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

Our next session is with Charlie Lowrey. Charlie is Chairman and CEO of Prudential. He was appointed as CEO in the fall of 2018. So -- it must feel longer to you.

Feels much longer than a year.

Prior to this role, Charlie was COO of Prudential's international business, has previously served as Head of PGIM as well. And joined Prudential in 2001 from JPMorgan, where he ran real estate and lodging, investment banking business. And I think you trained as an architect as well.

Yes, and practiced.

You did?

I did.

So if you need any design tips, that will be the session after this. I'm actually building a house now. So I might.

There you go, absolutely.

Charlie is a first-time presenter here, and we're excited to have you here.

Well, thanks, everyone. Thanks for having us.

So thank you for coming.

I want to start with some -- maybe some bigger picture questions. So you've been CEO for, I guess, a little bit more than a year. Give us your view on how 2019 went. And as you talk about it, what are some of the things that you were really happy with, you're proud of and some of the things you felt, god I wish we had done that a little bit better.

Okay. So the first year was -- last year was really a foundational year for us. And if you think about us coming in, we try to do 4 or 5 things. And the first thing we did was to change the culture of the firm. And you all may roll your eyes and say, what does that mean? And how does that translate into outcomes. But it really was about outcomes. It was about changing the way people thought from delivering intentions to delivering outcomes. And to having a different way of thinking about working, having a different way of thinking about the urgency with which we approach the markets and thinking about customers differently and how customers demand more. And as a result, we have to demand more from ourselves in order to meet our customers' needs. In order to do that and prove to the market that we were actually serious about this, we put into place what we call the future of work, which was, on the one hand, a transformational effort to, again, transform the way in which we do business. But one of the outcomes of that was, probably, going to be a $500 million expense synergy and margin expansion. And so we said that internally, and we said it externally so that you all could measure us over time and make sure that we were doing what we're supposed to be doing. The third thing we did was to be consistent and to be consistent in our practice of returning capital to shareholders. And so we returned about $4 billion to shareholders last year in terms of both dividends and in terms of share repurchases, so we continue to deliver on that. The fourth thing we did was to buy Assurance. It's a very different type of acquisition for us. It's a growth acquisition. It didn't -- it has no interest rate exposure, and it allowed us to get closer to customers and begin to expand our addressable universe, and I'll talk about that in one moment. And then finally, we put a down payment on our future of work. We want to show you that we were very serious about what we're doing. And so we did the voluntary separation program, which was an acceleration of the future of work, transformation that we're going through. That set us up for really this year. And in terms of this year, there are 3 principles: one is to continue to work on our foundational businesses, if you will, making sure that they're as efficient as possible, that they're operating well, that they are competitive in their marketplace as we go forward and that they are reaching our customers. The second is the whole transformation of future of work initiative and delivering on the $140 million that we promised to investors this year that we would deliver as part of that $500 million. And the third part is the -- is really the expansion of our business, expanding the addressable universe. But doing so in an environment that we acknowledge is a tough environment, right? You have low interest rates. And as a result, you need to think about business mix, you need to think about pricing, you need to think about sales and juggling that of expanding our addressable market within the context in which we're operating now, and trying to make sure that we manage both of those aspects accordingly. Long-winded answer, but at least it kind of sets up where we are, what we thought about last year. What didn't go well last year and what we take accountability for is the -- that our results were not as consistent as we would have liked them to be. They were a bit choppy. And what you've seen, I think, in the past couple of quarters is that we have met the expectations of the street. And we -- one of the other things we did last year was we eliminated guidance, which we thought was sort of a once and done. And now we're working much more closely with analysts and investors in terms of making sure that we're on the same page as they are in terms of managing their expectations and what we think we can deliver over time and just making sure there's clear communication. And I think you've seen that with Darin Arita and his team in terms of the level of disclosure and transparency that we provide on a quarterly basis, which hopefully helps both analysts and investors in terms of determining their own outlook for us.

A few question on that, Charlie, and that is -- so last, I guess, 2 or 3 quarters, estimates generally have come down. You did have that analyst meeting, I guess, over the summer out in Newark. Did you think at that point, maybe we should just get expectations lower? Or does something change after that, where estimates probably had to come down a bit?

Things changed. So if I look back on it and what I could do over again, it might be that eventful meeting. But the thing that changed materially for us were interest rates. So when we had the Analyst Meeting, we were at about 2.5%, trending to 3%, and now we're in a 1.5% environment. That makes a material difference to our ability to -- it makes a difference to our products, it makes a difference as we think about reinvestment rates, it makes just a big difference to an insurance company. And that was the material change that took place.

