Prudential Reprices Some Insurance Products as Lower Rates Weigh on Profits

By Mark Maurer

Prudential Financial Inc. planned for a pandemic as severe as the Spanish flu, modeling for a potential crisis that would be more severe than the initial coronavirus outbreak suggested. This prepared the company for some of the financial shocks, such as the difficulty in preserving capital, but not the ultralow interest rates.

Ken Tanji, chief financial officer of the Newark, N.J.-based life insurer, is helping lead the effort to combat interest-rate pressure on corporate profit by boosting prices of insurance products sold to both plan sponsors and individuals.

"Interest rates have changed pretty substantially in a short period of time, so making sure we adjust for that is a priority," he said.

After the Federal Reserve in March cut rates to nearly zero, in an effort to stimulate the economy, life insurers were faced with investing in bonds that have lower yields than bonds in their existing portfolios, denting their investment income. Typically, insurers generate income from investing in higher-yielding assets.

The company's operating income fell 25% in the first quarter to $939 million, Prudential reported in May. The group-insurance division's earnings also sank with lower variable investment income.

Sales will likely slow on some of the faster-growing products such as pension risk transfers, in which companies purchase an annuity to remove a defined-benefit plan from their books, because low interest rates have made the terms less attractive, said Rajiv Bhatia, an analyst at Morningstar Inc.

In recent months, Mr. Tanji has sought to make product changes to ensure adequate returns and address customers' needs. Despite raising prices, the company has allowed customers to waive withdrawal fees on some products and, for low-income clients, tried to make more products accessible. Mr. Tanji said he works closely with actuaries and the investment and product-development teams to make pricing decisions.

Mr. Tanji also is focused on redesigning insurance products that saw profits fall due in part to lower rates. The company has said it is pivoting toward lower risk and less capital-intensive products.

For example, Prudential is looking to sell more buffered annuities that offer a guaranteed minimum of return on top of any market returns. Buffered annuities are more appealing to customers during a period of market volatility, in part because the return doesn't hinge on the stability of the market. In May, Prudential unveiled a buffered annuity called FlexGuard.

Additionally, changes to the individual life-insurance business will lead to more products that are less dependent on interest rates, Mr. Tanji said.

The company also is trying to protect against profit declines by continuing to cut operating expenses and expanding its distribution of insurance products through Assurance IQ, an online insurance platform it acquired in October, Mr. Bhatia said.

When the pandemic began spreading in the U.S. in March, Mr. Tanji helped lead efforts to boost liquidity. The company issued $1.5 billion in debt to cover its debt maturities through 2021.

"As much as it's been difficult, there have been a lot of positives," Mr. Tanji said. "The role that finance plays in times like this is more important than ever."

Write to Mark Maurer at mark.maurer@wsj.com

(END) Dow Jones Newswires

July 09, 2020 16:33 ET (20:33 GMT)

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