Prudential Financial, Inc. (PRU) Earnings Call Transcript & Summary

Okay. We will get going here. So first, let me just say thank you for being here. I have Yanela del Frias, Jane Chief Financial Officer of Prudential Financial.

Well, thank you for having me. Great to be here.

Of course. So you've laid out a 5-year plan in August, narrowed the footprint more than a dozen to about 6 geographies rotate north of $3 billion of capital, take PGIM from 12% to 25% and remove $750 million of cost by the end of '28. There's a lot there. what are the components that are more tangible that you can focus on the next year? How would you map that out for?

Yes. Well, I agree, there's a lot there. But I would say we're not starting from scratch, right? So we -- this is something that has been well underway. Obviously, we rolled it out very recently, but we've been working through it, developing the strategy and beginning to execute for a while and maybe just let me go through each of the components -- when we think about the capital rotation, which will generate well north of $3 billion, we've been really executing that for a while now. We've announced a couple of the smaller emerging market transactions, Indonesia, Kenya, for example, there's a few other small ones that are very close to completion. And then the larger ones, Mexico, Brazil, those are processes are well underway. that we think through this year will play out over time. So from that capital rotation and the exiting of emerging markets, we feel really good about where we are and how we've been executing. Second is PGIM. So we have a stated objective of doubling PGIM's contribution, making it 25% of PFI's AOI. Half of that is organic, with the other half being inorganic. So that organic piece has very much been underway in terms of us investing in capabilities that will drive higher fee asset growth. And those investments are going quite well. Frankly, we've been executing them for a while, and they're starting to hit the J curve. So they're really contributing to the earnings. And that plus the fact that the integration of the multi-asset model to 1 PGIM, we're almost a year into that, and that also has been delivering results, including expense and revenue synergies. So that's PGIM. Third is the $750 million expense saves and what we call optimization. That's another thing that's been well underway. If you remember, we put out a goal of $150 million in sales back at the end of last year. through 2027. So those sales are coming along. We've been executing on that. And the $750 million is just sort of an expansion of that. and of looking at us operating differently, and there are several levers that we're looking at that we can talk about. But that's a process that's been underway as well, and we're starting to see the benefits in the earnings coming through already. And then lastly, there's inorganic, which obviously is a little bit more out of our control. But the way we think about that is we're very active. We're constantly out there in the now in the fall. We're not waiting for auctions to come to us. We're engaged in the process, and that's something that we will be driving and highly engaged in going forward and on an ongoing basis. And the last thing I would say is also very important for us is that continuous execution of the day-to-day business. We want to be excellent operators, excellent allocators of capital. That will show up every quarter has been slowing up every quarter, and that's a big part, especially in the near term, of how we intend to demonstrate progress towards this longer-term strategy.

Yes. So I want to follow up on the M&A piece. I mean my perception is you all have been a little louder in discussing M&A recently. And I wanted to get a feel for the kinds of things you're interested in? And how do you approach return hurdles and ultimately, over what time period does it need to be accretive to metrics like EPS.

