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How Deleveraging at Prudential Is Improving Performance

Robert Karr

Prudential Financial's Revenue Falls, Net Increases in Q3

(Continued from Prior Part)

Deleveraging at Prudential

Prudential Financial’s (PRU) operations fell in 3Q15 due to lower insurance business in the US market, and an unfavorable exchange rate. In the first nine months of 2015, the company deployed $1.5 billion in dividends and share repurchases. The capital generated by its core operations expanded in the third quarter of 2015, backed by positive impact from interest rates and lower benefit and expenses. Its overall leverage fell to 25.5% as of September 30, 2015, compared to 29.3% as of September 30, 2014.

Risk-based capital

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Prudential Financial estimated its balance sheet capital capacity to be ~$2 billion as of September 30, 2015. The company’s cash and short-term investments, excluding outstanding commercial paper, stood at $4.2 billion. The company has maintained $1.3 billion of excess liquidity to repay maturing operating debt, to fund operating needs, and to deploy overtime for strategic and capital management purposes.

AIG (AIG), with a price-to-book value ratio of 0.78x, ACE (ACE), with a price-to-book value ratio of 1.13x, Allstate (ALL), and Chubb (CB) form 0.63% of the iShares MSCI ACWI ETF (ACWI). An insurance company’s capital requirements are stipulated by regulatory bodies. Insurance companies must maintain capital in the form of liquid assets to pay unexpected large claims.

In the United States, insurers are required to maintain risk-based capital. The risk-based capital ratios are calculated as a ratio of the capital available to an insurer to the required capital.

Prudential Financial’s balance sheet and strong risk management have led to a smooth expansion of its operations globally. Its risk-based capital ratio as of December 31, 2014, stood at 498%, above the target of 400%.

Also, the solvency margin ratio for its entities, Prudential of Japan and Gibraltar Life, stood at 844% and 882%, respectively. Prudential Financial had set a target of 700% for each entity.

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