Prudential Financial Inc.'s rumored interest in selling its retirement plan servicing business would provide scale to a prospective buyer and allow Prudential to off-load a highly commoditized line for which fees have been shrinking under competitive pressure.

The insurer's management spoke recently about a plan to expand earnings faster by reallocating capital away from market-sensitive businesses in order to make acquisitions in growth markets, and for PGIM Inc.

Analyst reaction to the report from Bloomberg News was mixed given that the company is seeking to reduce the proportion of its earnings generated from its annuities business, which operates under a different corporate umbrella from retirement plan services. Proceeds from a sale of the business, which the Bloomberg report first said could go for around $2 billion, might be used on growth initiatives, observers said.

Prudential's reallocation strategy may be focused on annuities, but individual life and retirement services could play into them as well, Piper Sandler analyst John Barnidge said in an interview.

"They're more capital intensive and more full-service types of businesses," Barnidge said.

The relatively large $315.23 billion account balance Prudential reported for its retirement services business at year-end 2020 would be the main draw for a buyer, he said.

"Scale in retirement is increasingly important and would really be the focus of an acquirer," Barnidge said.

In a similar deal for retirement plan services, Empower Retirement LLC bought the business of Massachusetts Mutual Life Insurance Co. in a transaction valued at $2.35 billion. MassMutual's business had $167 billion in participant savings at the time.

Prudential's full-service domestic retirement business is one side of its two-pronged "workplace solutions" retirement division. The other side consists of institutional investment products and a pension risk transfer business. The annuities and individual life insurance businesses operate under the "individual solutions" division.

Keefe Bruyette & Woods analyst Ryan Krueger did not think management intended to make its U.S. retirement business part of the capital reallocation plan and assumed it would be central to a financial wellness initiative management set forth in 2019 to boost customer access and engagement.

"While the financial wellness strategy has been discussed less in recent quarters, full service retirement appeared central to it given access to a significant pool of 401(k) participants," the analyst wrote in a research note to clients.

Potential buyers for the business could include Principal Financial Group Inc. and Voya Financial Inc., though the latter might be interested in different types of properties with capabilities it does not already have, Krueger said. Large Canadian life insurers may also be potential suitors, he said.

Lines like Prudential's full-service retirement business tend to be commoditized with little pricing power, CFRA analyst Cathy Seifert said in an interview. Prudential anticipates continued spread and fee compression in the business, though it had deemed those to be "manageable headwinds" in its annual financial report. If a deal does happen, Seifert wondered to what degree the insurer would have to write down its value.

Another insurer or a retirement plan service provider could be in the running as acquirers, as could private equity, she added.

Although the stated goal of Prudential's management has been to reduce annuities' share of company earnings, recent deals for retirement assets have managed good multiples, Wells Fargo analyst Elyse Greenspan wrote in a research note. The company would likely be willing to sacrifice near-term earnings to revamp its financial profile, Greenspan wrote.

"Given that [Prudential's] plan is to dispose of assets within its U.S. business, any deal that they do … would most likely be earnings dilutive as they look to use proceeds to buy higher multiple growth businesses, in line with their capital plan," the analyst said.

Potential counterparties for a transaction include Equitable Holdings Inc., in addition to Voya, she added.