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

Good morning, everybody. My name is Brian Meredith, and I am the insurance analyst at UBS. From UBS, I've got my partner with me, Mike Ward, who follows the life insurance companies. And welcome to our next insurance fireside chat here. We have the great pleasure of having Mike Falzon from Prudential as well as Darin Arita, who is the Head of Investor Relations, to join us for a fireside chat. As a reminder, if you'd like to ask them a question, you've got the ability to do that on your screens. Upper right-hand corner, there's an area where you can type in a question. And Mike and I would be happy to answer it for you. And with that, I'm going to turn it over to Rob for some prepared comments.

Great. Thanks very much, Brian, and good morning, everyone. So I'll keep this very short so we can get into the Q&A because I know that, that's where people are primarily interested. But I just thought I'd share a couple of reflections that I've been sharing during the course of the morning. The first is that as we're coming off the second quarter, I think we, as a management and leadership team, feel quite good about our execution -- executing well. The -- we had another strong earnings quarter. And if you look at the underlying earnings power of the company sequentially continues to grow. We are ahead of schedule with regard to the variety of customer experience and cost initiatives as we've articulated them and, in fact, achieved a milestone there of $0.5 billion of run rate savings about 18 months ahead of what we had originally envisioned. Supporting that are good fundamentals in our businesses, good flows, good sales. The exception would be our retirement IIP business, but that's episodic and anticipated. So we feel each of the businesses has performed well and has a good outlook to it. We've reached record level of AUM and asset management fees within PGIM, our global investment management business. Our assurance business had revenues that were up 90%. We had a very strong recovery in the second quarter sales in our business in Japan, which we're quite pleased with in light of the pandemic experience there. And then finally, in our U.S. businesses, we've been -- had a very successful experience with our product pivots and our repricing. So we continue to have leading market shares in both our annuities and our life business having, in the case of annuities, transitioned away from traditional variable annuities and into our FlexGuard buffered annuity product. And in the case of life, pivoting away from GUL toward term and variable life. Also, as highlighted prior to the quarter, we're making good progress against our disposition objective. So we've now including the pending but announced sale of our retirement full service business. We would have proceeds of $4.2 billion against the objective of freeing up to redeploy between $5 billion and $10 billion from our existing businesses. With respect to that capital, we're being very thoughtful about how we redeploy it. So you've seen us invest in creating long-term sustainable growth for the company. Specifically, we made a relatively small but important acquisition in PGIM, creating a secondary private equity capability. And earlier, you saw that we also announced the closing of a second investment in Africa for us, in this case, in Kenya with ICEA LION. And we're quite excited about the long-term prospects for growth in that marketplace. We're balancing that with a redeployment of capital back to shareholders. So $2.2 billion of capital return to shareholders in the first half of the year. We announced twice now an increase in our targeted buybacks. So that it's anticipated that our targeted buybacks for the year are $2.5 billion. And that takes our target through 2023 from the originally announced $10 billion up to $11 billion over that period of time. And then finally, from a broader standpoint, I feel really good about how we're executing against the transformation strategy that we have for the company. The elements of that are in the first instance, being able to provide more solutions to more customers, but doing that in a way that finds the intersection of value for customers. So doing the appropriate things from the product pivots and pricing standpoints that creates that value proposition for customers, but also creates a good experience for our shareholders by reducing the market sensitivity that we experience in our businesses and the products that they sell. Secondly, by expanding our customer reach and improving customer experience. Elements of that are expanding the addressable market that we have in each of our 3 businesses, so both with PGIM, with our international business and with our U.S. businesses. And we have strategies that are going well in each of those. And in addition to that, from a customer experience standpoint, the efficiencies that I talked about before are not just producing the $0.5 billion growing to $0.75 billion of operating saves, we're actually producing a better outcome for our customers and, frankly, for our employees as well. And then finally, all of that what I've talked about accumulating in a change in our business mix. So our desire to have a business mix which is higher growth, less market-sensitive and producing compelling economics that ultimately translates into a good experience for our investors. And with that, Brian and Mike, I'll turn it back over to you guys. Thank you.

Yes. Thanks, Rob. Yes. So just kind of adding on to some of those comments here. I think as Prudential continues to transform here, can you talk about how you're trying to get your employees to work, call it, new ways that would make a difference from their perspective, kind of the customer, employee experience, costs, those types of things?

