Prudential Financial CEO: Pension Risk-Transfers Represent Attractive Opportunity
August 8, 2014 by Fran Matso Lysiak
NEWARK, N.J. – Pension risk-transfers represent an “attractive opportunity” for Prudential Financial Inc., the company’s chief executive officer said as the company swung to a second-quarter profit.
Net income rose to $1.04 billion compared with net loss of $517 million last year, which included $2.2 billion in pretax realized investment losses and related charges driven by changes in value of the Japanese yen relative to other currencies and decreases in the market value of derivatives.
Prudential Financial showed “strong results in the second quarter and we are on pace to achieve our goals for the year,” said John Strangfeld, chairman and chief executive officer of Prudential Financial, during the earnings call. “Business fundamentals are the main driver of our improving results,” he said.
In its asset-management business, adjusted operating income increased to $200 million from $172 million. Institutional and retail assets under management increased 16% to $547.1 billion at June 30.
The asset-management business achieved its 27th consecutive quarter of positive institutional flows, Strangfeld said. “Sustained growth” in assets under management is driving growth in asset management fees and operating income, he said.
Prudential didn’t record any pension risk transfer transactions in the quarter, Strangfeld said, adding that in July the company completed a “landmark” longevity reinsurance transaction.
Last month, in another longevity swap, the BT Pension Scheme, which covers retirees of U.K. telecommunications giant BT, announced a £16 billion (US27.5 billion) agreement with the Prudential Insurance Company of America to cover more than 25% of its liabilities (Best’s News Service, July 7, 2014).
The deal, noted lead actuarial adviser Towers Watson, was more than three times the size of the previous record, the £5 billion transaction announced in March 2014 between French reinsurer Scor SE and the pension fund of U.K-based insurer Aviva plc. The BT transaction, designed to cover risks associated with increases in life expectancy, involved the creation of a wholly owned insurance company to deal with Prudential, which will arrange for the reinsurance of the risk.
Pension-risk transfers, both funded transactions, and those in which Prudential Financial solely reinsures longevity risk, “is an attractive opportunity for Prudential,” Strangfeld said.
In its U.S. retirement and investment management division, adjusted operating income increased to $876 million from $851 million last year.
Included in adjusted operating income was $4 million pretax charge in individual annuities, including strengthening of reserves for guaranteed death and income benefits and adjusting amortization of deferred acquisition costs on policies and other costs.
Gross annuity sales were $2.7 billion, up about $200 million from a year ago, said Mark Grier, vice chairman for Prudential. “The mix of our sales has changed significantly, reflecting our strategy to broaden the choices we can offer to retirement-focused clients and their advisers while diversifying our risk exposure.” For example, about $300 million in sales in the quarter represented annuities without living benefit guarantees, Grier said.
Adjusted operating income for its U.S. individual life insurance business rose to $158 million. Prudential recorded an $8 million pretax charge in individual life for integration costs relating to its acquisition of Hartford Financial’s individual life insurance business in January 2013.
Individual life sales, based on annualized new business premiums were $103 million, down from $184 million a year ago, mainly driven by a $75 million decline in sales of guaranteed universal life insurance products, Grier also said. “This sales decline reflects actions we’ve taken to limit concentration in these products” and to maintain appropriate returns, including a series of price increases.
In addition, a number of competitors have taken steps to make their products “relatively more attractive” and several companies have recently entered or increased their presence in the guaranteed universal life market, Grier said.
Group insurance’s adjusted operating income jumped to $46 million from $22 million, driven by more favorable group disability and group life claims experience.
The current quarter net income included $273 million in pretax realized investment losses and related charges, and included gains of $199 million from its general investment portfoli0 and $151 million on increases in the market value of derivatives.
Prudential Financial has received a systemically important financial institution designation from the Financial Stability Oversight Council.
Prudential Insurance Company of America currently has a Best Financial Strength Rating of A+ (Superior).
On the afternoon of Aug. 7, Prudential Financial’s stock was trading at $86.21 a share, down 0.42% from the previous close.
(By Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com
