Unwinding a partnership not of its
making, US bank Wells Fargo has paid life insurer Prudential
Financial $4.5 billion in cash to purchase the life insurer’s 23
percent stake in Wells Fargo Advisors (WFA), their retail
securities brokerage joint venture (JV).
Sale of Prudential’s stake in WFA, which was
held by its lead life insurance subsidiary, Prudential Insurance
Company of America, is anticipated by rating agency Fitch to result
in an after-tax gain of $1.5 billion.
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One of the US’ largest retail securities
brokerages, WFA is responsible for retail client assets of about
$910 billion and is represented by nearly 16,000 financial advisors
nationwide. WFA is also a major distributor of Prudential’s mutual
fund and annuity products.
WFA was formed in July 2003 out of the merger
of Prudential’s retail brokerage businesses with those of US bank
Wachovia. Wells Fargo’s involvement dates back to October 2008,
when it acquired the problem-stricken Wachovia for $12.7 billion.
Prudential’s initial 38 percent stake in WFA was reduced in 2007 as
a result of WFA’s acquisition of securities broker AG Edwards for
$6.8 billion.
Sale of its stake in WFA represented
Prudential’s exercise of a put option it received at the time of
the formation of WFA – then named Wachovia Securities – which
permitted it to sell its stake to Wachovia before 1 January
2010.
Prudential announced its intention to exercise
its option in December 2008, and in June 2009 advised Wells Fargo
in writing of its decision.
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By GlobalDataPrudential’s sale of its WFA stake was viewed
positively by Fitch, which greeted the announcement with a revision
of its rating outlook for the insurer to stable from negative.
The outlook revision, noted Fitch, reflects
its view that Prudential has made considerable progress addressing
prior concerns regarding its capitalisation, liquidity position and
overall financial flexibility and is now well-positioned to address
future expected investment losses and other contingencies over the
medium-term.
Other steps taken by Prudential to strengthen
its capital structure have included raising $4.4 billion in debt
and equity in 2009 and reducing financial leverage by $11 billion
between the end of 2007 and September 2009.
Prudential anticipates that it will end 2009
with about $2 billion in cash at the holding company level.
The rating agency also noted that Prudential
has taken steps to reduce the impact of equity market volatility on
its earnings and capital.
