Prudential Change Tactic

Prudential Financial Inc. is about to become the largest life insurance company in America by assets. But U.S. life insurance sales aren't the biggest source of its profits.

Today, many Americans say they fear outliving their savings more than the premature death of a major breadwinner. And industry sales of individual life-insurance policies are down sharply since the mid-1980s. As a result, Prudential has transformed itself into an investing giant focused heavily on retirement-related products and services.

Its crown jewels include a $1 trillion global investment-management unit, known as PGIM, that ranks among the world's biggest and counts a couple dozen of the biggest corporate pension plans as clients. The unit could soon get even bigger: It is on the hunt for an acquisition, and it plans to launch its first exchange-traded fund as soon as later this year, according to people familiar with the matter.

Prudential's asset-management unit last year delivered $787 million, or 11% of pretax operating profit generated by the company's different divisions, and its business of selling annuities to individuals hauled in $1.77 billion, or 25% of operating profit. Annuities are retirement-income savings products.

U.S. life-insurance operations, by comparison, have contributed no more than about 12% of the company's quarterly operating profit in recent years.

"For a society living longer.... pension-fund assets or individual savings have to last for a longer period of time," said Stephen Pelletier, executive vice president and chief operating officer of Prudential's U.S.-based businesses. 

The changing tactic at Prudential is a major reason the firm is on track to become the nation's biggest U.S. life insurer by assets when MetLife Inc. deliberately shrinks. The rival is set by June 30 to spin off about a fourth of its $898.76 billion in assets into a new company, Brighthouse Financial. 

When insurers are ranked by assets, the convention is to include only those they own, not money managed for clients. As of Dec. 31, Prudential's own assets tallied $783.96 billion. Prudential has a market capitalization of $47.76 billion, compared with $58.59 billion for MetLife before its split. 

Another large Prudential business is the administration of employer-sponsored retirement-savings plans. Prudential is also a leading seller of "stable value" contracts, a type of investment offering designed to deliver bond-like returns to investors and protect against losses; it is commonly offered in tax-deferred savings plans, such as 401(k)s. All together, Prudential provides retirement services for more than 5,000 plans and 3.3 million participants. 

Prudential is also the U.S. leader, by sales, of billion-dollar "pension-risk transfer" transactions. Under this business, sponsors of old-fashioned pension plans pay insurers to take responsibility for financial obligations to retirees. 

Up next, PGIM is making its first foray into ETFs, according to people familiar with the matter. The firm aims to start with two types of ETFs: actively managed fixed-income products, and so-called smart beta equity ETFs, which track the performance of non-market-capitalization-weighted indexes, these people said.

ETFs have become increasingly popular investments partly because they have tax and cost advantages over many mutual funds, and trade like stocks. Prudential would be a latecomer to the area, which BlackRock Inc., Vanguard Group and State Street Global Advisors dominate. Many firms are jostling to find a competitive edge.

PGIM is also open to grow through deals. At a conference earlier this month, the unit's Chief Executive David Hunt told investors he would consider an acquisition if it was a "natural bolt-on to our multi-manager model."

Life-insurance was "the start of everything for Prudential: selling small policies door to door," said Jay Gelb, a Barclays analyst. But the insurer "has been out in front in terms of shifting away from traditional U.S. life insurance" as times changed.

The industry shift away from life insurance is in part the result of the proliferation of mutual funds in the 1980s, which opened the door to stock-market investing by middle-income households through tax-advantaged savings plans. Before then "whole life insurance," combining a death benefit with a tax-advantaged savings account, was a common way to save. 

Basic term-life policies picked up some of the slack as savings plans proliferated. But many agents quit the business because commissions were relatively small, further depressing sales.

Mr. Pelletier said the company has initiatives underway to boost U.S. life-insurance sales. But for now, most of the money Prudential makes from life insurance arrives from Japan, Mr. Gelb said.

Meanwhile, MetLife says it is hiving off slower-growing and more capital-intensive businesses. One goal is to avoid being re-tagged "systemically important" by federal regulators and subject to potentially stiff, yet-to-be-determined capital requirements. MetLife won a federal-court ruling last year to rescind the designation, but the government has appealed. 

Prudential was similarly tagged, but didn't challenge the designation in court. 

"We've divested, we've acquired, we've grown," said Prudential Vice Chairman Mark Grier. "Carefully managed growth would be totally appropriate."