, and use more cash, the company said yesterday. The insurer now plans to sell about $1 billion in stock and $1 billion in bonds, compared with a prior projection of $2.5 billion in securities. The company will use $2.2 billion of capital it already has on the deal. It will also take on $600 million of debt held by the units.
Prudential expects to have $4 billion to $4.5 billion of cash at yearend and $2.5 billion to $3 billion at the end of 2011, it said today.
Strangfeld slashed Prudential’s dividend in 2008 when the credit crunch interrupted insurers’ traditional sources of funding. Prudential and MetLife shunned bailouts, while AIG took a rescue valued at $182.3 billion. Last year, when markets recovered, Strangfeld raised capital with debt and equity offerings and the sale of a $4.5 billion stake in a brokerage.
Hartford, AIG
The capital helped Prudential as it jumped to No. 1 among sellers of variable annuities in the U.S. last year. Insurers that took U.S. aid, including Hartford Financial Services Group Inc. and New York-based AIG, scaled back to conserve funds. Prudential returned to profit last year with $3.12 billion of net income, compared with a net loss of $1.12 billion in 2008.
Prudential entered Japan in 1987 and expanded its business in 2001 with the acquisition of a failed Japanese carrier that it renamed Gibraltar Life Insurance Co. Strangfeld added another bankrupt insurer, Yamato Life Insurance Co., last year after winning an auction. Prudential also has business in South Korea, Taiwan and Brazil. The deal for Star and Edison will be completed in the first quarter, the firm said Sept. 30.
Japan accounted for about 17 percent of the world’s life insurance sales last year, according to a study by Swiss Reinsurance Co. Premium volume was $399 billion in 2009, down 0.8 percent when adjusted for inflation, Swiss Re said. In the U.S., the world’s biggest market, premiums dropped 15 percent to $492 billion, according to the Zurich-based reinsurer.
Prudential’s premiums, policy charges and fee income from Gibraltar and other Japanese operations rose 21 percent to $6.99 billion last year. Prudential posted total 2009 revenue of $32.7 billion.
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AIG’s bailout continues to send ripples out in unintended ways across the Life Insurance sector, though in the long run it will probably work out for the better. AIG is ploughing on full steam ahead in repaying the Federal Reserve and US Treasury for the benefit and hopefully for AIG, it will emerge as a leaner, fitter organisation than it was before.
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