Pru bolsters statutory reserves by $300-plus million for unlocated GAC annuitants, fined $1.2 million

Sept. 10, 2021 — Prudential Insurance Co. of America (PICA) and Prudential Retirement Insurance and Annuity Co. (PRIAC) have added about $302 million in statutory reserves to accommodate potential payouts for thousands of missing annuitants in guaranteed group annuity contracts, according to an April 2021 market conduct exam.

The penalty also included a sanction of $1.2 million by the state of New Jersey.

Prudential Financial Inc.’s subsidiary companies identified 13,911 unlocated annuitants as of January 2018 and an almost 4,000 additional missing annuitants on May 1, 2020, who were not caught in the scope fo the initial regulatory exam due to a data deficiency in the initial search criteria, the exam stated.

Statutory reserves related to the missing unlocated annuitants had been understated, thus requiring a bolstering of reserves, state regulators found.

To remedy this, Prudential posted an additional $218 million in statutory reserves as of Dec. 31, 2019 and then an additional $84 million in statutory reserves as of June 30, 2020, to address the situation. The lion’s share of the reserves added were for PICA’s missing annuitants. 

The situation stems from Prudential’s pension risk transfer (PRT) business under which plan sponsors at usually large companies buy annuity contracts from the insurer for their plan participants as a way of offloading risk. 

Prudential has been in the PRT business since 1928 and is a leader in the market. Its total annuitant population under GAC was about 1.9 million three and a-half years ago, according to the exam. 

The company told regulators that it inserted standard valuation laws as not requiring reserves for unlocated annuitants although it considers them “prudent” to hold them.

Before June 30, 2018, the company “released reserves associated with unlocated annuitants from GACs and did not hold reserves for unloaded annuitants for statutory accounting purposes,” the exam stated. This was due to the financial immateriality of the block of business, it claimed. Total GAC reserves for PCA as of year-end 2019 were $69 billion for PICA and $3 billion for PRIAC.

Hartford-based PRIAC is in the process of an acquisition proposition by a Denver-headquartered subsidiary of Great-West Life & Annuity Insurance Co., Empower Retirement. The price tag for Prudential’s full-service retirement business is $3.55 billion according to M&A documents. The transaction is subject to a public hearing by the Connecticut Department of Insurance once the application, filed Aug. 17, is deemed complete.

However, Prudential agreed it would ask for the insurance commissioner’s approval to reduce its reserves in the future for unlocated annuitants. 

The reserve impact associated with introducing a location contingency into the statuary reserve calculation was about $97 million between the two companies, according to the exam. 

Regulators did note that the number of located annuitants changes constant, with new ones added to the list and found annuitants removed. The exam did give props to Prudential for locating most missing annuitants within the first two years of their retirement date. 

The addition to statutory reserving have no impact on GAAP reserves and is said to be considered fully resolved. 

The exam, officially led by Prudential group-wide supervisor and lead state New Jersey, with the Connecticut Department of Insurance participating in relation to its domiciled company, PRIAC, found certain failures related to procedures to contact annuitants of reimbursement contracts approaching a normalized retirement date, along with some other administrative shortcomings retaliated to documentation and privacy notices. 

State regulators had given companies, under the subsidiaries of industry giant Prudential Financial Inc. until the end of September to confirm corrective actions noted in the internal audit and implement safeguards, which is not seen as a problem, as the company finished its own internal audit at the end of 2020. 

The exam is signed by David Wolf, examiner-in-charge of the New Jersey Department of Banking Insurance. Wolf and the NJ DBI did not return requests for information. 

The missing annuitant situation can be substantial to a company if it goes deep and wide enough and involves extensive and material shortcomings identified by the state regulator and federal oversight agencies.

This was the situation with MetLife Inc. a few years ago. It paid almost $20 million in a settlement with New York regulators and pay group annuity contract policyholders hundreds of millions in total in delayed or retroactive benefits to more than 13,700 missing GAC policyholders. Unlike MetLife, Prudential didn’t uncover a material weakness in its financial reporting nor did it have Securities and Exchange Commission filings or a steep penalty levied by the federal investments overseer. MetLife did try to reach the annuitants twice in letters before writing them off, which was considered inadequate by regulators. Prudential’s systems keeps the annuitants on its systems and they are searched for until found or death is confirmed, according to New Jersey’s market conduct exam findings. 

Even now, MetLife and the U.S. Department of Labor have recently locked horns over a subpoena the agency issued over the missing annuitants.

According to a summary by health and benefits firm Mercer, the DOL first opened an investigation “to determine whether MetLife, the plan sponsors that purchased GACs or anyone else involved in the transactions violated ERISA” in 2019 and then subpoenaed MetLife this year, looking for more information about how the New York company was planning on its internal fixes. MetLife argued that DOL does not have jurisdiction over state insurance law and that this was not an ERISA matter and DOL went to court to try to enforce its subpoena, claiming it does have jurisdiction over unpaid benefits under ERISA.


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