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

Going on the next session. Really pleased to have Prudential Financial with us today. And up on stage with me is Andy Sullivan, Chairman and CEO. I also want to acknowledge Tina Madden and the IR team in the front row.

So Andy, it's been about 18 months since you took over as -- It's something along those lines as CEO, and you did provide a strategic update recently. So I was hoping to start by summarizing the key components of your go-forward strategy and what you view as changing at the company in the new strategy?

So there's a good bit that's underway and changing. And hopefully, everyone had a chance to listen to our call. but it's very simple and straightforward. There's 4 main strategic priorities. The first is narrowing our geographic footprint in our insurance businesses. I'm a huge believer in focus. And I -- my team and I believe that Prudential had become my word spread too thinly. We think it's really important to focus talent, focus capital, focus investment if you're going to be successful. So we are narrowing our retirement and insurance business footprint. We're currently in over a dozen markets that will be about half of that. and in the process, raising well north of $3 billion as we exit those markets. We already have good momentum. On that process, I've been asked about that announcement. So what we wouldn't have talked about if we didn't have some momentum already in that regard. But narrowing the footprint isn't the objective or the goal, right? It's the enabler of what we can then do, which is really the second priority. I'm a big believer is pick the businesses that you believe that you could compete and win in and be a top-tier player because the -- no matter the industry, the top tier players, get the lion's share of the profitability, get the lion's share of the growth from a growth rate perspective. We believe that our global retirement, global asset management and our -- what we call our select protection businesses. So life in the U.S. and Japan and group insurance in the U.S. are businesses that we have the right set of capabilities that when we continue to invest in them that we will be a top-tier player and get those rewards. Our goal, as we've said, is to be category leaders in those businesses. The third priority is about optimizing our capital deployment. There's really 2 aspects of this. The first aspect, and this is a change, a difference is we've taken a much more top-down oriented approach to capital deployment. We have every intention to be my words, just excellent capital allocators to make sure that every dollar of capital that gets allocated produces a very, very strong return above the cost of capital. But then the other part of the third priority is shifting the mix of the business. It is really important when you have a set of businesses that are capital heavy and our asset-intensive insurance businesses are that you have the right mix of capital-light businesses. The capital-light businesses are, you should think of group insurance and asset management. And then finally, all that fueled by a change in the operating model, priority 4, which many people sort of digest down to just expense reduction, but it's broader than just expense reduction. We are really changing how we operate so that we're simpler, we're faster, we're more decisive. And as an outcome, we're taking out a significant amount of cost from the organization $750 million between now and the end of 2028. So those 4 priorities, we believe, will let us exceed our potential, and I've been pretty upfront that, that is the goal is to really take this to the next level.

Great. So 1 of the priorities is exiting emerging markets. So how are you thinking about redeploying the capital that does get freed up from those exits? And what areas are you the most focused on for redeploying the capital inorganically?

Yes. So the words I use on this, Ryan, is I've widened the aperture from what the previous strategy and previous team was aimed at. We used to be very, very focused on just asset management and very focused on only what I would call programmatic small to medium-sized acquisitions in the asset management space. So first and foremost, when I say wide in the app share, there's now 3 different areas that we are looking at inorganic opportunities. . First is asset management. Second is group insurance. And third is select opportunities to expand our retirement footprint in the U.K. Maybe let me take each of those. On the asset management side, we've again widened. We're certainly still looking at programmatic type acquisitions. Those would likely be if we do single asset class that are high multiple acquisitions because candidly, it would be too dilutive to do very large-scale things you could think of maybe infrastructure equity as an example of that. Those are still on the list of potentials, but we've also begun looking at more cross-asset class, broader platform that when combined with our asset management business could produce better, stronger expense and revenue synergies with a particular focus, obviously, on private alternatives as the higher margin, higher growth areas and private credit, given the connection back to the balance sheet. So that's asset management. Group insurance. We have a very strong national account group insurance business, mostly upmarket, mostly life of disability. There's a great opportunity given the set of capabilities we have to look to continue our product diversification. And typical next set of products would be dental and vision as an example, but also to continue to strengthen our downmarket capability and when I say down market, you have to always specify because that's different, depending on the company. We're really strong in employers that have 1,000-plus employees. So really getting down below that. And then finally, selectively looking to expand our retirement capabilities in the U.K. I'm a big believer and say what you're going to do and then do it. You've already seen us do that. We talked about it in August, but you've already seen us do the deal with Standard Life and CBC as partners expanding into the BPA market. The important part of that deal is that it brings a new, large, sizable client to PGIM for us to manage high fee, high margin products like asset-backed finance, commercial loans and direct lending. But that's the set of things that we're really focused on.

