Prudential’s Settlement of Death Benefit Practices Is Credit Positive

Prudential’s Settlement of Death Benefit Practices Is Credit Positive

On 13 January, state officials in California and Massachusetts announced that they had reached a 20-state settlement agreement with Prudential Insurance Company of America (financial strength A2 positive) related to a probe of death benefit claims’ practices. The settlement is credit positive for Prudential, whose reputation and business is based on the timely payment of insurance claims. While the company is still negotiating agreements with other states, the settlement brings the potentially damaging issue closer to a conclusion, with minimal reputational or financial damage.
California initiated a multi-company audit in 2008 to examine insurers’ compliance with the state’s unclaimed property laws amid allegations that insurers were less proactive than they should have been in paying out death benefits to beneficiaries. Specifically, state officials asserted that several US life insurance companies were less aggressive in using the Social Security death master file to pay out death claims than they were in using the database to stop annuity payments. It is important to note that death claims arguably are not owed to beneficiaries until they file a claim. Thus, the issue is somewhat murky since the legal code is subject to interpretation.

According to the settlement, Prudential agreed to actively cross-reference its policy database with public death records, an area it has already focused on improving. In a third-quarter 2011 filing with the Securities and Exchange Commission, Prudential indicated that it had increased death benefit reserves in the quarter by $139 million, including $99 million in the company’s financial services business and $40 million in the closed-block business. We do not expect the settlement to materially change these figures.

Prudential remains in discussions with representatives from other states not part of the settlement, including state officials dealing with unclaimed funds and insurance regulators. As a result, although we believe the financial implications will be modest, there could be additional announcements in the future.

Aside from the financial charges taken by Prudential, MetLife Inc. (financial strength Aa3 stable) on 6 October, announced in its third-quarter 2011 results that it had incurred a $117 million charge related to its claims practices for unclaimed funds. This followed an announcement by American International Group Inc.’s SunAmerica unit (financial strength A2 stable) that it had boosted its reserves in second-quarter 2011 by about $100 million for similar reasons.

We continue to believe that the dollar amounts of any prospective settlements will not be material from a credit perspective, considering that the industry maintains a surplus of over $300 billion and statutory income was about $28 billion in 2010.
The following exhibit shows the top 20 US life insurers with respect to individual life insurance in-force, which gives an approximate preliminary indication of the companies’ relative potential financial exposure. It is important to note that practices, and thus liability, may vary significantly among the individual companies. Exposure to fines and settlements is related to each company’s business in all states, and is reflected here.

Top 20 Rated US Life Insurers by Amount In-Force1 as of Year-End 2010