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

“As you know, we reached the conclusion that the personal lines property and casualty business was unlikely to provide an appropriate return on our invested capital and began a process last year to evaluate our strategic options,” explained Mark Grier, vice chairman of the Prudential Financial Inc., during a conference call last week.

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

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

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

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

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

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

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

“We found buyers who are anxious to write auto and homeowners business. These deals really are optimal for our employees because the buyers have offered to retain most of the employees in those businesses,” she said.

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

Paul Bauer, analyst for New York-based Moody's Investors Service, was among them, commenting that the deal was not a surprise since the company has been “shopping them around for quite some time,” but that the price was “lower than our expectations.”

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

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

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

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

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

He added that Prudential has been making it clear that it “does not like volatility in their earnings.” The company, he observed, has been making numerous transactions to minimize volatility and its p-c business has clearly been a volatile business.

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

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

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

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

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