By agreeing to buy American Skandia Life Assurance Co. Friday for $1.265 billion, Prudential Financial Inc. has positioned itself to quickly become a major player in the variable annuity business.
The Newark, N.J., company will also be able to leverage American Skandia's distribution network to grow into a force in the fixed annuities, and the deal could improve the rationale for a rumored brokerage venture with Wachovia Corp., analysts said.
American Skandia is the biggest provider of variable annuities through independent financial planners, and operates a mutual fund business. It has 1,350 independent distributors with 159,000 financial planners. The Shelton, Conn., company has variable annuity assets under management of $21.5 billion and mutual fund assets under management of $4.1 billion. It does not have a fixed annuity business.
Prudential's rank in variable sales would move from 22nd to sixth, the company said. Skandia's 48 external and 52 internal wholesalers are to become Prudential employees. American Skandia is expected to operate as a subsidiary of Prudential Insurance, said Arthur Ryan, the chairman and chief executive officer of Prudential Financial, in a Friday conference call.
The American Skandia variable annuities will be marketed under the Prudential American Skandia name "for the first couple of years," Mr. Ryan said. He added that Wade Dokken, American Skandia's president and chief executive officer, would be part of a transition team.
"It is clear that [Mr. Dokken] will stay on as a Prudential employee," said Prudential spokesman Bob DeFillippo. Mr. Dokken was not available to comment by press time.
"In the life insurance industry, you need scale and size to participate, and generally Prudential has that," said Michael J. Barry, the managing director for insurance at the New York-based ratings agency Fitch Inc. "But in the variable annuity market, they haven't had that size. You need to be a top 10 to 15 player, and now they're in the top five area in assets under management. They now have the scale to make a difference."
Bob Donohue, a vice president and senior credit officer at Moody's Investors Service in New York, also said that Prudential would gain much better position in the variable annuity market.
"Skandia gives them significant scale," he said.
Analysts on the conference call asked about the risk in the variable annuity business, especially variable annuities as aggressive as American Skandia's, but Prudential executives said they believed in the product's long-term profitability.
Mr. Barry added that the deal, which is expected to close in the second quarter, also gives Prudential a chance to build its fixed business, though American Skandia no longer participates in fixed annuity sales. This is something Prudential must address if it wants to be a big player in the bank channel, he said.
American Skandia once was a big player in banks, but in the last two years it was fixed annuities that dominated sales in the channel, while variable annuities crashed. Meanwhile, American Skandia pulled out of the fixed annuity market entirely, leaving it only with the less popular variable products.
Many banks, Mr. Barry said, only want to do business with providers that offer both varieties of annuity because they want to limit the number of providers on the shelf.
"If you mix the American Skandia distribution with Pru's, that's a nice sized group to introduce a fixed annuity," Mr. Barry said. "I don't think they have to go out and buy a fixed provider. But I do think they need a fixed product."
Mr. Donohue, however, did not see the planned American Skandia purchase as a big bank channel play.
"Inasmuch as fixed annuities sell better in the bank channel, this is not a home run as far as penetration into the bank channel goes," Mr. Donohue said. "It might give them some firepower in the bank channel, but this is clearly targeting the independent financial planners and independent agents."
Prudential's comments during the conference call regarding third-party distribution mentioned wirehouses and independent agents, not banks.
Mr. Barry, meanwhile, said that the deal could fuel the Wachovia joint-venture rumors.
"Where is Prudential still lacking? In banks," Mr. Barry said. "Having a Wachovia association has to help. Wachovia would also help because the big brokerages want the annuity providers to cross-sell their products as well. With Wachovia, Pru [would have] a bigger sales force to offer," he said.
And Mr. Donohue of Moody's said of the Skandia deal, "This doesn't eliminate the possibility of partnering with Wachovia at all."
Mr. DeFillippo, the Prudential spokesman, said the company has no comment on the Wachovia rumors.
As for American Skandia, the sale came less than three months after reports circulated that its Swedish parent, Skandia Insurance Co. Ltd., had put it on the market.
"American Skandia was a one-trick pony without the capital to create a fixed product, so this addresses those challenges," said Kevin Ahern, the director of financial services at the ratings agency Standard & Poor's in New York. "Prudential has a good platform, so from American Skandia's perspective, it addresses some of their challenges."
The deal is subject to regulatory approval.
