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

All right. Good morning, everyone. I'm Ryan Krueger, the Life Insurance analyst at KBW. Really pleased to be joined today with Charlie -- by Charlie Lowrey, the Chairman and CEO of Prudential.

Thank you for having me.

So to kick it off, a few years ago, Prudential had introduced a strategy to shift business mix, improve growth and also become more capital efficient. Can you start by discussing the company's progress on these objectives as well as what your key focus areas are as we go forward from here?

Sure. So as you said, about 5 years ago, we created a strategy, which has become a higher growth, less market-sensitive and more nimble company. All under the guides of fulfilling our vision, which is to become a global leader in expanding access to retirement, to insurance and to investment security over time. And everything we've done, as you said, over the past 5 years, can fit into one of those 3 buckets. So if we go through the buckets just very quickly. Less market sensitive, you saw we did another GUL transaction a couple of weeks ago and have reduced GUL exposure by about 60%. We have reduced [ BA ] exposure through reinsurance, and sales by about 50%. By the way, that decreases at about $4 billion to $5 billion a quarter. And so or $3 million to $4 million a quarter and so you can think of that as -- over the course of the year is another transaction sort of $15 billion-ish. So we are well on our way to reducing market exposure. In terms of higher growth, we think about 3 areas. We think about capabilities, we think about distribution, and we think about product. So in capabilities, you've seen us make acquisitions in PGIM with Montana Capital Partners, the latest Deerpath Capital. You've seen us do an acquisition in emerging markets with Alexforbes couple of years ago in South Africa. So we're adding capabilities as we go. You've seen us increase distribution in PGIM and in Brazil, in other areas. And so we're increasing distribution. You've seen us change our product mix to become less market sensitive, but also meet the clients' needs. So creating the fixed index annuities product, creating the RILA products. We have the largest sort of suite of products we've ever had in Individual retirement. And so we've made a conscious effort with capabilities, distribution and product to expand. The results of that you're starting to see. And in the second quarter, I think you started to see some material results. So in retirement strategy we're up 67%. We did $22 billion in the first quarter. You've seen in Brazil, we're up 27% through increased distribution product and what we're doing with Mercado Libre. You've seen in Japan, we're up 20% in terms of the retirement savings products that we've offered. Group was up 13%, Individual Life was up 7%, and we can go through some of those. But in general, we're beginning to see the traction of a lot of the work we've been doing. The final part is becoming more nimble. And you've seen us take out costs. You've seen us take out layers, increase spans of control, doing things to, what I call increase the metabolic rate of the company. You've seen that in terms of product design. You've seen it in terms of capabilities and what we're doing. So we're making progress in all 3 of those areas, and you're beginning to see tangible results. And I think some of that has occurred in the first and second quarter of the year. So brief overview, but it kind of gets you to where we are.

And are those the same focus areas as we go forward from here?

Absolutely. So our desire is to always work on the foundational capabilities of the company, to make sure that we are competitive, and that we're meeting our customer needs as we go forward.

So another new thing is Prismic, your reinsurance platform that you launched I think it was almost exactly a year ago because it was announced, I believe, right after, you guys were at our conference. Because I think there's been a lot of questions on kind of how meaningful can Prismic be to Prudential over time, as well as just what are the opportunities for Prismic with Prudential both in the near term and over the longer term?

Absolutely. I think your comment over time is critical because we think of Prismic not as a panacea, but as another arrow in the quiver. So you think about the capabilities we have and the alternatives we have now as we write new liabilities. We can keep those liabilities on our balance sheet as we go forward. We can reinsure them to third parties. We can reinsure them to our Bermuda of captives or we can reinsure them to Prismic and as we did with the Structured Settlements transactions a year ago. So -- and we can do this with back book forward flow third parties. And we created Prismic, it took time to create Prismic because it's a different vehicle. It's not a sidecar vehicle with a bespoke product like fixed index annuities, sort of a one liner. We designed it so that it could take a variety of different liabilities. It could create, take mortality, longevity, international, domestic, long duration, short duration. And the idea with the like-minded investors we have investing in Prismic is that we're going to create a portfolio of liabilities and assets to create a risk return profile that will exist for decades to come. And so it is -- the calculus we go through is which assets and which liabilities do we want to put into Prismic, in what order over time to create a durable, diversified portfolio and that's what we're doing. So as we joke when you've done one transaction, you've done one transaction. Each transaction is different and each one has its own sort of gestation period over time and we're working on a whole series of transactions, and we'll see when they come to fruition. But we have high hopes for it, but it's going to be over time. This is a long-term effort, not a short-term effort.