Yes. So I think on M&A, we have been open about it about the fact that it is part of the strategy, and we've opened the aperture a bit. Historically, when we spoke about M&A, it was constantly about PGIM about sort of smaller programmatic transactions that would enhance our capabilities. And we've done those, and they've gone well. Deer path, for example, being one of them, but we do think, as we think about the longer-term strategy and the more ambitious goals that we have that larger transactions will be more impactful. So that's -- when we say open the aperture in terms of the size but also in terms of the areas that we're focused. So when we think about where we're focused, I will start with PGIM. That is an area of focus. Obviously, we will continue to look at the smaller single-asset capabilities because that is -- that will be helpful. But we've also expanded to look at platforms that have multi-asset that will bring in more capabilities within one transaction, which will result in revenue and expense synergies. So that's an area that we've been focused on. Second is in group insurance. So we believe that group insurance is a strong business for us, a strong opportunity, capital-light business where we have a very strong current position, brand, distribution, and part of our goal is to grow those capital-light earnings, PGIM and group insurance. And so the strategy there has been to go down market and to diversify from a segment perspective. And there is inorganic opportunity there, an example being dental and vision as a capability we don't have today. And then third would be around expanding our presence in U.K. retirement. And you've actually seen us already transact in terms of our partnership with Standard Life to expand and to participate in the U.K. BPA market. And that also brings on board a significant client for PGIM in terms of managing the assets. And I would highlight that transaction also in terms of opening the aperture as to what types of transactions we do, how we leverage our capabilities, how we leverage our balance sheet. It doesn't all have to be an outright acquisition. So that's one, I think, a creative way of entering and expanding our presence in U.K. retirement while not going out there, having an outright acquisition, acquiring a license in the U.K., which we don't have today. So those are the 3 areas of focus. I think we will continue to be very active. We will be very disciplined in terms of the type of transaction and the economics to your question, we'll be active. We'll be disciplined. It has to be the right transaction strategically, culturally, it has to bring on the right capabilities. And we have multiple levers of funding. We've had the well north of $3 billion, but there are other levers that we do have. And in terms of the solution altering our capital deployment plans, there will be a very high bar for dilution. There will be a very high bar for us to alter our current capital deployment plans. and ultimately, the transaction has to add long-term value to the shareholder. And we will look at it in terms of what are the returns? What are the economics relative to other capital deployment plans and opportunities, including giving that capital back to shareholders. And it has to be additive and contribute to our objective of top quartile earnings growth, higher cash flow generation and market-leading returns on equity.

Okay. I want to key in on the group business for a minute and just the strategy to go down market. Yes, Group Benefits has been, I'd call it, a pretty fantastic business exome COVID volatility over the last several years. I totally get the interest there. I would say that some of the peers have had a tough time going down market. Like that's the one thing in group benefits. I haven't seen a big company really succeed that. So how do you approach that? And how do you sort of succeed where others have fallen down there?

Yes. No, I think that's a great question. And I think, look, our strategy there has been to diversify the product set and diversify our segment penetration and presence. And actually, I ran that business a couple of years prior to coming to this role. And when I got to group insurance having been at Prudential for 27 years. I was positively shocked at the brand that we have in that space and the strong distribution that we have. So it was obvious that we had a huge opportunity to grow because we were highly concentrated in very large employer life and to some extent, disability, but mostly life. So the strategy has always been about diversifying the product set coming down market. And we've actually executed quite well doing that, right? So we view this as we have a larger opportunity, we can grow beyond the growth of the market because we're so concentrated yet we have this fantastic brand and this great distribution, and so we've been very successfully coming down market. Now that's where the sort of inorganic and the investments come in because there are certain capabilities that we will need to acquire over time. you can go down market successfully at some point, dental becomes something that you need to have. So we're highly focused on that. But we have great conviction in the business. It's a great business. high cash flow, low capital, we're well positioned. We do need to execute in terms of enhancing those capabilities, but we are confident that we can do that over time.

Got it. So I have one more on M&A before I leave the topic, and then I will leave the topic. But -- and it's a little more of a harder hitting 1 I would say, but...

Okay. Bring it on.

The last 2 proved larger-scale transactions that were done did not go particularly while they faced some headwinds. Right now, in Japan, you have some things that you're having to work through there as well right now. Why is right now the time to consider larger so M&A when there puts a lot of balls in there?

Yes. No, I think that's fair. What I would say there is that one of the key tenets of our strategy, and frankly, this new leadership team is really around focus on businesses where we could be market leaders. We have a very strong belief that market leaders generally are rewarded with an outsized piece of the returns in a profit pool, right? So we believe that we need to be market leaders in all our chosen businesses. The good news is that we are market leaders in a lot of them. But we're not at all. And so that's where the inorganic comes in some of these areas where we believe we have the right to win, again, PGIM group insurance being examples. They are the right businesses from a capital-light perspective we have great brands, we have great opportunities and capabilities to really grow substantially. We do need inorganic growth, and that's why we're leaning into it because we think it is the right way to have a meaningful impact on the business and the strategy. We will be very focused and very disciplined. I've said that before. The other thing I would highlight, we believe we're an advantaged acquirer because we bring to bear a $500 billion balance sheet, which creates synergies beyond price. So especially when you look at an asset management acquisition, an insurance balance sheet, that size really matters. So back to the point about we're being creative as to how we think about it. how we fund, how we structure. We're an advantage acquirer, we believe. And then I'll close back with the economics, we will be disciplined. We will be focused. This is about the right transaction that makes sense consistent with the strategy, not something outside of the strategy. It has to pencil out. It has to really contribute to top quartile earnings growth, cash flow generation and market-leading returns on equity. The bar, again, it's really, really high on dilution. And to the extent we do something, it has to make sense that we will clearly articulate why we believe it makes sense strategically and how the economics play out over time.