You've probably been asked this a lot, but how do you go about the sequencing of this? So you're selling emerging markets -- is there a risk that you end up sitting on that capital for a while as you look for the right compelling opportunities? Or do you already have certain targets in mind? Or just how do you think that sequencing will play out?

Yes. So -- and I'm always very upfront of the sequencing of this is a complex thing. But it is an intentional sequenced capital rotation. Think the first thing that needs to be understood is you don't sell businesses and then start a process of buying businesses, right, because these processes are year long, 2-year long type processes. So it is a safe assumption that we have both processes in flight. Part of widening the aperture on the acquisition side is that gives us an ability to get more at bats to get more looks at platforms and to, over time, match capital sources and capital uses. But safe to assume that we're doing both simultaneously, and we don't have an intention of raising a bunch of capital and then sitting on it because that's not a great answer for anybody.

And then I guess related to this, but just how do you stay disciplined on M&A, given that the areas you're focused on, particularly probably asset management and group insurance are also areas. There's a fair amount of other likely buyers in and it could be a competitive process to do M&A?

Yes. So maybe a couple of thoughts on this. First, you need to look at a lot of things. that's really, really important. When I talk about this, the investment banking space is a very important space. I have very good relationships with investment bankers, but I'm not a believer on relying on investment banking processes. Most of the best acquisitions and deals I've seen in my career have been principal-to-principal relationships that have been built over time. I spend a very large portion of my time. You've heard me say this on the call, in the now and in the flow, developing principal to principal relationships. So we get a lot of looks but it's also so that the counterparties know us, know we bring more to the table than just the best price adjust the price tag. . The other thing is we're an advantaged acquirer and I really deeply believe that. When you look at asset management, obviously, a number of the private alternative capabilities we look at we have a $500 billion balance sheet, right? We are probably 1 of the biggest balance sheets in the world. And we have the ability to bring that balance sheet to bear to help with the growth of these private alternative businesses that is very, very attractive to counterparties. We have an incredible liability generation engine with a brand that's second to none. That is very attractive to these counterparty asset managers. If you think about the group insurance conversation we just have, with the right complementary platform, there's incredible revenue and expense synergies that could be shared with the counterparty, so we believe we're an advantaged acquirer that can bring a lot more than just paying the top dollar and paying the top multiple.

Got it. It's probably my last 1 on M&A. But -- how do you -- if you do find an opportunity that is larger that exceeds your excess capital, what other resources could you pull on to fund a larger transaction and is there a scenario where you would also consider some portion of equity financing on an M&A deal?

Yes. So I do get asked this question quite a bit because the brains naturally went to, okay, well north of $3 billion. everyone said, okay, that probably means 3-point whatever and that's not big enough to actually rotate. We have other sources and other levers and other tools. The very next 1 that I would go to is we are a sizable company with very big blocks of business. So reinsurance is an important way that we can raise capital. And that's through third-party reinsurance or reinsuring to our affiliated platform is [indiscernible] but that can bring pretty significant firepower in addition to that well north of $3 billion. Obviously, for the right acquisition, and when I say right acquisition, it needs to be strategically down the middle, it needs to be a very good cultural fit and it needs to pencil over the long term for the shareholder from an accretion dilution perspective, we could suspend the buyback. We have a very high bar for that. I want to be very clear. like you would expect, that's a very high bar, not an intention to do it, but it's a tool and a lever. And then you mentioned the ultimate tool as a public company is equity issuance. And that's an even higher bar is the way we look at it. So we sort of look at that priority. The asset sales produced a level of capital, reinsurance adds to that. And we have additional levers if we see something really, really right that's even bigger.

Got it. I want to move to PGIM. So last year, you transitioned from a multi-manager model to more of a single integrated model and platform. What were the reasons that you decided to do that? And then how are the expense and revenue benefit emerging from that transition so far?

Yes. So the reasons we're very simple. It's all about growth in customers. What's happened in the asset management space is the world is moving from a specialist model, right, where the deployers of capital, right, the institutional providers of capital and even the retail used to be willing to work with dozens of asset managers. That's changing. More and more we see our clients, they don't want to work with dozens of asset managers. They want to work with 2 or 3 or 4, and that requires those 2 or 3 or 4 to have much broader and deeper capabilities, right? You need to be able to speak for all the different ways on the risk spectrum and on the liquidity spectrum that they want to deploy capital. So our customers were telling us, we want to work across. We don't want to be called on by 6 different salespeople from Prudential, 1 for fixed income, 1 for private capital, 1 for real estate. And we want to have a strategic conversation with you. So the rationale was all customer-driven and growth driven. And from a growth-driven perspective, I think we said this on the call, only 10% of our clients in PGIM have business across more than 1 asset class. If you looked across other asset managers, that's a significant opportunity for us. We are absolutely on the low end of the spectrum. So how is that going? We -- our distribution has been integrated, and we already have sold cross mandates where that number will take us time and it will be over time. But we expect that 10% cross-sell rate to go up significantly over time. It's on track. And we've not lost part of what you worry about when you do these things in asset management, is talent loss. We've not lost anybody that we didn't want to lose in the distribution system. And then there's the expense fall out of that. If you think about fixed income, private capital, real estate, they're run as fully separate businesses. They had their own CEOs, their own Chief Technology Officers, their own Chief HR officers. We had 6 of everything. So there is a significant expense opportunity and at this point, we are ahead of pace, ahead of schedule, and you should expect that we're going to be able to take north of $150 million out of that business over time. And that will show up in growth rates and margins, right, all of the that I just went through.

