Prudential’s Retirement Business In 2015: New Deals, Operating Margins In Focus

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Prudential’s (NYSE:PRU) retirement business has gotten off to a strong start in 2015. Beginning in January, Prudential added new pension fund business from TP Contractors, extending benefits to 362 plan participants with $20 million in assets. [1] More recently, Prudential signed a pension fund transfer agreement with Kimberly-Clark Corporation (NYSE:KMB). As part of the agreement. Kimberly-Clark will transfer pension liabilities worth $2.5 billion evenly among Prudential and Massachusetts Mutual Life Insurance Company by June 2015. [2] Prudential also completed a longevity reinsurance transaction with Rothesay Life, with pension liabilities of $450 million covering about 25,000 beneficiaries. [3]

There is significant potential for more such deals; according to a research report by Mercer, as of February there was an aggregate deficit of $486 billion in the funding level of pension funds sponsored by S&P 1500 companies. This has more than doubled in the past twelve months.  ((S&P 1500 pension funded status increases 6% in February as interest rates and equity markets rise, Mercer Press Release)) Although Prudential stands to gain new business in this vast market, it will also need to focus on its operating margins. Below we discuss the outlook scenario for Prudential’s retirement business in 2015.

See our full analysis of Prudential here

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Operating Margin Fell In 2014

In 2014, Prudential reported over $4 billion in annuity premiums and fees, a rise of 8% over 2013. Total assets under management in the division also got a 7% year-over-year boost and stood at about $933 billion at the end of December 2014. Most of the retirement fees are determined by total account values, which in 2014 increased by over $30 billion to about $343 billion, nearly $34 billion of which came through new sales and transfer agreements signed during the year. However, operating income in 2014 fell by nearly 10% y-o-y to $3.47 billion. This included the adverse impact of low returns on fixed-income investments. The yield on fixed maturity securities stood at 3.94% in 2014, an improvement over the 3% in 2012 but still lower than the 5% seen in 2008. The operating margin also took a hit, falling from 29% in 2013 to 17.7% in 2014. [4]

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Notes:
  1. Prudential Retirement adds new client TP Mechanical Contractors, Prudential Press Release []
  2. Prudential signs pension transfer agreement with Kimberly-Clark Corporation, Prudential Press Release []
  3. Prudential Retirement completes fifth reinsurance transaction with Rothesay Life, Prudential Press Release []
  4. SEC 10-K Filing []