I think the near-term view you're getting on earnings now is actually quite helpful. And so changes in interest rates, hopefully, in that very near term are not going to impact, so at least we have good visibility, which we think most -- the response I'm getting is very good. Let's talk about the $500 million expense cuts. I think when you ask people like me and in the audience, how you cut expenses, they'll just tell you just get rid of a bunch of people. And it's far more complex than that. So how do you go about that? What are the sources of reducing the expenses for you?

So that is exactly what we worried about, because you can put across that cutting cost is easy, right? Retaining those cost cuts is difficult. So if I came to you and said, Jay, cut your costs by 15%, you'd say, that's easy, I'll cut 3 people and then I'll sneak them back in over time when you're not looking. That's exactly what we did not want to happen. So what is -- this isn't about cost cutting per se. It's about changing the way in which we do business. And I'll give you some specific examples of that, part of which will be lower -- a lower number of people. But that, again, is an outcome of our efficiencies. So to give you 2 or 3 just simple examples -- and I can go as granular as you want, and I'll tell you why in a minute. But one example is the combination of all call centers from group insurance annuities and life insurance, right? You put them all together, you can be far more efficient, you can have less people, you can actually have much better customer service because it's a one-stop shop, you can actually cross-sell over time. It's just a much better outcome for customers when you do that. That's a mundanely simple example. But that's one example where you have better customer service, you may have higher sales and you have less people. Another example, we put into place over 100 bots. We had 1 chat bot that had over 200,000 hits last year. When you think about that, and it's not one-for-one, but let's call it, 100,000 less calls to call centers, that will reduce that as well. We put into place through -- part of what we're doing is investing in technology. We put into place a whole new front-end system for retirement. When somebody goes on their mobile app now, they can withdraw, they can take loans, they can change their investment parameters. They can do all sorts of things, they can up their contribution to 401(k). All those things you don't need to go through a call center, you don't need paper, you don't need any of that stuff anymore. Speaking of paper, one other example, we send out over 1.5 billion pieces of paper a year, okay? Not only does it sort of cut down forest so from a sustainability perspective, but also from a cost perspective. We are eliminating vast lots of that over time through the digitization of processes, of putting things online, of having frequently asked questions put into places where we can ping your mobile app and do that. And it will eliminate a vast majority of the paper that has to be sent out. That's worth tens of millions of dollars. So as you think about all these things that we're doing at a micro level and at a macro level, those are what's going to transform the company, both in terms of speed and in terms of customer outcome. So those are just a few examples, but I could go on and on with more and more examples of what we're doing, it's exciting.

It sounds like you have a lot of specificity around it.

We had 3 days of meetings, and I'll do one more granular thing, and then you can move on. But we had 3 days of meetings where the entire executive team met with every single corporate function and every single business for between 60 and 90 minutes a piece, driving at what they're doing to transform their work. We're then taking those results, and we are translating that into metrics and dashboards by which to measure their progress from now to the end of 2022. If you came to me and said, Charlie, I'll get there by the end of 2022, I wouldn't believe you, right? With all due respect to you. And that's because you need tripwires along the way. So this is the operator side of me that's coming out. But we're going to have dashboards, it's green, yellow, red, that's going to tell us every step of the way, where people are, how they're doing and what they have said they'll accomplish and what they will accomplish by the end of this period of time.

Some of the themes that you talked about initially and some of the philosophy behind what you're doing, some of it was at the company already before. It sounds as if you're really -- you even used a term sense of urgency. It sounds like you're accelerating and adding to stuff that had been already part of the company's DNA.

Part of it was in the DNA, part of it wasn't. So to be completely frank, there was a lot of good intention. But it wasn't as focused on outcomes, right? So if you differentiate between intention and outcome -- and so now we're concentrating on making sure that we deliver the outcomes we say we're going to deliver, holding ourselves accountable, holding everybody accountable and really moving with a sense of urgency. Why are we doing that? Because customers are. We live in a world of Amazon, where people expect things in 2 days. Frankly, if I don't get in 1 day, I'm disappointed now. Why should we be any different than that? And as customers' expectations go up, the expectations for ourselves have to go up. And that's what's producing the sense of urgency as we focus on the customer and customer outcomes.

Got it. Let's talk about the acquisition of Assurance IQ. It was somewhat different to past acquisitions you've made, the size, the services. Can you talk about how you see it fitting together with your other business?

