Agreements With Motorola, Bristol-Myers To Boost Prudential’s Retirement Business
In a major boost to its retirement solutions division, Prudential (NYSE:PRU) has reached pension obligation transfer agreements with Motorola Solutions (NYSE:MSI) and Bristol-Myers Squibb (NYSE:BMY) that amount to more than $4 billion.
Prudential’s U.S. Retirement Solutions business contributes about 40% of our valuation of the company. The business contributes 25% of the company’s total revenues, and reported double-digit growth in its operating income in the second quarter of 2014. Below we review these recent deals, as well as the implications for Prudential.
We have a price estimate of $102 for Prudential’s stock, which is nearly 20% ahead of the current market price.
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Agreement With Motorola Solutions
In the last week of September, Prudential entered into an agreement with Motorola Solutions to transfer pension obligations worth approximately $3 billion. [1] As a result of the agreement, Prudential will now be responsible for the monthly pension benefit payments for Motorola’s retirees. The agreement involves the purchase of a group annuity contract by Motorola under which Prudential will pay and administer future benefits to approximately 30,000 retirees. Prudential will start making payments by early 2015, as the transaction is expected to be completed in 2014. [2]
Deal With Bristol-Myers Squibb
Earlier this week, Bristol-Myers Squibb announced the settlement of $1.4 billion worth of pension obligations for about 8,000 of its U.S. retirees and their beneficiaries who started receiving monthly pension payments on or before June 1, 2014. As part of the agreement, Bristol will purchase a group annuity contract from Prudential, and Bristol believes that the transfer of these obligations to Prudential will reduce its pension risk and provide better management of costs associated with the maintenance of its pension plan. The transfer is expected to be completed in December 2014.
Prudential’s Strategy Has So Far Paid Off
In 2012, Prudential signed an agreement with General Motors (NYSE:GM) to transfer pension obligations. GM purchased an annuity contract worth $29 billion, giving Prudential a much-needed shot in the arm as it was reporting losses at the time. [3] In the same year, Verizon (NYSE:VZ) transferred $7.5 billion worth of pension obligations to Prudential. [4]
We expect the two deals to fuel solid growth for the company. Deals such as these have been a good way for the company to limit its exposure to interest-rate risk and poor investment returns, thus avoiding capital deficiencies for its core operations. [5] Going forward, we expect these results to lead to more such deals in the market for the company.
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- Prudential signs pension transfer agreement with Motorola Solutions, Prudential Press Release [↩]
- Motorola Solutions to Reduce Pension Plan Liability by $4.2 Billion While Preserving Benefits, Motorola Solutions Inc. Press Release [↩]
- GM Announces U.S. Salaried Pension Plan Actions, General Motors Press Release [↩]
- SEC 8-K Filing, October 17, 2012 [↩]
- Prudential to Take Responsibility for $3 Billion in Pensions From Motorola, Wall Street Journal [↩]