Mike Wells, chief executive officer of Prudential Plc, poses for a photograph following a Bloomberg Television interview in London, U.K., on Thursday, Aug. 10, 2017. Prudential is getting close to reaching its target of doubling operating profit from Asia, helping the U.K.’s largest insurer raise first-half earnings by 15 percent on an actual exchange-rate basis. Photographer: Luke MacGregor/Bloomberg Mike Wells (Photo: Luke MacGregor/Bloomberg)

Jackson National Life Insurance Company could soon return to being an independent, U.S.-based life insurance company.

Its parent, Prudential PLC of London, said earlier this week that it sees the sale of an 11.1% equity stake to Athene Holding Ltd., a reinsurer, as the start of efforts to separate from Jackson.

Resources

  • A copy of the Prudential PLC earnings call transcript is available here.
  • An article about the Prudential-Jackson-Athene reinsurance deal is available here.

Mike Wells, Prudential’s group chief executive, said earlier this week, during a conference call with securities analysts, that the company is making that move because Asia is a better market for the company today that the United States is, even though many markets in Asia are also facing COVID-19-related social distancing rules.

“The Asian insurance market is not only growing, it’s close to an inflection point of even faster growth,” Wells said. “When income per capita reaches around $10,000 per capita, this is when insurance penetration takes off… Prudential seeks to focus in particular on those markets in Asia where we see the largest growth opportunities.”

Sean Dargan, a securities analyst, suggested in 2018 that the insurance industry was about to go through a “great restructuring,” with factors such as low interest rates and new “mark to market” accounting rules pushing publicly traded companies to split off life and annuity operations.

Low interest rates squeeze life and annuity issuers by cutting earnings on the large bond portfolios, mortgage loans, and mortgage-backed securities they use to support long-term benefits obligations.

The new mark-to-market accounting rules affect the appeal of life insurers because life insurers often have asset totals, benefits obligation totals and hedging arrangements that are much larger than the insurers’ annual revenue. Even small changes in the estimated value of assets, obligations or derivatives arrangements can look enormous when compared with a life insurer’s operating earnings. A life insurer with mark-to-market accounting can swing from having billions of dollars in net income in one quarter, and explaining billions of dollars in net losses in the next quarter, even when sales, underwriting margins and cash flow are about the same.

Here are seven other things to know about Prudential, Jackson and Prudential’s planned separation from Jackson.

1. Prudential PLC has nothing to do with Prudential Financial.

Prudential PLC is a life insurer with about $454 billion in assets that was founded in 1848 and is based in London.

Prudential Financial is a separate, Newark, New Jersey-based life insurer that was founded in 1875.

2. Prudential PLC paid $608 million for Jackson in 1986.

Jackson itself was founded in 1961, in Jackson, Michigan. It’s been a major player in the variable annuity and non-variable indexed annuity markets since the mid-1990s.

Jackson, which is now based in Lansing, Michigan, generated $1.3 billion in pretax operating income for the first half of the year on $295 billion in assets, compared with $1.6 billion in pretax operating income for the first half of 2019 on $282 billion in assets, according to financial data prepared using the International Financial Reporting Standards.

Jackson was the top individual annuity issuer in the United States in 2019, with $19.6 billion in variable and non-variable sales, according to the Secure Retirement Institute.

The company generated $9.8 billion in annuity sales and deposits in the first half, compared with $10.8 billion in the first half of 2019.

3. Prudential turned on its turn signal in September.

The company said at the time that it was conducting a strategic assessment of the Jackson business and that it wanted to get more cash out of the business.

4. Prudential executives have two possible exit strategies in mind.

Prudential could sell a minority stake in Jackson to the public, through an initial public offering (IPO) of stock, in the first half of 2021.

If the market conditions don’t seem right for an IPO, Prudential could implement the separation by distributing shares of Jackson stock to Prudential shareholders, Wells said.

AXA S.A. turned Equitable back into a stand-alone company through an IPO and a series of other stock sales.

MetLife made Brighthouse Financial a separate company by distributing Brighthouse stock to its own shareholders.

5. Prudential wants Jackson to borrow money.

Once Jackson issues debt, Prudential will use cash from the debt issuance to pay down debt at the parent level, Wells said.

IPO proceeds would help Prudential finance efforts to expand in Asia, Wells said.

Wells said Jackson would still have very strong finances after issuing the debt.

6. Jackson may do new things.

“An IPO its immediate strategic priority,” Wells said.

But “Jackson will continue to explore further opportunities to diversify its business over time,” Wells said.

7. Jackson has adjusted its annuity offerings to fit in with a low-interest rate environment.

Jackson has repriced its fixed annuity and non-variable indexed annuity products, and that contributed to sales being 83% lower in the second quarter of the year than in the first quarter, according to Mark FitzPatrick, the Prudential group chief operating officer.

“If interest rates remain at current low levels, I would expect similarly low levels of new general account sales over the balance of the year,” FitzPatrick said.

Although fixed and non-variable indexed annuity sales were down, variable annuity sales were up 1%, FitzPatrick said.

— Read U.K. Pru Aims to Sell Stake in Jackson to Investorson ThinkAdvisor.

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