On April 10, 2020, Prudential Financial, Inc. (PRU; A3 stable) announced it had signed a
definitive agreement for sale of The Prudential Life Insurance Company of Korea (POK), its Korean life insurance operation, to KB Financial Group Inc., for the equivalent of approximately $1.9 billion.
The transaction will free funds for redeployment in other regions and/or activities that may prove more profitable over time – a credit positive. In the nearterm, however, Prudential will be challenged to replace the operation’s lost earnings amid a US economy struggling with the current coronavirus pandemic.
According to Prudential, the transaction is expected to close by the end of 2020, subject to
regulatory approval and other closing conditions. POK, which has operated in Korea since 1989, is an established provider of life insurance and other protection products sold by Prudential’s life planner distribution force. The operation generated $228 million in 2019, which is just under 7% of the firm’s international adjusted operating income, and about 3% of Prudential’s total 2019 consolidated adjusted earnings. Capital associated with the transaction was not disclosed.
Although Prudential provided few details about the reasons for the sale, it did note that the transaction will result in an after-tax loss to net income of approximately $300 million. This indicates a sales price lower than the operation’s book value, which may imply a sub-scale operation that does not meet current/future target returns.
From this point of view, the sale is a modest credit positive, as it will provide Prudential with a cash payment and capital that it may choose to redeploy in other activities, which include expansion in higher-growth emerging markets outside of Japan, in Japan, if there are other capital needs there, or elsewhere within Prudential. Whether coincidental or not, the timing of the transaction’s closing this year, amid the current global pandemic, is also credit positive.
On the negative side, Prudential will lose an operation that, although modest relative to
the rest Prudential’s international operations, is still profitable, and has capital associated with. Given almost certain pressures in the coming quarters on the earnings of life insurers, including Prudential, as well as financial uncertainties longer term, Prudential’s ability to find a replacement source of earnings may not be so easy.
If Prudential were to use the funds for shareholder-friendly activities, including the payment of stockholder dividends or share repurchases, it would also be credit negative, particularly in the current environment.