Prudential Projects Lower Investment Returns; Shares Drop

Prudential Financial Inc. (PRU), the second-largest U.S. life insurer, fell the most in sixth months in New York trading after lowering its assumptions for equity and bond returns.

The insurer slipped 4.8 percent to $52.76 at 4:15 p.m. The Newark, New Jersey-based company cut its projection of annual stock market returns, including dividends, to 8 percent from 9.25 percent. The projection for bond returns was lowered by about 100 basis points, the company said on a conference call today. The new estimate is for 4.6 percent total returns.

Weaker investment results pressure earnings at life insurers, which hold securities to back obligations to clients. Prudential posted a third-quarter net loss of $618 million yesterday, fueled by costs tied to derivatives, currency-related contracts, long-term care policies and an annual review of actuarial assumptions.

“That’s a pretty heavy thing to say, that common stocks will permanently produce a lower rate of return than you had anticipated,” Eric Berg, an analyst at RBC Capital Markets, said on a conference call today with company executives.

Mark Grier, Prudential’s vice chairman, said that stock gains are typically correlated with returns on bonds. Fixed income yields are at near-record lows as the Federal Reserve, led by Chairman Ben S. Bernanke, has said it will keep rates low through at least the middle of 2015.

“Maintaining a reasonable relationship between fixed income returns and equity returns is appropriate,” Grier said. “The risk premium in the market tends to be over a long period of time, fairly durable.”

The Standard & Poor’s 500 Index slumped 1.2 percent, paring its return for the year to 12 percent including dividends. The return is less than five percent over the past five years.

To contact the reporters on this story: Susanna Pak in New York at spak10@bloomberg.net; Zachary Tracer in New York at ztracer1@bloomberg.net

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net

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