Got it. Maybe shifting to PGIM, your asset manager. So I mean it has an impressive amount of assets, $1.3 trillion, I think it's a top 15 global asset manager by AUM. The earnings contribution to Prudential is about 10% of your earnings. And I was curious, where do you see that 10% going over time? Do you see big -- meaningful opportunities for PGIM to become a bigger percentage of Prudential's overall earnings?

Yes, absolutely. And I divide the growth prospects into 3 parts: one is assets, one is our investments in growth; and one in our efficiencies. And all 3 play into margin and ultimately play into sort of size of contribution to PRU. So with assets under management, that's a function of a couple of things. It's a function of where the markets are and a couple of years ago when you have a 500 basis point increase in interest rates very quickly and you run $900 billion of fixed income, your assets go down, your fees go down, and your margin goes down. There's nothing you can do about that. In terms of net flows, we're beginning to see or feel a difference in the marketplace. So Institutional Retirement investors were absolutely on the side, when they thought interest rates may continue to go up. Now that the propensity of thought is that interest rates may start to come down, you're starting to see a softening of that. That's not saying that we're going to get huge flows tomorrow. It is saying that on the retail side, we're seeing some positivity. And on the institutional side, we're seeing some interest in coming back into the market. I'd say the same, obviously, for real estate, too, which kind of grind to a halt in terms of transactions and the price. The price is -- we think that maybe at a need here and beginning to sort of perk up a little bit. So net flows overtime will, I think, be more -- the environment will be more constructive for net flows. Again, I can't predict anything. Secondly, we've been investing a lot in growth. So whether it is the alternatives, capabilities and other things where we can -- where we will have net flows. Whether it's in distribution, and we've been investing in distribution in Europe and Asia and the Middle East and in retail, and that's going to a near to our benefit overtime. The third area, which will help contribution, but also just certainly help margin is we have very much as a firm, including PGIM focused on efficiencies. You saw a few years ago, we wrung out a fair amount within the company of expenses, some of that was within PGIM, and that was to become more efficient overtime. So we are very constructive on PGIM. We think they will become a larger percentage of the company's earnings, but that will happen over time and has a variety of those factors.

You mentioned adding capabilities within PGIM. You've also done some smaller M&A transactions there as well as in emerging markets. To what extent is M&A something that is of interest in the future? And what are the key areas you consider going forward?

It's certainly of interest to us. We've talked about programmatic M&A, where we would be adding capabilities over time. And we've said in PGIM, those capabilities would be in the alternatives area, as you've seen with Deerpath or Montana or Green Harvest or others that we've done or it would be in distribution, especially in Europe and Asia for PGIM. So we'll do very targeted M&A deals with mature companies that can add the capabilities that we need. In emerging markets, we're in all -- we're in the countries we want to be in, and it's just a question of going deeper into those countries. So you saw us, the last country we want to be in was South Africa to complete the kind of triumvirate between Ghana, Kenya, and South Africa to create our Africa strategy. And now we'll go deeper into those countries and in Asia as well.

Yes. Shifting to the U.S. Retirement business and starting with your Institutional strategies, can you talk about the growth opportunities you're seeing there?

Sure. So we have been and remain very constructive on institutional retirement on PRT, essentially. We think the pension funds are overfunded at this point. They're in a good place to, in fact, transact. And we have said and remain constructive that there is a very healthy pipeline of transactions out there in their overfunded position. We are one of the real leaders in the jumbo space. We do some transactions in the cash base, which I would say was sort of $1 billion and under, and I think we announced the transaction last week or 2 weeks ago, a small multiemployer transaction. It was the first multiemployer transaction, I think, that's been done. But where we -- our sweet spot is really in the jumbo transaction. It's the big complicated deals where brand and experience make a real difference and we see no letup in interest in doing those side. When you look at the international space, so longevity reinsurance, there are about 10 players. We have about a 15% market share. We see real demand there, too. Both in the U.K. We did our first transaction, in the Netherlands recently. And so we've been expanding there as well. But we see continued strong demand on both sides of the Atlantic for that.

In your Individual Retirement business, you've started to sell more fixed annuities, which were not a historically very large product for Prudential. Can you talk about why you've expanded into that product? And then also just, are there other adjacent products generally within, I guess, within either the Individual or Institutional Retirement business that could be of interest that you could add from here?

