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Prudential Projects Lower Investment Returns; Shares Drop

Prudential Slumps as Insurer Projects Lower Investment Returns
Prudential Financial Inc. slipped 3.5 percent, to $53.44 at 12:24 p.m. Photographer: Emile Wamsteker/Bloomberg

Prudential Financial Inc., 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.

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