#19 | Hartford and Prudential

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It’s official. The speculation that Prudential would purchase Hartford’s life insurance division turned out to be true. I want to briefly touch on how Hartford fits strategically and economically into Prudential and the implications of the purchase for product development and distribution.

But first, the price. General speculation a few months ago was that Hartford was looking for $1.5 billion and the market was pushing back with a $1 billion valuation. So why did Hartford let it go for $615 million in cash? That number might be a bit of a red herring. The sale will generate a total of $1.5 billion in freed statutory capital for the Hartford due to released reserves on the life block. Hartford arguably got much closer to its asking price than the $615 million cash consideration might suggest.

The economics for Prudential are a bit more interesting. Prudential receives $7 billion in reserves but, I’m assuming, will have to post additional reserves to cover the $885 million that Hartford got to keep. Prudential is also on the hook for reserve adjustments associated with AG38 going forward. Hartford was a major player in the NLG market and extensively used the two tier shadow account structure to minimize its AG38 reserves. Chances are very high that the reserve adjustment for AG38 will be fairly sizeable. But Prudential doesn’t appear to be worried about reserves. According to the corporate line, Pru has a virtual monopoly on cracking the code to NLG profitability in an extremely tough environment. They’ve said they have efficient reserve financing and have voiced strong commitment to the NLG market. In a way, buying Hartford doubled down Prudential’s bet on NLG and for an attractive price.

Hartford also offers some strategic value. Prudential has been somewhat explicit about the fact that it is very interested in expanding its distribution beyond its career agents and the independent brokerage space. Hartford is the indisputable juggernaut in point-of-sale distribution in the banks and wires. Hartford has been nothing short of brilliant in reinventing itself on an alternative distribution platform – precisely what Prudential wants.

But, of course, the transaction is not without financial and strategic challenges. Everyone knows that Hartford propped up its new distribution strategy by offering cheap product and Santa Claus underwriting. It’s impossible to know whether Hartford’s distribution strategy was intrinsically effective or if sales were a result of unsustainable competitive positioning in the NLG market. My opinion on this deal is that Pru is making a bet. If Hartford were a guaranteed profit annuity, the price would have been much higher. Instead, Pru got a discount by betting on its ability to effectively manage a questionable block of business and leverage a distribution platform that would have been expensive to build from scratch.

Product development, a stated goal of the acquisition, will also cause some friction. Where Hartford is inventive, Prudential is consistent. Where Hartford is proactive, Prudential is reactive. Where Hartford is aggressive, Prudential is, well, prudent. Hartford finds a story and then creates a product. Prudential creates a product (quite infrequently) and then finds a story. Hartford incessantly tweaks its portfolio with almost childish enthusiasm. Prudential only changes when necessary. Hartford delivers innovation at the risk of surprises. Prudential delivers consistency at the risk of being stale. Both philosophies have virtue and vice but are incompatible in their current forms. The new Prudential will have to figure out a way to effectively manage the tension by harnessing Hartford’s development prowess with Prudential’s focus on risk management or else the Hartford folks will be looking for new gigs.

Which, if we’re being honest, might happen anyways. The release provided precious little details as to what Prudential actually plans to do with the folks in Simsbury. Will the combined companies generate enough premium to justify two expense structures? Probably not. Scale isn’t worth much in the life insurance business, especially in the independent brokerage space. Small companies have approximately the same market penetration as large companies. Scale is certainly not holding Prudential back from writing more business right now. Hartford does add new exposure to the bank and wirehouse space but that’s not a major part of the expense structure. All of this is not to say that Prudential wouldn’t be smart to keep many of the people at Hartford because they’re some of the best in the industry. I’m merely pointing to the fact that Hartford and Prudential have substantial redundancies in both manufacturing and distribution (Monarch vs. BGA). Something has to give and two schools of thought are already emerging. One says that the two companies will efficiently integrate and the best of both will stay. The other says that Prudential is primarily interested in Hartford as a runoff with the exception of the wirehouse distribution arm. Only time will tell.

But to be clear, the acquisition is nothing but positive for the industry as a whole even if the benefits to Pru or Hartford in particular are ambiguous. It continues a long trend of capable companies stepping up to buy struggling competitors. In a world of vastly increasing economic pressure, this is precisely what ne

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