Yes. So the main reason is because of customer demand. So if you think within PRU, this is a little alarming, the zoomers have taken over boomers, right? So why is that? Because Boomers are retiring. And so we see an immense wave of retirement taking place. And what do retirees want? They want certainty of income. And so they are looking for ways for guaranteed income for a period of time. And so there is a very strong demand for fixed index annuities. And so we're meeting that demand. I mean, the demand in the first half of this year, I think, is up 20% over last year, just in general. And so we're doing that. We also have adjacent products. We have 2 RILA products, which we have, which are selling very well. In fact, all 3 of those products had record sales in the second quarter which speaks to your point of the demand that's out there for these products. So we feel we have the broadest product suite we've ever had to meet this demand. And in fact, we have the right product at the right time, and the right place with good distribution in order to get to our customers. So we feel very good about what we have, and we think there's, given the wave of retirement coming and the need for income security that it will continue to -- it will continue to be a robust demand.

So I think a common question I've been getting certainly a lot more of is, just we've been in a higher interest rate environment finally for a few years, which has been a benefit to both demand for retirement products as well as margins of the business. Now there's -- we might be possibly shifting to, at least a somewhat lower interest rate environment again. How do you think that would affect, I guess, both growth opportunities as well as potential margins in your U.S. retirement businesses if we do end up with a lower rate environment again?

Yes. It's a really good question. We spent a lot of time kind of thinking about that. Let me take the Institutional first and then go to Individual. So on the Institutional side, on the PRT side, we see no letup in demand. Now the good news is that pension funds are overfunded at this point. So there's a cushion there. So interest rates can come down somewhat and they will still be in an overfunded position. The second thing I'd say is that if an Institution is thinking about doing a PRT transaction within the next 6 to 18 months, rough justice, they probably already hedged it out. So the near term -- their near-term pipeline of institutions looking to do PRT transactions probably won't be affected very much. And I think there'd have to be a quite significant change in long-term rates for there to be a real change. So I think we're still constructive, even if interest rates start coming down on the PRT side. On the Institutional -- on the Individual side, I'd say a couple of things: one, getting back to the kind of demographic wave that's taking place. We see no letup in the demand for fixed index annuities or the RILA products. I think there's just an overwhelming need for income security. And that's not going to change in the short term with a change in interest rate. So I think the fundamentals are still going to be there for that. From Prudential's perspective, I'd say a couple of things. One, if you look at the cash we have on our balance sheet or the collateral we have in our Individual Retirement services business, we hedge that out. So we're going to be fine if there's a decrease in interest rates. The other thing I'd say is that as of the second quarter, we had basically a 200 basis point spread between our new money rate and our yield on our portfolio. So we have cushion there, too, the rates can come down some and we'll still be earnings accretive. So I think from a Prudential perspective, we're in good shape.

Just one other related follow-up in-plan annuities. You recently did announce that you're on the JPMorgan Asset Management platform with like a newer in-plan annuity product. Like what do you generally think about that opportunity for Prudential and maybe the whole industry going forward?

Yes, I think it could be quite large. And so you think -- and I'm very much supportive of it because when you think about 401(k)s, when you think about the in-plan annuities, it's a way for people to gain their security, to gain that comfort easily without having to do a lot of machinations. And so whether it's a Fidelity or JPMorgan or some of the others, I think having giving retirees, the easy option of creating a fixed income for them for life or for a period of time is actually a great thing. And so we're very supportive of companies that are looking at this and doing it and happy to help where we can.

In Japan, you did mention the retirement product or the growth of retirement products. So I wanted to get more into that. But just, I guess, just generally, your Japan businesses have generated a lot of earnings, and they're consistent over time, but the challenge has been more. How do you keep growing them from here? So can you talk a little bit more about the growth initiatives in Japan that you have?

Sure. So we really focus on 3 things, which is product, its distribution and its service, and we're sort of [ maniacally ] focused on those. The result of that has been that we've been one of the top 3 providers in terms of new business face amount over the past 10 years. So we have a very robust business. We have 4 channels of distribution between Bank, IA, Gibraltar and POJ, Prudential Japan. And each one serves a different market. And so we feel like we have a very good foundation from which to be able to change and pivot and that's what we've been doing. And so we've been looking at more yen-based product as the yen has weakened, we've looked at more retirement and savings products. You saw in the first half of this year, retirement savings products were up by 20%. And so we feel we have the chassis is there and our ability to pivot and change and adapt is there as well, which is what I think has been the key to our success over 35 years.

