Prudential Insurance, one of the best-known names in life insurance, plans to sell 110 million shares this week in the biggest initial public offering since the Sept. 11 terrorist attacks.
But because the market for new issues remains unsettled, and because Prudential's profits compare unfavorably with those of its competitors, many analysts expect the company to set a modest price for the shares, perhaps US$27.50 each on Dec. 12. That would be about 85 percent of Prudential's book value, while its rival for leadership in the American life insurance business, MetLife, is trading at 1.4 times book value. The comparable multiple for John Hancock, another major insurer, is 2.14.
"What you're basically buying with Prudential is a sort of home improvement story," said Randall Roth, an analyst at Renaissance Capital in Greenwich, Connecticut, which specializes in research on initial public offerings and runs the IPO Plus Aftermarket fund. "They've got to do some fix-up work, and because of that, it's supposed to be priced at a discount."
The transaction, the final step in a reorganization in which Prudential's 11 million policyholders will relinquish ownership in the mutual company, is expected to raise a little more than US$3 billion. Most of the policyholders are expected to receive stock -- 456 million shares -- which could make Prudential the most widely held stock in America, ahead of MetLife, with about 9 million shareholders. The remaining policyholders will get cash, which is to be raised in the public offering. Goldman Sachs is lead underwriter.
The insurer, which has changed its name from the Prudential Insurance Co of America to Prudential Financial Inc, must begin to squeeze out higher profits if its shares are to rise substantially in the future, analysts say. Its return on equity, a widely used measure of profitability, is expected to be 4.6 percent this year, or about one-third the 12 percent to 15 percent of the most successful publicly traded life insurers. It is also far lower than the returns that MetLife and John Hancock reported when they converted from mutual ownership nearly two years ago. MetLife converted at 7.5 percent, John Hancock at nearly 12 percent.
Yet analysts say Prudential has considerable appeal. They value its brand recognition and its great size and scope: 11 million insurance customers, a big securities brokerage business, a money management operation controlling US$564.2 billion in assets and a vast international division.
Investors were skeptical of MetLife's prospects when it went public, and it was also priced below book value. But like shares of John Hancock, which drew a higher initial price, its stock has since doubled in value. Share prices have also increased for two smaller insurers that went public this fall: Principal Financial, in life insurance, and the Anthem Insurance Companies, in health care. Principal's shares have jumped more than 26 percent, Anthem's, 34 percent.
Some analysts point out that because Prudential will be issuing so many shares, it is almost certain to be added to the Standard & Poor's 500 index of major stocks. Inclusion in the index, a benchmark for many money managers, would be expected to increase demand for shares and drive up their price.
Arthur Ryan, Prudential's chief executive, has aimed toward bringing the company public almost since the day he was recruited from Chase Manhattan seven years ago.
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