Yes. So it starts -- actually one of the very first things that Joe and I focused on when we took the reins of leadership for the company that sort of is more of an internal dynamic than might have been noticed externally, but it was a real shift in culture for the company. A key element of that was around accelerating decision-making. Where that manifested itself externally was the $0.5 billion then up to $750 million of cost efficiencies, where we wanted to accelerate the implementation of things that will otherwise take a decade to do. But it also had a lot to do with customer obsession, with being kind of risk smart and technology forward. And so a couple of -- there are 4 or 5 dimensions that we articulated in order to try to move the culture of the company toward one that was more focused on customer, customer experiences and outcomes and, of course, doing so also creating better experience for our employees. We stood up a transformation office, Brian, to help with that and essentially institutionalized a constant transformation capability within the firm, which now has over 1,000 different initiatives that are associated with it, all of which are tagged with a specific outcome, either for the benefit of our customers or the benefit of the employee experience in dealing with our customers, which then produce those efficiencies. And I think the discipline that we've created around having that process institutionalized in the way that we have will continue to pay dividends for us on a go-forward basis. And those dividends will be in the form of not just continuing to watch our operating margins improve, but also making us more competitive in the marketplace by being able to be more price competitive and being able to create a better experience for our customers.

So maybe switching over to Retirement segment. With the recently announced sale of full service, just wondering if we could dig in a bit more to some of the motivations behind that and how that might fit into the transformation initiative.

Yes. So let me start, Mike, by saying we remain committed to the Retirement business. It is a big marketplace. We're going to have an ongoing presence in that marketplace. Our presence is there in our PR -- pension risk transfer and longevity risk transfer businesses. It's there in the form of our annuities business, which is providing critical decumulation capabilities into a market that's going from accumulation to decumulation. And obviously, we're there in the form of PGIM, our asset management business, both with respect to the focus that they have on DCIO, so investment-only defined contribution as well as their very significant presence as a manager of funds for pension clients. With regard to the record-keeping business specifically, it is a quality business, but it's a business that we thought that not being in that business would further our transformation with an objective to enhancing the overall growth profile of our business and reducing the market sensitivity in that particular case, interest rate sensitivity of the business. And so we also faced incidentally with what we thought was a decision where we even needed to make a major capital investment into the business because it's a business where scale is increasingly important. And you're going to have to be -- if you're not selling, you're acquiring and there's a -- and the bar on technology investment continues to rise. And so given the growth profile of the business, given the -- our ability, what we thought were the ability to leverage the platform on a go-forward basis to the benefit of our other businesses and significant capital investment that it would require, we came to the conclusion that by selling the business, we could actually improve the overall business mix profile and so undertook to do so. Very happy that it's going to land in the hands of Empower, who we think will be a great operator that will be good for our customers, which we care a lot about and for our employees. So quite happy with the arrangement that we struck there.

Great. Yes. No, that makes a lot of sense. So I guess, you started out with talking about what remains in retirement. So I guess sticking with PRT for a second. It's gotten a little bit more competitive. And although there's probably not many players out there with your brand recognition or capabilities, wondering how you view the pipeline as we enter the back half of the year. And then how does PRU differentiate itself in that area?

Yes. So reiterate what you said, Mike, I'd say, that -- our capabilities -- we were a pioneer in that market. We have a strong set of capabilities. We have a unique track record with respect to execution on that and customer experience after the fact, which is critically important. And we have a strong brand, I think, that serves us well in that marketplace as well, which gets us first and last look at a lot of transactions. As we look at -- when we first pioneered the market to where we are today, we'd have to acknowledge that where we were the only or 1 of 1 or 2 players in the jumbo segment of that market, there are now half a dozen different firms that -- in addition to ourselves that are playing in that space. So it has become more competitive. But having said that, it is a large market that continues to grow. We had, I think, 4.5 billion-ish of transactions in the second quarter, a lot of momentum heading into the second half of the year. The average pension plan is 99% funded at this point in time. CFOs recall the experience what happened to those funding levels when we hit the dot-com bubble and the financial crisis, and I don't think they have much appetite for experiencing that again and so continues to be good demand to transact. And so given the strength of the platform that we have, given the outlook that it will remain quite robust, we continue to be quite optimistic about getting our fair share of that marketplace by focusing on the jumbo sector where we think both our capabilities are differentiated and the returns that we can get in that sector are attractive as well.

Got it. That leads right into my next question. I was going to ask if there's a target size for new deals or if there's capacity or interest in another mega deal or deals, jumbo?

Yes. I think we don't necessarily draw a line under a specific number, but what we look for is where the deals get larger, that the competition begins to become with a handful of players as opposed to, I think, it's a broader set of players that can play when you get dealing in the hundreds of millions versus the several hundreds of billions, kind of $0.5 billion in door, starts to get -- the field of players begins to thin out. With regard to large transactions, we have capital capacity appetite, both from standpoint of capital and our appetite for longevity that we would be interested in entertaining very large transactions as we've done in the past. And I think that's differentiated versus what others may be able to do in the marketplace.

