Prudential’s Balance Sheet Strengthens as Its Leverage Falls



Strong liquidity

Prudential Financial (PRU) had a balance sheet capital capacity of $797 billion as of June 30, 2016. Its parent company’s cash and equivalents stood at $4 billion, in line with 1Q16. This was mainly due to the impact of cash inflows, including $1 billion related to annuities restructuring and a dividend from PICA.

The company has maintained an excess of $1.3 billion in liquidity to repay maturing operating debt, to fund operating needs, and to deploy overtime for strategic and capital management purposes. Prudential Financial’s current price-to-book value ratio is stable at 0.9x.

AIG (AIG) has a price-to-book value ratio of 0.83x, and Allstate (ALL) has a price-to-book value ratio of 1.29x. AIG, ACE, Allstate, and Chubb (CB) form 0.63% of the iShares MSCI ACWI ETF (ACWI).

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Prudential Financial’s operations in 2Q16 were affected by the adverse impact of weaker non-coupon investment results, subdued equity markets, and foreign currency headwinds. In 2Q16, the company deployed more than $700 million in dividends and share repurchases. The capital generated by its core operations remained fairly stable in 2Q16 compared to the previous quarter, backed by positive impacts from interest rates and lower benefits.

Prudential’s long-term debt-to-equity ratio fell to 38% as of June 30, 2016, compared to 67.5% as of December 31, 2015, mainly due to building reserves and acquisitions.

Capital requirements

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 ratio is calculated as the ratio of capital available to an insurer to the required capital. Prudential Financial’s balance sheet and strong risk management have led to the smooth expansion of its global operations. Its risk-based capital ratio as of December 31, 2015, was 5x, above the target of 4x.


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