Lots of chatter about serious problems at Pru and today they're really gettin wacked. Maybe it's true.
Aug. 2 (Bloomberg) -- Prudential Financial Inc., the second- largest U.S. life insurer, said it's still buying securities backed by subprime mortgages and expects turmoil in the market to cost the company no more than $150 million over five years. Prices of some subprime securities rated AAA and AA are now ``disproportionate to the underlying risk and are primarily liquidity-driven,'' Prudential Vice Chairman John Strangfeld said on a conference call with analysts today. ``As a consequence, we see selective opportunities to take advantage of that.'' Prudential is capitalizing on a faltering market for mortgage bonds that's making it difficult for sellers to unload even the most highly rated securities. The secondary market ``is not functioning,'' Michael Perry, chief executive officer of Indymac Bancorp Inc., the ninth-largest mortgage lender, said in an e-mail to employees yesterday. Prudential didn't disclose the sellers of the securities, and Chief Executive Officer Arthur Ryan said he doesn't expect to boost his overall investment in subprime securities by much. At least half of the insurer's subprime holdings mature within a year, the company said in a regulatory filing yesterday. ``We believe there are segments in this market where we can be opportunistic in the short term, but we also recognize that this is a market going through turmoil, and therefore you would not expect to see a significant net increase,'' Ryan said on the call. Shares of Newark, New Jersey-based Prudential rose $1.45, or 1.7 percent, to $89.45 in New York Stock Exchange composite trading. They've risen 4.2 percent this year, outperforming the 3.7 percent decline in the KBW Insurance Index. Worst-Case Scenario The $150 million loss estimate is a worst-case scenario reflecting the $8.5 billion in subprime holdings Prudential held in its main units at the end of June, Chief Financial Officer Richard Carbone said on the call with analysts. It doesn't count the $6.8 billion in Prudential's so-called closed block, which represents policies sold before the company went public in 2001. All the securities are asset-backed holdings collateralized by subprime mortgages, according to Prudential. Of the $8.5 billion, 70 percent is rated AAA, 20 percent AA, 9 percent A and 1 percent BBB, Prudential said. Of the $6.8 billion, 81 percent was rated AAA, 17 percent AA, 2 percent A, and less than 1 percent BBB. The $8.5 billion represents about 5 percent of $167.3 billion in invested assets. Prudential doesn't disclose the size of its holdings in the closed block, said spokesman Robert DeFillippo. AIG, MetLife Default rates on subprime mortgages that have been packaged into bonds are at a 10-year high, according to Friedman Billings Ramsey Group, an Arlington, Virginia-based securities firm. Insurers are disclosing their subprime holdings in response to investor concerns that defaults could result in losses for the industry. For American International Group Inc., the world's largest insurer by market value, the worst-case scenario may be $2.3 billion in losses, Paul Newsome, an analyst at A.G. Edwards Inc. in St. Louis, said in a report yesterday. The New York-based company had $33 billion in subprime-linked securities at the end of March, about 4.1 percent of its cash and investments, according to spokesman Chris Winans. Less than $300,000 of AIG's subprime holdings are rated below investment grade, Winans said. MetLife Inc., the largest U.S. life insurer, had about $2.3 billion in securities linked to subprime mortgages at the end of June, less than 1 percent of its invested assets, the New York- based company said earlier this week. Genworth Financial Inc., the Richmond, Virginia-based insurer divested by General Electric Co., had about $2.13 billion at the end of June, while XL Capital Ltd., a Bermuda business insurer, held about $1.2 billion. Prudential is the country's No. 2 life insurer according to a ranking of 2005 premiums by A.M. Best Co.