Rob, can we pivot over to the international area? The transformation initiative, could you discuss areas where you're targeting for growth internationally? Any specific regions, countries, product line, distribution channels? What's the kind of strategy here going forward?

Yes. So Brian, as I think about our international business, I like the international business. I like the footprint that we have in our international business. And our focus is really on growing the platforms that we've got, the constellation of businesses that we have internationally today. Specifically, that includes, obviously, Japan as a dominant presence within our international portfolio, but also a dominant presence in that market. But outside of Japan, the emerging markets, where we're very focused on the higher-growing markets in Asia and Latin America, the nascent but useful and long-term great growth prospects that we see in Africa as areas that we want to continue to focus on. So I'm sort of thinking about those in pieces. With respect to Japan, we have continually able to demonstrate that we can grow faster than the market. We capture market share perennially. We are the #2 in that marketplace, including the indigenous players on a new business basis. So we're quite a large player with a differentiated, very successful distribution model there that allows us to continue to capture market share. We'll grow in Japan, both by adding more life planners and life consultants, so agents in the marketplace, which really drives most of our growth, but also by expanding geographically. We're very concentrated in the Greater Tokyo area, the prefectures outside there. We have opportunities to grow further. Association marketplace in which we're involved through our Gibraltar business, we can also penetrate further. So we see good growth opportunities there or traditional death protection, but also the opportunity to grow it beyond death protection in areas like retirement, which is sort of the next evolution for us in Japan. So using that distribution to increase the numbers of -- the ways in which we can solve for challenges that our customers have. When you go outside Japan and you think about each of the markets we're in, we -- in Latin America, the 2 sort of premier franchises we have there is our AAAA business based out of Chile, but we're the #1 in Chile and the #2 in Latin America in the AAAA, so pension management. So we're quite excited about the ability to grow that business both organically and inorganically, which we have in the past. So we acquired a business in Colombia, by way of example. And in Brazil, where Brazil is the largest insurance market in Latin America. It's like 60% of the market. And we are the largest individual life insurance company in Brazil. We've complemented our -- just our Life Planner model there with third-party distribution and with a group business that we acquired a couple of years back. So we'll continue to look at expanding in Brazil and in Latin America. And again, like in Japan, looking beyond protection into the retirement space as well. And then with the footprints that we've got in Asia and Africa, it gives us an opportunity to be -- to have boots on the ground. So we're a smart acquirer there and with platforms that we can leverage. So we can get better economics from the sets of things that we're looking at that someone de novo going into that market might be able to yield versus what we're looking at. So very much around programmatic-type acquisitions in markets in which we're -- which we are already operating successfully.

Got you. Got you. What about divestment side? I mean, you just recently divested Taiwan, Korea. Are there any others as you kind of look at your portfolio?

So as you point out, Korea, Taiwan, earlier than that, Poland and Italy as well. There's nothing material that I would call out on a prospective basis that we're looking to exit from that marketplace. So I think the most significant things that we've looked to do in order to hone into a footprint that we're focused on are largely behind us at this point in time, Brian.

Great. So I guess, moving over to PGIM for a second. So on the PGIM piece of the transformation, just wondering if you're targeting expansion into specific asset classes, customer bases or specific regions there?

Yes. So Mike, start with acknowledging PGIM is already at scale as an active multi-manager and successful in each of the areas in which it's engaged. So we have a very significant, both private and public fixed income capability now with the Montana acquisition that we've made, both the private and public equities capability and then -- and similarly, within alternatives. The premier piece of which would be our real estate platform, where we're one of the handful, second, third largest between equity and debt in the world on that. From a focus standpoint, it would be very much like what you've seen us already announced this year that I highlighted upfront around the Montana acquisition. We have very specific capabilities that we're looking to add as opposed to simply adding scale. The multi-manager model has worked well for us, and so we're looking for capabilities in real assets. So that would include things like infrastructure. We were looking to do something in the private equity space. We've now done that. So we're happy with that. We like and are interested in the private credit space. And we're looking to grow internationally. If you look at the footprint that we have, about 30% of our AUM comes from outside the U.S. And when you look at the market, it's 40%, 45%, maybe 50% of the market of AUM, probably 45-ish percent or so is from outside the U.S. And so we have an opportunity to grow our platform from 30%, 35% to 40%, 45% and would look at both organic and inorganic opportunities to do so.

Got it. Very helpful. So asset management, I guess, sort of market multiples have been elevated recently. Does that impact at all, how do you view -- or your willingness to pursue sizable bolt-on deals? Or how does that weigh into sort of your required return rates as well?