Got it. Next, I'll turn to the expense save initiative, $750 million. Could you help us think through how much of that we should expect to sort of hit the bottom line more mechanically and we'll be able to see more clearly what portion of it is maybe more of like reinvested in the growth and then operating leverage play over time?

Yes. So I mean, the way we think about it, and this gets at your question is it's much more than just efficiency and optimization as we call it, but it's really about creating capacity and capital to invest in the growth of the business. So it is both -- when I think about the levers, there's really 3 key levers that we're looking at. The first is just continuing to simplify our company and our operating model. We've done a lot of work around that, we are still really complex, and there's incredible opportunity, whether it's management layers, increasing spans and control, just simplifying the way we're organized. There's real value to be had there. Second is just technology and automation. And I'm not just talking about AI. Everyone talks about AI, and that's work to be done and to be understood. But it's just simple automation. We still do a lot of things manually, and we also have an incredibly complex technology infrastructure that as you simplify there's incredible savings because it costs so much money to run a complex technology stack, whether in the U.S. and Japan, and they're separate and there's incredible opportunity there. And then the third is really leveraging a global workforce. And this is an area that we're behind. We have not leveraged a global workforce. And I'm not talking about outsourcing, we've outsourced. But this is really having our own capabilities, our own employees. So we have a global capability center in Ireland. We just opened one up in India. And this is about taking end-to-end processes and really transferring them, reenvisioning them, transferring them to the right location, leveraging that -- the skill sets and the talent in those locations and then creating efficiencies as we do that. The reality is today, the majority of our workforce is in the Northeast. That's really expensive. So we're taking this opportunity to obviously not only leverage the potential savings that we can have from doing that, but reenvisioning our processes and leveraging the talent and skill sets as well.

Got it. Very helpful. A quick update on Japan. I think you've talked about an assumption that sales would resume sometime in November. I think at a recent industry conference, you mentioned 12 to 18 months kind of phase-in of sales. And I just wanted to see if how do I translate that into what's already been laid out? Is there any kind of update on when you expect that process of phased reopening to begin? And what does that look like?

Yes. I mean -- so I'd start with -- Japan is just for us. It has been and continues to be a fantastic business, is a fantastic opportunity. When you think about that market, how it's evolving and the tailwinds of higher rates more retirement savings focus, things that are right up our alley and capabilities. And so it's a great business. There's 3 components to Japan, to be clear, right? So there's Prudential of Japan, which is the Life Planner model. This is where we have voluntarily stopped selling. There's Dobalter, which is the life consultant model. Both of those are captive agencies. And then there's the bank channel and independent channel, which obviously very attractive because that market is actually transitioning from much more of a captive channel to an independent channel. So those are the 3 pieces. And first and foremost, for us, it's about doing business the right way and caring for our customers. So when we voluntarily chose to stop selling, that's not an easy decision, but we thought it was the right thing to do to care for our customers, to earn back that trust and really to take the time to make sure we have the right governance, the right agency model, the right compensation model. So that's a bit of the background just because I think it's important. We've laid out very clear plans for Japan that we've been very, very public about, including the financial impacts. And we're executing very clearly. We're right on track. And in terms of everything we can control, it's on track, and we feel really good about that. The November 6 being the day after the suspension, the voluntary suspension ends. That's something that would really focus on what we can control, but it's more than just us. There's multiple stakeholders. as we bring regulators along, et cetera. So we are very comfortable with what we can control, but there's multiple stakeholders, and we're working our way towards that with a very active dialogue. The other thing I would say, and this goes back to the comments that Andy made last week, it is a ramp-up. So November 6 is not a flip of a switch. It is a ramp-up of we're opening certain agencies over time, and we expect it to be a 12- to 18-month process. That allows us to, in an orally fashion test what we've created and what we're rolling out. That ramp-up, though, is built into all the financial impacts that we've shared. We've talked about -- I've talked about our assumption is that in 2027, next year, we're at 50% productivity. as we ramp up over time. And so that ramp-up is built into the financial implications, and we're very comfortable that we're tracking to that.

