Prudential to Sell $31B PALAC Block to Fortitude Re

Prudential Financial, Inc. (PRU), a global provider of insurance, investment management and other financial services, has agreed to sell a portion of its in-force legacy variable annuity block to Bermuda-based multi-line reinsurer Fortitude Re for $2.2 billion.

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Prudential aims to become a higher growth and more nimble company by reducing its exposure to market-sensitive and traditional variable annuities with guaranteed living benefits. (See Prudential Financial stock charts on TipRanks)

As per the terms of the deal, PRU will sell one of its units, Prudential Annuities Life Assurance Corporation (PALAC), to Fortitude Re for $1.5 billion in cash. Additionally, Prudential will receive a capital release and an expected tax benefit, all together aggregating to $2.2 billion.

Moreover, PRU expects a reduction to pre-tax annual adjusted operating income of approximately $290 million. The deal, which is subject to certain closing conditions, is likely to complete by the first half of 2022.

The PALAC block includes all of Prudential’s non-New York traditional variable annuities with guaranteed living benefits issued before 2011. The said block values approximately $31 billion or 17% of Prudential’s total in-force individual annuity account values as of June 30, 2021.

Commenting on the deal, the Chairman and CEO of Prudential, Charles Lowrey, said, “This transaction underscores how a partnership with the right expertise and financial strength can benefit our customers and investors, while also unlocking new opportunities for our businesses.”

Fortitude Re is a subsidiary of Fortitude Group Holdings, LLC that provides tailor-made transactional solutions for legacy Life & Annuity and Property & Casualty (P&C) lines. The PALAC block complements Fortitude Re’s capabilities of providing solutions to a broad array of long-dated insurance liabilities.

To ensure a smooth customer experience, Prudential will continue to service and administer all contracts in the PALAC block post the deal. Also, PRU will continue to sell new FlexGuard and other protected outcome solutions through additional existing subsidiaries.

Following the news, Wells Fargo analyst Elyse Greenspan maintained a Hold rating on the stock with a price target of $107, implying 2.6% upside potential.

Greenspan said, “Prudential has rolled out a plan to shift its business mix towards high growth businesses (including PGIM and emerging markets) and significantly lower its concentration to annuities, its most interest-rate sensitive business. While this should result in lower-interest-rate exposure it could also potentially result in a lower earnings profile for PRU.”

Overall, the stock has a Hold consensus rating based on 8 unanimous Holds. The average Prudential Financial price target of $105.75 implies 1.4% upside potential to current levels. Shares have gained 50.5% over the past year.