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Prudential Is Working On Annuity Derisking Deals: Rob Falzon

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What You Need to Know

  • The Newark, New Jersey-based company reduced costs by $110 million in the first quarter.
  • Prudential wants to reduce the contribution of annuities to about 10% of earnings.
  • Sales of the FlexGuard buffered annuities now account for 84% of total annuity sales,

Prudential Financial Inc. is continuing to shift toward sales of variable life and variable annuity products that limit the amount of risk it assumes, and it hopes to use reinsurance arrangements or other transactions to shed more annuity risk.

The firm’s executives talked about the company’s pivot away from stock market and interest rate risk during a conference call they held to go over first-quarter earnings with securities analysts.

The Newark, New Jersey-based company announced a year ago that it would be responding to low interest rates, stock market volatility and other forces by reducing its appetite for annuity risk.

Charlie Lowrey, Prudential’s chairman and CEO, said during the conference call that the company reduced costs by $110 million in the first quarter.

Prudential is reallocating more than $5 billion in capital to asset management and international emerging markets, and it is actively executing on efforts to reduce exposure to the risks associated with providing life and annuity guarantees, Lowrey added.

“We expect Prudential to emerge as a higher-growth, less market-sensitive and more nimble company, he said.

Robert Falzon, Prudential’s vice chairman, said the company wants to reduce the contribution of annuities to about 10% of earnings.

Prudential hopes to get about 40% to 45% of that reduction in annuity risk exposure by running off its block of relatively high-risk annuities.

“Reinsurance and/or sales” will close the remainder of the gap, Falzon said. “We are actively executing on that, including through derisking transactions. While we’re making progress, we’re not yet in a position … where we’re going to speak any more specifically.”

Much of the $5 billion or more in capital flowing to the asset management and international emerging markets will come from the annuity derisking transactions, Falzon said.

One analyst asked whether the move to derisk could affect Prudential’s retirement plan and employee benefits operations Prudential sells group life insurance and group disability insurance.

“We’ve spoken about the fact that we’ve taken a broad strategic review on our businesses within the context of having a business mix that is less market-sensitive, less capital-intensive and higher growth,” Lowrey said. “And we’re going to be really thoughtful and diligent about how we execute on the process, with the goal of maximizing value for shareholders.”

The Earnings

Prudential (PRU) is reporting $2.8 billion in net income for the first quarter on $14 billion in revenue, compared with a net loss of $271 million on $13 billion in revenue for the first quarter of 2020.

At the U.S. individual annuities unit, adjusted operating income before income taxes increased to $444 million on $1.2 billion in revenue, from $373 million on $1.1 billion in revenue in the year-earlier quarter.

In part because of the effect of COVID-19 on life insurance claims, the U.S. individual life unit is reporting a $44 million adjusted operating loss before income taxes on $1.6 billion in revenue, compared with a $20 loss on $1.5 billion in revenue.

The Sales Mix

Lowrey said Prudential is running off some blocks of life and annuity business and working to increase of less risky products, such as the FlexGuard variable annuities. The FlexGuard annuities are “buffered annuities,” meaning that the base contract protects only a limited amount of contract value.

Sales of the FlexGuard annuities now account for 84% of Prudential’s total annuity sales, Falzon said.

Here’s what happened to sales, expressed in annualized new premiums, for key life and annuity products between the first quarter of 2020 and the latest quarter.

U.S. Individual Life

Sales

  • Term Life: $31 million (down from $47 million)
  • Guaranteed Universal Life: $12 million (down from $29 million)
  • Other Universal Life: $15 million (down from $30 million)
  • Variable Life: $146 million (up from $88 million)

Other Indicators

  • Life Sales through Prudential’s Own Advisors: $36 million (up from $35 million)
  • Sales Through Outside Distributors: $168 million, (up from $152 million)
  • Total Amount of U.S. Individual Life Coverage in Force: $480 billion, (up from $456 billion)

U.S. Individual Annuities

Sales

  • Variable Annuities: $1.75 billion (up from $1.72 billion)
  • Fixed Annuities: $105 million (down from $211 million)

Other indicators

  • Insurance Agents: $613 million (down from $674 million)
  • Wirehouses: $134 million (down from $310 million)
  • Independent Marketing Organizations: $6 million (down from $43 million)
  • Independent Financial Planners $1 billion (up from $767 million)

(Photo: Emile Wamsteker/Getty via Bloomberg Images)