Tax Bill May Cut Prudentials RBC Ratio But Boost Its Profits

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Executives at Prudential Financial Inc. say implementation of the Tax Cuts and Jobs Act could change how the company’s finances look.

If something like what Congress has been considering becomes law, and works as expected, tax changes could reduce Prudential’s capitalization level while increasing the company’s after-tax profit margins, according to Robert Falzon.

Falzon, Prudential’s chief financial officer, made that prediction Thursday, during a 2018 financial outlook call with securities analysts.

(Related: 9 New 2018 Tax Numbers to Know)

Prudential told the analysts that it expects to continue to meet ‘AA’ financial strength standards next year, whatever happens with U.S. tax change efforts.

General Predictions

“Business mix and solid fundamentals continue to produce an attractive financial profile,” the company said in a conference call slidedeck.

Earnings per share growth should continue in spite of low interest rates and slower stock market growth, the company said.

In the United States, in individual product lines, “we expect the challenged sales environment to persist,” Falzon said.

In the individual life market, “product actions over the last several months could result in a slightly higher tilt towards term and variable life sales,’ he said.

Tax-Related Changes

During the conference call, the analysts pressed Prudential executives for thoughts about how the proposed tax changes could affect the company’s finances.

Falzon emphasized that Prudential is still not certain what the final legislation would look like.

Insurers and their regulators often refer to “risk-based capital” (RBC) levels, or the value of the assets an insurer has to meet its insurance obligations, after adjusting for the possibility that investment market risk could depress the prices of some of the assets.

Rating agencies want insurers that hold an ‘AA’ financial strength rating to have total RBC equal to 400% of the minimum RBC level.

Prudential believes the proposed tax changes could cut the company’s RBC ratio by about 100 basis points, but that the changes would leave the company’s RBC ratio above 400% of the minimum RBC level, Falzon said.

The tax changes could also lead to a big increase in the company’s after-tax profit margins, Falzon said.

Because the tax changes would improve after-tax margins, “on an overall basis, we’re actually stronger, post tax reform,” Falzon said. “We’re in a stronger capital position.”

Prudential has already started to talk to regulators and rating agencies about its belief that tax reform could improve the company’s overall solvency metrics, even though the RBC ratio might be somewhat lower, Falzon said.

Prudential has posted a copy of the conference call slidedeck, and an audio recording of the call, here.

—Read Corporate Bonds Sour on the Republican Tax Plan on ThinkAdvisor.

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