And just any color you can give on how the current pipeline looks at PGIM for flows?

Yes. So the most important thing to really keep in mind on flows is -- first of all, we had a very quarter-- last quarter we were very pleased with but we have a tale of 2 cities that anybody that's in the public equity business has a tale of 2 cities. The public equity business has been in for a very long time systemic outflow. Our Jenison business has been in systemic outflow. Interestingly enough, everyone's business is the same, though. Those have -- earnings have been well maintained because of how equity markets have performed over time. That is -- you got to kind of set that aside. On -- outside of that, we feel very good about our flow opportunities, mostly because of what I just went through, the integration of the distribution force the fact that we're starting to see cross mandate sales, but also because of the work that we've done to grow direct lending and asset-backed finance, we are very pleased with the mandate wins that we're beginning to see. And our intention going back to what I said, if customers want to work with 2, 3 or 4, we intend to be in that set of people that customers want to work with.

Got it. So at the strategic update, 1 of the targets you laid out was doubling the earnings contribution at PGIM from 25% -- from about 12% to 25% over the long term. How much of that can be achieved organically through the revenue and expense benefits that you were just talking about? And then how much of that would you say is needed from an inorganic standpoint to get there?

So I very much appreciate the question because as soon as I think those words left my lips, the immediate focus was acquisition, acquisition, acquisition. And the reality is there are 2 levers: organic growth and inorganic growth. And first, thank you, over the long term, this you should think of over 5 years. right? So this is not overnight. It takes time to change business mix and move the system. About half the journey, Ryan, will come from the organic growth. So you think we're covering 12% to 25%, about half rough numbers. We believe we have organic line of sight to based on the things we've already just talked about. We believe very strongly we have good organic growth opportunities. And Jacques and his team are already after that. In particular, we're seeing good growth in some of the more private credit-oriented direct lending, asset-backed finance, et cetera. That means the other half, though, has to come from inorganic and as I said earlier, we've widened the aperture that can be anything from plugging in an infrastructure equity business to something that's more across. Obviously, we're looking for things that are most synergistic. We're not looking for just pure scale deals because those candidly don't -- when you're already scaled in an asset management business like fixed income, scale acquisitions don't work because clients have concentration limits, they can't do much more fixed income necessarily with us. We have to get new clients. But half the journey organically half inorganically and over a 5-year period, and our confidence level is high in that journey.

Got it. You mentioned this earlier, but a few weeks ago, you did announce a new partnership in the U.K. [indiscernible] risk transfer the partnerships with Standard Life and other capital providers and other asset managers. Can you give a little more information on how that will all work and and how the benefits will flow through to Prudential?

Yes, absolutely. So first and foremost, that's a good example, Ryan, of when we announced things on the August call, we already have a lot of momentum in various areas that we had line of sight to getting things done, and it goes back to say what you're going to do and do what you say. The first thing I'd say is this builds on and I think most know this, we have a really very successful top-tier longevity risk transfer business in the U.K. So we've been in the U.K. BPA longevity risk transfer space, not in the BPA but in that general world, for over a decade. So we have good expertise. So we're building on that longevity risk transfer business. When we do partnerships, acquisitions, anything with counterparties, we look for high-quality counterparties. I will tell you, I know Andy Briggs and the Standard Life team very, very deeply. I think the world of them, they are very talented. He's done a great job with that Standard Life and then CVC is 1 of the best private capital firms in the world and obviously, extremely capable in the U.K. that partnership, if you think of those 2 parties plus what we bring to the table from our knowledge of pension risk transfer and our capabilities in PGIM and in particular, U.S. capabilities, positions that Triumvera along with Goldman. We're very confident that we will win business in that $2 billion-plus level, and we'll win it at nice return levels. The most important aspect though that I would stress about this partnership is the PGIM aspect. At the end of the day, this creates what we believe will be 1 of PGIM's largest clients at the end of the day, where PGIM is managing asset-backed finance, commercial mortgage lending or commercial mortgage loans, direct lending, higher fee, higher margin type products as we look to juice up the margin and grow PGIM. But really pleased. And we've known the Standard Life and CVC team for quite some time. .