#231 | Lincoln VULone and Prudential VUL Protector Review – Part 3

The way I was planning to close out this series is not the way I’m actually going to do it. Yesterday, Prudential had calls with its key distribution partners alerting them to the fact that it is indefinitely suspending sales of UL Protector, its traditional Guaranteed UL product, with a one-week timeline to submit applications in good order and placed by the end of August. Make no mistake about it – this is the end of an era. Prudential has long been a top-3 seller of Guaranteed UL and has been completely dominant in the last five, single-handedly commanding more than 20% of the market last year. As detailed in the recent series on reinsurance, Prudential is sitting on well north of $30 billion of Guaranteed UL reserves, which is likely larger than any other company in the industry. The holy trinity of Guaranteed UL during the heyday were John Hancock, Lincoln and Prudential. Now only one remains. You might say that Prudential pulling UL Protector isn’t that relevant. After all, VUL Protector handedly outsold UL Protector last year and the pricing for UL Protector isn’t exactly the most competitive in the market. So who cares?

Here’s why you should care. At the end of the last post, I asked the million-dollar question – is Prudential’s pricing for VUL Protector sustainable? In some ways, the fact that Prudential just bailed out of Guaranteed UL answers that question. The factors that undoubtedly pushed Prudential to get out of Guaranteed UL are also at play in VUL Protector. There’s no getting around that fact. Both products have a long-term embedded guarantee with a value that is highly sensitive to interest rates. The only substantive difference is that separate account performance can bail out the guarantee in VUL Protector. Without separate account performance, then VUL Protector is even more imperiled than UL Protector because it’s cheaper and it’s a single premium product (therefore lower lapses). As I wrote in the last post, VUL Protector is purebred to rely on separate account performance for profitability. The question, then, for the long-term future of VUL Protector is how long Prudential will feel comfortable making a bet on separate account performance.

I’ve heard on very good authority that the profitability of Lincoln VULone pre-reprice, pre-coronavirus was basically 0%. My guess is that it’s still pretty close to that after taking into account the changes in price and the changes in the economic environment. Lincoln knows the game they’re playing with VULone. Prudential, however, probably is hitting their profitability target based on whatever set of assumptions have been divined by the corporate functions. In recent earnings calls, Prudential has been playing up with analysts that it is de-risking its annuity and life businesses. On the annuity side, Prudential is trying to move away from its flagship Variable Annuity with Living Benefits (VALB), where Prudential has been a regular top-3 player for over a decade and has hundreds of billions of dollars under management and towards accumulation-oriented products, particularly structured annuities.

Strangely and simultaneously, Prudential is touting its switch from Guaranteed UL to Variable UL without disclosing the fact that the Variable UL products in question also have secondary guarantees not dissimilar from the guaranteed living benefits in variable annuity that Prudential is swearing off in the same breath. See what’s happening? This is the classic case of a company telling itself stories to justify whatever it’s doing regardless of the facts. As they say, never let the facts get in the way of a good story. And this is hardly the first time Prudential has done this sort of thing.

A few years ago, the story was that Prudential felt comfortable with its GUL exposure because the mortality risk was “offset” by the longevity risk embedded in its VALB products and, later, its pension risk transfer business. This is a bizarre claim. Anyone with even a passing knowledge of GUL, VALB and PRT knows that the mortality and longevity risk components of these products plays a distant second fiddle to the economic risk components, particularly interest rates. And to make matters worse, all 3 products have exposure to interest rate risk in the same direction.  Prudential wasn’t “offsetting” its risk in GUL by selling more VALB and PRT, they were compounding it. Then, of course, there’s the much-derided decision to buy fledgling Assurance IQ for $3.5B (plus earnouts) on the absurd story that Assurance IQ had cornered the market and cracked the code on next-gen distribution. So far, it’s been a black hole for losses and hasn’t grown nearly to the expectations that underpinned its completely absurd valuation. Insuretech news source Coverager nailed it when they titled their editorial on the acquisition as “Prudumbtial.”

I have personally seen this movie before – actually, I was part of the cast. I was involved very, very early in the work that ultimately led to spinning Brighthouse Financial off from MetLife. I learned a lot. Particularly, I learned how a very large, diversified stock company views its domestic retail life insurance and annuity businesses. My gut is that Prudential is in the middle stages of taking a hard look at their retail life and annuity operations in the same way that MetLife did prior to spinning off Brighthouse. During that process, there were a lot of products that went from being fantastically profitable to black holes basically overnight when subjected to new metrics. It was a shocking exercise that upended much of what the organization fundamentally believed about the products that it was selling.

The result of a deep-dive like that one is that the company starts to make some painful decisions about which products to sell. In 2013, MetLife dumped VALB for structured annuities and GUL for Whole Life. Prudential is now dumping VALB for structured annuities, but they’re swapping Guaranteed UL for Guaranteed VUL. I can’t imagine that’s going to be anything but short-lived. Whatever internal metrics are slamming the brakes on Guaranteed UL and VALB will also slam the brakes on Guaranteed VUL. It’s only a matter of time. And it’s also probably only a matter of time before Prudential looks at Pruco Life the same way that MetLife looked at MetLife Investors.

Even if the current VUL Protector pricing is unsustainable and Prudential ultimately decides to jettison Pruco, should that cause you pause in selling VUL Protector or any other Prudential product, for that matter? I don’t think so. There’s no reason to believe that Pruco wouldn’t be a well-capitalized and well-rated as a standalone enterprise like Brighthouse. If nothing else, seeing the separation of Brighthouse from MetLife gave me confidence that large companies will adequately capitalize their spin-offs if it’s up to them to do it. Now, of course, it’s a different story when they’re selling the block to another insurer. Witness Voya selling their life insurance blocks to Resolution Life, a company with a capital layer thinner the patty on a 99 cent hamburger from McDonalds – and just as suspicious. Prudential’s Life and Annuity operations are too big to sell.  They’d have to be spun off. That’s a superior alternative to selling, at least if the examples we’ve seen so far hold.

But there’s even less concern for clients who own VUL Protector. The beauty of Guaranteed VUL is that it combines the best aspects of a life insurance contract – ownership of the assets with an irrevocable death benefit guarantee. What more could you want? These products are fantastic bargains for consumers. There’s no question about it. Are they fantastic bargains for insurers? If the incredible industry about-face in Variable Annuities from being eaten like candy to avoided like poison is any indication then, no, they are not. And that’s all the more reason for consumers to load up while they can. Let’s take a hard look, then, at this idea of VUL Protector being bailed out by separate account performance and draw some conclusions about whether or not it’s actually sustainable.