Got it. Over to PGIM, One of the things you've talked about is this integration into a single platform. And I think 1 of the things you were targeting to come out of that was more cross-selling of business, how is that going? And do you expect us to be able to see it contributing to the net flow story and being a meaningful offset to some of the headwinds that the whole industry may be facing?

Yes. PGIM, as I said and as I think you all know, is a key component of the strategy. The integration of PGIM is a key component to PGIM growing and to our overall strategy. And I would say it's going quite well. And your question is around revenues. I would say, around the efficiencies going quite well. I always talk about, well, we had 6 of everything, and now we have one. So that's really good outcomes, and we're looking at about $150 million in savings, and we're tracking very well to that. On the revenue side, when you take multiple sales forces and combine them, you're caring for the client in a better way, right? You're meeting them where they need to be. You're really able to understand their challenges, create the right solutions and provide them with the right products and strategies, and over time, that does create revenue opportunities. We are seeing instances where somebody that used to only sell fixed income, now actually selling other things because we've combined the sales forces. That will take time because there's an education component. If you've been selling fixed income, your entire life, you need to learn a little bit about the other assets. But we see that going quite well and that will contribute. We also see opportunities, though and just expanding our client set, right? So into insurance, we started with Prismic, but we are managing other insurance type of portfolios family offices, sovereign wealth funds. And also geographically, we see opportunity. We're in Japan with PGIM. As our Japan business evolve towards retirement savings. And even as we integrate better between the insurance business in PGIM, there is opportunity to grow PGIM in Japan. And the credit market -- the private credit markets over time, we expect to evolve in Japan as well. So those are all things that will contribute to that growth in PGIM.

Got it. Okay. Next topic I have for you is affiliated reinsurance, actually. And it's a question that I get probably more than you'd think actually because there's some criticism out there of affiliated reinsurance. And to be fair, I think we have seen a couple peers restructure affiliate reinsurance and maybe it was more dated to as part of a cash flow improvement program. When you look across your organization, I think people have had the observation is it's a little more complex, just to Japan and Bermuda and U.S. and so forth. Is there any need to take a look at that from a Peru standpoint? Is that something that needs to be looked at to improve cash flow?

Yes. The short answer to that is no. But just to give you a little bit of background because I think we're a market leader in how we leverage reinsurance. And it's a key component of our strategy. And we're looking at the full spectrum. So we have our captive reinsurance and we have 2 entities in Bermuda. We reinsure U.S. business into that, Japan business into that. We have third-party reinsurance at the other side of the spectrum. And then we have Prismic, which is our sponsored entity that actually is pretty unique because it allows us to grow our capital-intensive businesses, leveraging third-party capital while still having PGIM manage the assets. So that's really an advantage for us. But our goal with reinsurance, especially with captive reinsurance is always about ensuring that we're managing reserves and capital in a jurisdiction that best reflects the economics, full stop, because it allows us to be more capital efficient and allows us to offer better products. And so we've been doing that for a really long time and doing it very effectively. We've had the Bermuda entities for a very long time. And that's been just a great strategy for us, and we continue to leverage that. About 70% of our Japan business is reinsured out of Japan into either the U.S. or Bermuda and it's been a tool that we've utilized over time and has been quite helpful in managing to the new capital standards around ESR. So that's been very helpful. And with Prismic, again, that's just a great tool that allows us to, over time, bring in third-party capital, grow our capital-intensive businesses, but also grow PGIM as it manages the asset. So we don't need to restructure. We're always looking to optimize, honestly, right? So there's always tweaks that we make, and as we do that and as we leverage Prismic, we will -- that will be a contributor to us growing earnings in a capital-light manner and growing cash flows over time.