Moody’s Investor Service Inc., (Moody’s) has said that the June 1 agreement between General Motors (GM) and Prudential Insurance Co. (Prudential) to provide income annuities for GM white-collar pensioners is a credit negative for the Newark, NJ-based financial services company.
The deal was thought by industry experts to be an augury, with many other companies looking to make similar deals albeit not of the same magnitude.
When asked last week if more deals like the GM one were anticipated, Prudential CEO John Strangfeld matter-of-factly answered, "Yes." Strangfeld then went on to say Prudential would be doing more of these deals adding, “It is the shape of things to come" and that there would be "more of this to follow.” Strangfeld was responding to reporters' questions on June 7, during a press conference for the Geneva Association, an international insurance think-tank, at the National Press Club in Washington, D.C.
If the transaction does become a new trend, it would behoove smaller companies to pay close attention to some of the potential liabilities entering into an annuities agreement for pensioners can bring.
Moody’s stated in their Weekly Credit Outlook that they view the transaction as a credit negative for Prudential because the contract will now comprise 5% of Prudential’s general account holdings. Moody’s maintains that a percentage that high poses a significant risk concentration due to the obvious challenges of managing a long-duration portfolio as well as investing a portion of the proceeds through existing investments in a low-yield vehicle and the emerging problem for any company in the industry: the challenges of estimating longevity risk.
Moody’s did say that Prudential’s asset liability management as well as its investment and actuarial expertise renders it in a good position to deal with the type of obstacles that accompany a deal like this.