Sure. It was completely different than many of the things we've done in the past. If you think about the things we've done in the past in terms of the Hartford acquisition, Star, Edison, Kyoei, all the different things we've done, they've been existing companies with big embedded blocks of business. This was very different. This is entirely a growth business. It's a growth business, and that's one of the things we wanted in a low interest rate environment. We're looking for growth in different areas. It's a business with no interest rate sensitivity, that's important to us as we sort of diversify. It's a business on which we can put our own products as we go forward. They can teach us about technology, and they're already doing so in various ways. They're incredibly sophisticated in new ways. And over time, I emphasize over time, they can help us on an international basis with some of our other things. We are excited about what we're doing with them. In part, because they have 20 million permissioned shoppers. So we are able to deal directly with clients. And one of the things that we want is to have direct access to clients. We don't want to just be a product provider, because I think you get commoditized over time. And so we see Assurance really fitting in, in a whole variety of ways to our vision of how we're going to expand the addressable universe and how they can help us going forward because the final point I'll make is in expanding the addressable universe, because of their economic model, they can access a different demographic than we can with our tight agency system and some of the products we have now. And therefore, I think we'll be able to expand the number of clients and types of clients with whom we can do business.

And so far, integration, everything is on plan?

Integration is on plan. So we've put a COO out there. We have put a CFO out there. We're putting a Chief Compliance Officer out there. But what's important is the COO. So if you think about the founders, the founders do -- what the founders do really well is to come up with amazing ideas and think about things. What we're doing is making sure the trains run on time. And so we are already putting in place -- this is really a fourth quarter business, right? So a lot of the revenues come in the fourth quarter. We're already putting into place now. We're registering all the insurance agents to be able to sell Medicare and Medigap in the fourth quarter. Because in this last fourth quarter, we had a bit of a demand/supply problem, right? There was far more demand than we could actually supply. And we are rectifying that as we go forward. So we're excited about what we're doing. We're excited about the product we're going to put in place, which is a simplified term product. We're moving that up from the third quarter to the second quarter, and we'll have that on the platform in the second quarter.

That's helpful. Let's talk about capital deployment and your philosophy around buybacks, dividends, M&A.

So first, with buybacks and dividends, and then I'll talk about M&A. So we have a philosophy. We -- our earnings -- the cash flow is about 2/3 of our earnings, and we return a lot of that to shareholders in the form of either dividends or buybacks. You've seen us be consistent in our buybacks. Over the years, we've just put another $2 billion plan into place. And in terms of dividends, we've increased dividends 12 years in a row. If you look at the past decade, it's been sort of in the low double digits of the increase, and we think that's a very good way of both showing our confidence in the company as well as providing capital back to shareholders. We will -- we think about M&A in terms of -- and you've seen us do a whole number of different transactions in M&A, both domestically and internationally. So on the domestic side, you will see us do M&A in terms of additions to the existing businesses we're in. So in PGIM, you saw us do the Wadhwani acquisition last year, as an example, just to bring a skill set into PGIM. On the international side, what you see is the divesting of certain businesses, like Poland and Italy from low-growth markets, where we don't have scale and investing them in higher-growth markets. So over the past 3 years or so, you've seen us invest in Ghana, put more investment in Brazil, in the group business, you've seen us last year invest in Colombia, and we've also invested in Indonesia. So we're investing in higher-growth markets as we go forward, and we've divested out of sort of smaller markets, where we don't have scale or competitive advantage that are lower growth.

Got it. Let's chip into some of the different businesses. By the way, if you've a question, just raise your hand, and we'll get a mic to you. We've got a question right here in the middle.

I wanted to ask about coronavirus. It's been very topical. And what I'd like to try to figure out is if -- what level of mortality would you have to see from corona to cause a capital event for the industry in general, and for PRU in particular?

Okay. So we do stress tests for pandemics and for other -- a variety of different things. And the -- it would have to be a fairly high degree of mortality.

How high?

Darrin, we don't -- I don't think we disclose that. But it's significantly -- it's high for us to have a capital event, if you will, and by a capital event, meaning that we would dip into our reserves. Now, our stress tests show that at a very high level of mortality, we're still okay. But those are things we do every year as we look at this. So we're following it closely. We don't have a large business in China. The bad news, we don't have a big business in China. Right now, the good news, we don't have a big business in China. But we're following it very closely as we go forward. I get daily reports on this.