Prudential Gains on Pension-Risk Transfers; Profit Jumps 22%

  • Insurer lifts dividend by 5 cents to 75 cents a share
  • Account values climb in retirement unit on pension deals

For many large companies, the pension promises that were made years ago to employees became a large and distracting headache. For Prudential Financial Inc., these retirement plans are a pathway to growth.

Account values at the retirement unit climbed by $17 billion in 2016 to $386 billion as of Dec. 31., the Newark, New Jersey-based company said Wednesday in a statement. That helped Prudential’s fourth-quarter operating profit climb 22 percent to $1.09 billion.

Prudential won retirement-contract deals in the fourth-quarter with United Technologies Corp. and Owens-Illinois Inc. The transactions add to growth at a business that established its dominance in the pension-risk transfer industry through 2012 deals involving plans initiated by Verizon Communications Inc. and General Motors Co. Retirement account values have almost doubled since the end of 2010.

“They haven’t been shy about going in, taking on some big liabilities and making this a core business even though it’s not a business, like selling annuities, where you can measure it month by month,” Jonathan Adams, an analyst at Bloomberg Intelligence, said in an interview. “It’s a little more lumpy, but they’ve made it sufficiently important to them and they’ve put enough resources behind it that I think it’s been beneficial.”

The obligations involve an element of risk, which is why employers are often eager to offload them. While Prudential Chief Executive Officer John Strangfeld adds to assets under management with the deals, the insurer takes on responsibility for decades of payments. And liabilities swell if bond yields are too low or beneficiaries live longer than expected.

Bond Yields

Markets went in the right direction for the business in the fourth quarter, however. The 10-year Treasury yield was 2.44 percent at the end of the year, up from 1.59 percent on Sept. 30, on speculation that President Donald Trump’s policies will stoke economic growth. Prudential’s stock has surged 19 percent since Trump’s surprise victory in November.

Operating profit was $2.46 a share, up from $1.94 a year earlier. That beat the $2.31 estimate of analysts surveyed by Bloomberg. The company lifted its quarterly dividend to 75 cents a share from 70 cents.

Prudential has said it is well equipped to handle long lifespans because it also offers traditional death-benefit policies that are most profitable when mortality rates are low. While firms including Athene Holding Ltd., the annuity provider tied to Apollo Global Management LLC, are seeking to expand in the pension risk transfer market, other competitors have highlighted risks. Voya Financial Inc. recently stopped seeking such deals, opting instead to focus on operations that require less capital.

Prudential’s net income in the quarter was $284 million, or 65 cents a share, compared with $735 million, or $1.60, a year earlier, according to the statement. The result was hurt by investment losses tied to derivatives.

Asset Management

Adjusted profit at the retirement segment climbed 89 percent to $318 million, helped by a legal settlement, better investment results and lower expenses. At the individual annuities business, profit rose 2.9 percent to $422 million. The asset management operation posted a jump of 13 percent to $224 million.

Earnings at the U.S. individual life and group insurance unit climbed to $181 million from $126 million a year earlier. Prudential’s international insurance operations posted operating profit of $755 million, compared with $738 million a year earlier.

Strangfeld has also been working to recover from a botched sales relationship with Wells Fargo & Co., which signed up customers for Prudential policies without their permission, according to a lawsuit by former employees of the insurer. The CEO halted distribution of those policies through the San Francisco-based lender and promised to reimburse customers.

Book value, a measure of assets minus liabilities, fell to $104.91 a share at the end of December, compared with $128.37 as of Sept. 30. While higher interest rates can help investment income in the long term, they pressure an insurer’s book value. One reason is the decline in derivatives. Also, the market values of bonds fall when rates rise. Insurers say they tend to hold bonds for the long haul, and that investors should look beyond the volatility of results under generally accepted accounting principles.

MetLife Inc., the largest U.S. life insurer, reported a net loss on Feb. 1, fueled by declines in the value of derivative contracts. Results deteriorated at property-casualty operations and Brighthouse Financial, the U.S. retail business that the company plans to spin off. That separation will make Prudential the largest life insurer in the U.S.

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