So we're very disciplined from an acquisition standpoint. We look at it from a multiple of financial lenses and strategic lenses. And it has to make sense for us, both from a financial and strategic standpoint. When we look at -- we obviously look at all the things you would expect from a financial standpoint. So looking at the accretion associated with the transaction, the ROE that we can get and the pattern or the evolution of the earnings that are associated with those returns are important to us as well and the free cash flow that we can get. We also look at how any acquisition we would do would complement the existing franchise that we've got. So what we find very interesting about the PE space that we enter from a secondary standpoint is in our conversation patients with CIOs around the world, one of the things that they highlight in virtually every conversation is the need for liquidity in their private portfolio, whether that be in equities or otherwise. And so having a secondaries capability puts us around the table in an important conversation solving needs that they've identified. That endorse to the benefit of our other capabilities, which we can then bring into that conversation. And then the halo effect goes the other way as well. We have 1,600 clients, and that will be to the benefit of Montana's platform in terms of their ability both to tap them from an AUM standpoint and to think about engagement and solving problems from a secondary standpoint. So absent an ability to find things that land in that intersection of both strategic and financial interest, we would look to be good stewards as we've always been of capital. And we will return capital to shareholders. But we remain optimistic that it's through both inorganic and organic ways that we can change the overall mix of the portfolio at the end of the day such that as investors look at us, they'll look at a collection of businesses that have higher growth and lower volatility and command a better multiple in the marketplace.

Great. So there's been industry-wide fee pressure for a number of years now. Just wondering if it's driven strategic changes or like you've been saying, should we expect to continue to see AUM shift more into more specialized areas over time?

So in the industry phenomena, we've not been immune to that industry phenomena. We see it as well. You wouldn't know it because our asset management fees have been pretty stable at around 21 basis points for a very long period of time. But that's a reflection, Mike, of very conscious growth strategy. That's allowed us to offset the industry-wide pressure on fees. So first, I'd note that we've got in excess of $0.25 trillion of alternatives already even before the acquisition of Montana. And alternatives have not experienced the same fee compression that we have in the fixed income and equity markets and particularly the public sectors there. And so that's helped quite a bit from that standpoint because, obviously, our alternatives are -- not only have -- we not have fee compression, but those are the highest earning fees we have within the portfolio. So they have an outsized contribution to our asset management fee profile. The way in which we've been growing organically has helped. So a lot of our organic growth has come from international and higher returning strategies, which tend to command higher fees than more core strategies. And as we look at our inorganic growth that I articulated before, whether it's in PE, real assets like infrastructure, private credit, which is of interest to us or international strategies where we're looking to grow more internationally, all of those areas are higher fee areas. And so the combination of how we're growing -- a combination of having a resilient alternatives organic growth that's been skewed toward higher-returning strategies and the inorganic strategy, which is toward higher fee strategies as well or higher fee asset management capabilities. The -- all that leaves us optimistic that we'll continue to be able to demonstrate solid earnings in the business and be able to grow those without some of the negative experience that others have had from a fee compression standpoint.

Got it. Makes total sense. So I guess we can shift over to individual annuities for a second. So the decision to wind down sales of policies with guarantees, I think, makes sense and is likely appreciated by investors. But just wondering if you could help us at all to understand some of the differences between the economics or the margins between VAs with and without guarantees.

Yes. And so maybe to answer that, Mike, I'll talk about sort of our legacy block, which is VAs with guarantees versus what we're selling today, which is FlexGuard, a buffered annuity. So it has protection but not guarantees. And so that's the first distinction, right? So it's not a guaranteed outcome. It's a protected outcome. And it creates a good customer value proposition as evidenced by the level of sales that we're witnessing, but a much better shareholder experience from the standpoint of the volatility that's associated with that product as contrasted to the accounting volatility that we see in our traditional VA product. It is a less capital-intense product in addition to being less market sensitive. And the hedging associated with it is quite simple. And actually it's done on kind of a weekly basis, have locked in for the period of the guarantees. So while we fully hedge our legacy product, it's a more sophisticated hedging capability as contrasted with the very simple readily market available hedging that's required for the FlexGuard buffered annuity product. So it has a very, very different risk profile, but very attractive returns to us. So not getting the same level of very high teens returns that were associated with our HDI product, but on the other hand, getting really attractive returns. And beyond that, there's a diversification benefit that we get for being in that product that sort of even further turbocharges those returns. Firms like ours that have both our HDI product and our FlexGuard product, there are statutory capital diversification benefits associated with that, that make it an even more attractive value proposition for us and for shareholders.

Got it. Yes. No, that makes a lot of sense. And I guess, so sticking with FlexGuard, they've been growing in popularity for the industry. For PRU, though, do you think they really have the potential to sort of offset over time some of the lost earnings from the wind down or maybe inorganic removal of the legacy block?