I think the one thing that's been interesting with LDTI disclosures is you can kind of calculate embedded insurance margins, and you guys have talked about that some in Japan, you have a very large amount of embedded value. It seems like in your Japan business, that would be recognized over a very long period of time in the future. Are there any strategies you've considered to try to accelerate the recognition of some of that value?

Sure. So we look at a variety of mechanisms fairly regularly, including reinsurance, which would be sort of the obvious way of doing that. Reinsuring through either a third party, through Prismic, through our Bermuda captives. And so that is clearly an alternative we have. And if it's in the best interest of shareholders, given the strategy of the firm, we would certainly consider that.

I guess outside of Japan, but sticking with international. Can you provide a little more information on your emerging market businesses? And how big are they at this point? And what's the opportunity?

Sure. So we think of our emerging market businesses in 3 buckets, sort of short term, medium term and long term. Short term would be Latin America. And I'll talk about -- particularly, Brazil. Medium term would be Asia, and that would be Indonesia, India and China. And then longer term would be our investments in market-leading companies in Africa and Ghana, Kenya and South Africa. So that's how we think about it. And we think about it that way because we are now the beneficiaries of our former colleagues who planted seeds in Japan 35 years ago. And so my hope is that whoever our colleagues are, succeed us, are talking about Africa and others in the same way as we are talking about Japan now. But in the short term, Brazil would be kind of the major one we should focus on, the major country. And there, it's been a very interesting strategy where it's -- you can see what we've done and what we want to do in other countries because we're in most of the countries we want to be in, we just want to go deeper. So in Brazil, we're the largest nonlife insurer, excuse me, nonbank life insurance company. And what we realized a few years ago was that, we're playing in about 20% of the market, which is that market. The rest is group about 40% group, 40% bancassurance. And so we went out and we bought a -- and this was about 10 years ago, we bought a group company from Itau. So we're now in the Group Insurance business. And then at the same time, we created a bancassurance relationship with Itau to be in that other part. So we're now in 100% of the market. That has near to our benefit over time in terms of the absolute growth of Brazil through third-party distribution, through group insurance, through bancassurance. And as a result, you've seen this, for the first 6 months, again, we're up 27%. If you'd asked me this question 2 or 3 years ago now, we -- the contribution to our international business would have been mid-single digits. Now 3 years later, it's high single digits and growing. So it is becoming a more meaningful part of the business. And if you add, our business in Chile to that, it would become even more. So that's why Latin America is in the short term. So that's what we've been focused on and talk most about, then you have the medium and long term, which will come later.

And going back to the U.S., your U.S. insurance businesses, both Group and Individual. I guess, combined are the smallest contributor to the overall earnings of PRU. Can you talk about how those businesses fit into the strategy at this point? And do you see opportunities to improve margins in both of those businesses?

Yes and yes. So if you go back, we'll be 150 years old next year. And the company was founded with the purpose of creating life insurance for working-class families to provide the dignity of a burial. And we have retained those roots. Life insurance is core to our purpose. And so we're unapologetic about being in the business. We think it is a good business and we're in the business. The business we're writing today in the life insurance business is far less market sensitive. It is a profitable business. We like the business. It's meeting a customer need and the life insurance business has grown 7% year-to-date, so -- year-over-year. So we feel good about the business we're writing. We've reinsured some of the 60% of the GUL stuff. So we think that the dynamic of that business is changing materially. On the Group side, what you've seen is the product expansion on a voluntary basis that we've done. So our voluntary products are getting larger, which has enabled us to go from the national market down to the premier market. And so we are a leader clearly in the national market and we are now beginning to systematically go down and penetrate the premier market, which is why our sales are up 13% year-to-date. And so we're very pleased with the business we have there. We've invested in efficiency. So if you look at our benefit ratio was 81% for the second quarter. And we are very pleased with the progress we've made with both those groups and are constructive about them going forward.

You had mentioned upfront that one of the objectives was to become more nimble, which I think probably that's -- part of that is speed of decisions...

You bet.

I think, but then you've also taken out a lot of expenses as well to improve efficiency. Can you talk about some of the things you have done to become more nimble, but also to reduce expenses? And do you think there's more to do on a go-forward basis?

