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Prudential’s Individual Annuities Show Improving Profitability

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Mar. 25 2015, Updated 6:06 p.m. ET

Overview of annuity products

Annuities are retirement-oriented consumer products. When a customer purchases an annuity, he or she pays a certain lump sum or makes periodic payments to the insurer. In turn, the insurer makes periodic payments to the customer after an agreed-upon date until the death of the purchaser.

Prudential Financial’s (PRU) Individual Annuities business offers individual variable and fixed annuity products to retail customers, mainly in the US mass affluent segment. In this market, Prudential’s competitors include MetLife (MET), Lincoln Financial (LNC), and other life insurers held by the Financial Select Sector SPDR ETF (XLF) or the iShares US Financials ETF (IYF).

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Disciplined sales

As mentioned in An investor’s guide to the insurance business, the sales of variable annuities track the performance of the equity market.

Prudential’s variable annuity sales moved in line with the equity markets until 2012. In 2013 and 2014, Prudential saw a drop in sales. This change reflected the company’s strategy to update pricing that reflects changing market conditions and to diversify its risks.

Improved profitability

Disciplined sales and diversification in its product mix has helped Prudential improve its return on assets (or ROA), calculated as pre-tax adjusted operating income on average account values. As shown in the above chart, Prudential’s ROA improved significantly from ~0.4% in 2009 to the current ~1% ROA.

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