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Lower hedge fund, private equity returns hamper Prudential Financial's earnings

'sexposure to hedge funds and private equity firms stung its results in the firstquarter, as returns from its alternative investments dragged on the lifeinsurer's earnings.

Thecompany said May 5 that its noncoupon investment portfolio, which includeshedge fund and private equity holdings, missed its performance target by $90 millionin the first three months of 2016. The poor returns contributed to a netnegative impact on its earnings of about 10 cents per share.

Prudential'svarious business segments also felt the effects of the rough start to the year,with noncoupon investments in its retirement business finishing $40 millionbelow expectations and noncoupon investments tied to its individual life unitfalling $10 million below its target.

Overalladjusted operating earnings in the company's retirement business fell to $219million in the first quarter, from $284 million in the prior-year period. TheU.S. individual life unit reported adjusted operating income of $120 million,compared with $116 million in the year-earlier period, though the prior-yearfigure included $9 million of integration expenses.

"Whilethese investments diversify our exposure and are a good fit with some of ourlonger-term liabilities, especially in retirement, the pattern of returnsintroduces some variability into our results," Vice Chairman Mark Griersaid on a conference call to discuss earnings.

Inaddition to hedge fund and private equity investments, Prudential's noncouponportfolio includes real estate holdings and a $3.6 billion public equityportfolio held mainly in Japan that includes stocks, mutual funds and Japanesereal estate investment trusts. The overall portfolio boasted $8.8 billion ofassets at the end of March, about $1.1 billion of which was connected to hedgefunds.

Prudentialis just the latest insurer to see its earnings hit by its exposure to hedgefunds and private equity firms, which struggled in the first quarter withbroader market volatility. Both American International Group Inc. and announced in May that theywould shed significant chunks of their respective hedge fund holdings.

ButPrudential is unlikely to join them any time soon. Executives said on the callthat they viewed the first-quarter noncoupon results as an anomaly, and theyremain pleased with the company's hedge fund exposure and performance.