Prudential Sells P-C Units Prudential FinancialInc., the country's largest life insurer, is selling off its autoand homeowners insurance businesses to Liberty Mutual InsuranceCompany and Palisades Group for some $673 million in total.

Under the announced agreement with Palisades Group, the BerkeleyHeights-based company will buy the Prudential Property and CasualtyInsurance Company of New Jersey for $260 million. Boston-basedLiberty Mutual will acquire Prudential's p-c operations in 47 otherstates as well as in Washington, D.C., for $413 million innotes.

According to figures from Oldwick, N.J.-based A.M. Best Inc. andPrudential's annual financial filings, Prudential's nationwide p-coperations posted $1.57 billion in net written premiums last year,while its New Jersey business had $512 million in 2002 net writtenpremiums.

These newly announced transactions, according to Prudential, arepart of the company's ongoing effort to improve its profitabilityand focus on its life insurance and financial services units.

The Newark, N.J.-based Prudential had announced late last yearthat its goal for the next couple of years is for all of itsbusiness units to post a return-on-equity of at least 12 percent–atarget that most of its p-c units have not met.

“As you know, we reached the conclusion that the personal linesproperty and casualty business was unlikely to provide anappropriate return on our invested capital and began a process lastyear to evaluate our strategic options,” explained Mark Grier, vicechairman of the Prudential Financial Inc., during a conference calllast week.

Mr. Grier also recalled that his company had signed a deal thispast March with Nationwide Mutual Insurance Company in Columbus,Ohio, to sell THI Holdings, its specialty automobile insurancebusiness, for some $142 million.

“That transaction, combined with the two we just announced, willresult in a redeployment of about $1 billion of total of $1.4billion of capital we have committed in property-casualty businessas of year-end 2002,” Mr. Grier said.

He also assured existing agents and customers of Prudential'sNew Jersey and national p-c units, noting that his company willhelp provide continuity by entering into a five-year distributionagreement. This will allow its agents to continue to have access tothese p-c products and to service their clients' renewal business,he said.

Following these transactions, expected to be completed by theyear's end, Prudential's only remaining p-c business would beMerastar, “which sells mainly auto insurance through work-sitemarketing and payroll deduction. We continue to explore options forthis business, which has a book value of about $30 million,” Mr.Grier said.

Laurita Warner, spokesperson at Prudential, also added that thecompany's focus now is life insurance and financial services.“Property-casualty has never really been our core business,” shetold National Underwriter. “As you know, property-casualtyinsurance business is very capital-intensive. This transactionfrees up capital for other opportunities,” she said.

Ms. Warner also pointed to a comment by Prudential's chairmanArt Ryan, who had remarked last year that his company will not keepunderperforming businesses. “Anything below 12 percent for thereturn on equity would be defined as underperforming over the nextcouple of years,” she said.

Also, these deals will have a minimal impact on some 3,000workers in insurance units that will be sold off, since most ofthem will be able to keep their jobs, Ms. Warner said.

“We found buyers who are anxious to write auto and homeownersbusiness. These deals really are optimal for our employees becausethe buyers have offered to retain most of the employees in thosebusinesses,” she said.

Prudential's announcement was soon followed by a wave of otherannouncements from ratings agencies keeping a close eye on thecompany, with some firms placing a review status on their ratings.A number of analysts told National Underwriter that such adeal has long been expected. Some added, however, that theannounced selling price for Prudential p-c units was lower thanthey had anticipated.

Paul Bauer, analyst for New York-based Moody's InvestorsService, was among them, commenting that the deal was not asurprise since the company has been “shopping them around for quitesome time,” but that the price was “lower than ourexpectations.”

“At the same time, it's a difficult time to sell off suchassets,” he suggested.

The main issue from his ratings perspective, Mr. Bauer added, ishow these units would perform under new companies. His firm hasplaced on review its “A2″ rating on Prudential's national p-coperations for a possible downgrade. Its “A2″ financial strengthrating for Liberty Mutual, the buyer for Prudential's nationwidep-c unit, has been confirmed, but with a “Negative” outlook.

Insurance rater A.M. Best also put Prudential's New Jersey p-cunit, as well as its buyer, Palisades Group, under review with“Negative” implications and put Prudential's national p-c businessunder review with “developing” implications.

One of the issues A.M. Best has to work out in the New Jerseysale is that its financial strength rating for Palisades is“B-double-Plus”, which is actually lower than the rating forPrudential's New Jersey unit, which stands at “A-minus”.

“Going forward, this New Jersey unit will not have thetremendous flexibility it had with Prudential,” argued AnthonyDiodato, assistant vice president at A.M. Best.

He added that Prudential has been making it clear that it “doesnot like volatility in their earnings.” The company, he observed,has been making numerous transactions to minimize volatility andits p-c business has clearly been a volatile business.

Mr. Diodato pointed out, though, that Prudential's New Jerseyp-c business has been very profitable and solid over the past fewyears, turning in better numbers compared to Prudential's overallp-c business. Still, “the company's strategy is that it's going tosell all its p-c businesses.” Further, “if you are familiar withthe New Jersey marketplace, you know that there are a lot ofchanges going on. And Prudential felt it didn't really want tomaintain their p-c infrastructure for just one market segment,” Mr.Diodato observed.

He added that both Liberty Mutual and Palisades Group wereattractive buyers. “It was just a conscientious decision byPrudential to exit p-c business. We recognize that Prudential soldits entities below their book value. Both Liberty Mutual andPalisades certainly did not overpay.”

John Keefe, senior vice president for Baltimore-based Ferris,Baker Watts Inc., told NU, “The sale was long expected. Atthis stage, it's definitely positive that Prudential is exiting itspersonal lines p-c business, because homeowners insurance has beena black hole for the industry generally for some time,” Mr. Keefesaid.

He also noted that over a long period of time, a “12 percentreturn on equity is difficult to achieve for homeowners insurance,and it's not that much easier for writers of private autoinsurance, either.”

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, June 2, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved. Copyright in this article as anindependent work may be held by the author.