Individual Life Has Assumption-Change Headaches: Prudential

Prudential Financial Inc. is now assuming that some older U.S. individual life insurance policies are going to perform differently than it had originally expected, and that change in assumptions took a $153 million bite out of U.S. individual life results in the second quarter.

Executives from Prudential told securities analysts Thursday that concerns about the problems with old U.S. individual life assumptions are affecting how they price new individual life policies, and could affect how they sell individual life going forward.

Executives from Prudential and Lincoln National Corp. are also starting to talk about the effects lower interest rates might have on their business.

Prudential’s U.S. Life Business

Steve Pelletier, the chief operating officer for Prudential’s U.S.-based businesses, emphasized that Prudential’s new U.S. individual life business is different from its old business.

“The business has been priced using much more current assumptions,” Pelletier said. “We’ve remained quite disciplined in our pricing.”

(Related: Earnings: RGA, Pru, Lincoln, FBL, MetLife, Unum, Cigna, CVS, Humana, WellCare, Molina)

Prudential may try to transfer some of the old life business to reinsurers, and the company also is focused on “ongoing and continuing efforts to enhance the cost effectiveness of the business operating platform,” Pelletier said. “We’re exploring some innovative new ways of delivering our life insurance policies in a cost-effective way.”

Overall company earnings were strong.

The company indicated, in an earnings slidedeck, that it wants to increase U.S. individual life sales, in part of deepening existing distribution relationships and adding new relationships.

A pie chart shows that the company gets 21% of individual life sales from Prudential advisors, 18% from institutions, and 61% from independent producers.

Individual life sales increased to $181 million in the second quarter, from $142 million the second quarter of 2018.

Earnings

Prudential reported $738 million in net income for the second quarter on $14 billion in revenue, up from $200 million in net income on $13 billion in revenue for the second quarter of 2018.

The individual solutions unit, which sells annuities as well as life insurance, is reporting $462 million in adjusted operating earnings on $1.3 billion in revenue, compared with $507 million in operating earnings on $1.3 billion in revenue for the year-earlier quarter.

Lincoln’s Results

Lincoln National, which does business as Lincoln Financial, is reporting $363 million in net income for the second quarter on $4.3 billion in revenue, compared with $385 million in net income on $4 billion in revenue for the second quarter of 2018.

The company’s annuity unit is reporting $266 million in operating income on $1.2 billion in revenue, compared with $275 million in operating income on $1.1 billion in revenue for the year-earlier quarter.

Commission payments increased to $287 million, from $265 million.

Dennis Glass, the company’s chief executive officer, emphasized during his company’s conference call that the company has managed to increase sales of variable annuities without any living benefits guarantees by 86%.

Now that interest rates are heading lower, the company has cut the rate guarantees for the variable annuity contracts that do offer guarantees by 0.15%, Glass said.

“We’ll continue to do what needs to be done to get the proper return on new business,” Glass said.

Glass said Lincoln has cut the amount of all types of new sales involving long-term guarantees to 19% of the total, from a five-year average of 30%.

Resources

Links to documents related to Prudential’s earnings are available here.

Links to documents related to Lincoln’s earnings are available here.

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