Pru Domestic Business Head: Company Will Be Resilient to Any Final Labor Fiduciary Rule
December 12, 2015 by Thomas Harman, Washington Bureau manager, BestWeek: Tom.Harman@ambest.com
NEWARK, N.J. – Prudential Financial Inc. expects to be “highly resilient” in the face of whatever results from a proposed Labor Department regulation that would include insurance brokers as part of Employee Retirement Income Security Act conflict-of-interest requirements.
The House has passed legislation blocking the rule’s implementation until the U.S. Securities and Exchange Commission approves its own version. When asked about the possibility during a call discussing Prudential’s 2016 financial outlook that Democrats could prevent the fiduciary rule from being part of a final omnibus spending bill, Steve Pelletier, head of domestic businesses, declined to directly comment on any movement in Congress.
But he did say Prudential’s business mix and business strategy “will make us highly resilient in the face of a range of outcomes on the regulation.” Rob Falzon, Prudential’s chief financial officer, said while uncertainties exist on the impact of the Labor Department proposals, “we feel that we are well-positioned to adapt.”
Pelletier said any final rule should not have any negative impact on the access of Americans receiving financial advice and solutions. Any expense increases concerning compliance requirements had been factored into the guidance Prudential was offering, he said, noting business earnings — especially in the annuities business — are driven by in-force business. “Even if there were a meaningful impact on sales in 2016 as a result of the regulation, that would not have a significant impact on the guidance we’ve provided,” he said.
Prudential Financial Chief Executive Officer John Strangfeld said earlier this year the proposed fiduciary rule concerned his company because of “unintended consequences that could result from these proposed regulations” (Best’s News Service, Aug. 7, 2015).
Prudential’s outlook for 2016 is a strong one — an expected return on equity of 13% to 14%, Strangfeld said. He said the target for 2016 reflects a mix of protection, retirement and asset management business that allows Prudential to invest across its platforms and infrastructure to capture long-term growth opportunities.
The company is generating increased free cash flow that will support capital deployment. He said the company should product deployable capital at levels of about 60% of company earnings.
Prudential has taken actions to reduce complexity and volatility in its business. Strangfeld announced Prudential’s intent to recapture its variable annuity living benefit riders from its captive insurer and to house all of Prudential’s variable annuities product risks in statutory insurance entities during 2016. “While we have always managed these risks on an economic basis, and held strong reserves and capital against those risks — a practice that we will continue — managing through a captive has added a source of complexity and capital volatility that has distracted from the core fundamentals of our business,” Strangfeld said.
Prudential has gained approval from insurance regulators on key aspects of the plan, which he said would be implemented in phases during 2016. He said Prudential expects to fully manage product-related capital market risks within its annuities business and said Prudential will cover the net impact of the recapture with existing capital and reserves. “Upon completion, we expect the recapture transaction to substantially reduce the volatility in capital and capital debt that we have historically experienced due to our variable annuity business,” he said. “With this reduced volatility and the simplified corporate structure, we anticipate our available on-balance sheet capital capacity will show more stability on a quarterly basis and become less relevant than other indicators of our financial strength and flexibility.”
The move to recapture the variable annuity living benefit rider from its captive is in advance of a guidance document being crafted by a National Association of Insurance Commissioners’ variable annuity issues working group, but Falzon said the terms of the recapture are consistent with issues that are identified by the NAIC and its consultant.