So first of all, there's always more to do. And so what we're doing is adopting, part of it's a cultural change. So we're really adopting a culture of continuous improvement. And that might sound like motherhood and apple pie, but it is really a mindset shift within the company that we work for our shareholders. And every day, we want to become better. And that's incredibly important to me and it's incredibly important to the senior leadership team that we do this. We have gone on a systematic, I would say, journey to get to a place that is more nimble. So firstly, we took out almost $1 billion in costs over the -- and we track that for you guys as we did that. We've reduced spans. We've increased spans of control. We've reduced the numbers of layers. We've invested a lot in process and technology. We've taken out a lot of work through AI and other means. So what I've tried to do, what we've tried to do to make the employee experience better is through AI and GenAI, take the, what I call the [ menial ] and turn it into meaningful, so to make their work more meaningful over time, but also more efficient. And as we've done all of that, we've increased, as you well point out, the speed at which we've been able to make decisions. You look at the time it takes to create products and you look at the time to do approvals, it has gotten much, much faster. So I talked about increasing the metabolic rate of the company. You are beginning to see the results of that. And part of that is a tangible proof with the kind of increase in sales and the speed at which we've gone to market with a number of things we've done. So more to -- there's always more work to do. That's a mindset shift that we're never done, but we're making good progress.

Can you talk about some of the capital deployment priorities for PRU. I think one question I think that we get sometimes is, if you free up capital by their reinsurance to Prismic, what would you then potentially use in terms of redeployment of that capital? So I guess maybe a broader question just your capital deployment strategy from here?

Yes. So the first is always organic growth. And so we will continue to invest in our businesses. You look at our ROE, and we think that's a very good return for shareholders on the investments. We'll be very careful about the investments we make, but we're investing again in capabilities, in distribution, in product, in technology and that's something that we will continue to do. The second would be M&A, and we talked about the programmatic M&A that you've done. And finally is if we don't have a good use of that capital, we'll return it to shareholders over time. We have a very sort of steady state, return of capital to shareholders, and we will continue with that philosophy as we go forward. But right now, there are tremendous number of opportunities for organic growth. You saw, we did $10 billion of PRT in the first half. It's one of the best years we've ever had. And so we will continue to use the capital wisely on behalf of shareholders, but organic growth would be our first priority.

So a couple of follow-ups from earlier. One, going back to Japan and selling more retirement products. Is that just -- is that more of a product of just where you're seeing demand in Japan? Or kind of why are you focusing more there now when, probably, traditionally, you were a little more focused on mortality and other insurance products?

Yes, part of is just the inexorable demographic change that's taking place and the need of the Japanese consumer for -- as in the U.S. with the boomer wave, for retirement security. And they don't have the safety necessarily that we do with social security and other things. And as a result, or the pension funds. So as a result, they are looking for retirement and savings products that can help them during their retirement. So there is very much of the demand that is accentuating and we see it.

And then on Prismic, I think you've talked about opportunities from Prudential's existing liabilities, new business, Japan third-party reinsurance. Is there any one area you see as a bigger opportunity than the rest? And -- or do you see these as all kind of pretty meaningful over time?

Yes, I think there is obviously opportunity in back books, but that's a diminishing opportunity that goes down. Forward flow is obviously, by definition recurring. And therefore, that's a meaningful opportunity. And we think that there is a significant opportunity given our brand, our reputation and our standing in Japan to begin to do Japan third-party deals over time. So I would say the latter [ 2 ]. That's not to say that we won't do existing back book deals, but there's only -- by definition, there's a sort of finite amount of that you can do. The Structured Settlements was always a way to jump start Prismic a year ago.

All right. Well, we're just about out of time. I don't know if you want to make any closing comments before we wrap it up.

Yes. Well, first of all, thank you for the opportunity. And second of all, just I think the -- what I said in the beginning, which was, we have 3 priorities, which is to become a higher growth; less market-sensitive; and more nimble company. You will see us continue to have that mantra and everything do fits under one of those 3 buckets. And we'll be maniacally focused on continuing to emphasize those 3 priorities as we go forward in order to become the global leader that we aspire to be over time. And we think we have all the capabilities that we need to do that. It's now a matter of execution. And hopefully, what you've seen in the first half of the year is some proof points on the execution of what we've been doing for the past 5 years. So we will continue on that track, and we'll become even more competitive over time.

Excellent. Well, thank you very much, Charlie...

Thank you. Appreciate it...

And [ thanks ] for attending and also thanks to Bob and Stan from Investor Relations, and we will wrap it up there.

Thank you.

Thanks.

Thanks so much.