Prudential Continues Shift Toward Low-Guarantee Products

Executives at Prudential Financial said the company is continuing to try to shed individual life and annuity benefits guarantee risk, by shifting toward selling more variable products.

Rob Falzon, the vice chairman of the Newark, New Jersey-based company, talked about the fixed-to-variable shift Wednesday, during a conference call Prudential held to go over its second-quarter earnings with securities analysts.

"We took aggressive pricing actions aligned with intention to significantly reduce sales of HDI, our legacy flagship [variable annuity] product, and launched FlexGuard, our buffered annuity product, which has been well received by the market," Falzon said.

Low Interest Rates

Because of regulatory constraints and risk management concerns, life insurers depend heavily in high-grade corporate bonds to support life and annuity obligations.

The Federal Reserve Board pushed interest rates down sharply around 2009, in response to the 2007-2009 Great Recession.

After that, rates started to creep up.

In recent months, however, the Federal Reserve Board has pushed rates down, in an effort to nurse debtors along, and to buoy stock prices.

Many life insurers have reported that their interest rate spreads, or the gap between what they pay product holders and what they earn on their own investments, were much narrower in the latest quarter than in the year-earlier quarter.

Prudential's Response

Falzon said during the analyst call that increasing the price of the HDI contracts, which offer rich guarantees, and emphasizing the sale of the new FlexGuard contracts, which offer more limited guarantees, supports Prudential's shift to reducing risk levels.

Prudential is applying those same principles to other units, such as its individual life business, Falzon said.

"In our individual ife business, we suspended sales of our single-life guaranteed universal life product in July," Falzon said. "This will result in the continued shift to variable life and other less interest rate-sensitive products. We'll continue to take product and pricing actions, including steps to diversify our mix of business, to maintain profitability in this interest rate environment."

Those actions may continue to reduce individual life and annuity sales in the near term, Falzon said.

Falzon said Prudential is also looking for ways to shed risk associated with the products it has already sold.

The company may simply suspend sales of some products and run off the blocks, reinsure blocks of business, or sell blocks of business, Falzon said.

When Prudential does continue to sell products associated with guarantee risk, it may reduce individual and overall risk retention limits, in an effort to reduce potential volatility, Falzon said.

"So, you saw us significantly reduce the retention limits within our individual life business," Falzon said.

Efforts to reprice products, and to shift to lower-risk products are "sort of the first steps toward transitioning to lower volatility, less interest rate and general market sensitivity across our businesses," Falzon said.

"On a go-forward basis, our strategic emphasis is really on growing the elements of our business that are less rate-sensitive and more predictable," Falzon said.

He gave the asset management business as an example of a unit that Prudential would like to expand.

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