First Quarter 2024 Earnings Transcript

CORPORATE PARTICIPANTS

Robert McLaughlin	Yanela del Carmen Frias
Vice President-Investor Relations, Prudential Financial, Inc.	Chief Financial Officer & Executive Vice President, Prudential Financial,
Charles F. Lowrey	Inc.
Caroline A. Feeney
Chairman & Chief Executive Officer, Prudential Financial, Inc.
Robert Michael Falzon	Executive Vice President & Head-US Business, Prudential Financial,
Inc.
Vice Chairman, Prudential Financial, Inc.	Andrew F. Sullivan
	Executive Vice President, Head of International Businesses and Global
	Investment Management, Prudential Financial, Inc.

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OTHER PARTICIPANTS

MANAGEMENT DISCUSSION SECTION

Operator: Ladies and gentlemen, thank you for standing by, and welcome to Prudential's Quarterly Earnings Conference Call. At this time, all participants have been placed in a listen-only mode. Later, we'll conduct a question-and-answer session. Instructions will be given at that time. [Operator Instructions] As a reminder, today's call is being recorded.

I'll now tuthe call over to Mr. Bob McLaughlin. Please go ahead.

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Robert McLaughlin

Vice President-Investor Relations, Prudential Financial, Inc.

Good morning, and thank you for joining our call. Representing Prudential on today's call are Charlie Lowrey, Chairman and CEO; Rob Falzon, Vice Chairman; Andy Sullivan, Head of International Businesses and PGIM, our Global Investment Manager; Caroline Feeney, Head of US Businesses; Yanela Frias, Chief Financial Officer; and Rob Axel, Controller and Principal Accounting Officer. We will start with prepared comments by Charlie, Rob and Yanela, and then we will take your questions.

Today's discussion may include forward-looking statements. It is possible that actual results may differ materially from the predictions we make today. In addition, our presentation includes references to non-GAAP measures. For a reconciliation of such measures to the comparable GAAP measures and a discussion of the factors that could cause actual results to differ materially from those in the forward-looking statements, please see the slides titled Forward-Looking Statements and non-GAAP Measures in the appendix to today's presentation and the quarterly financial supplement, both of which can be found on our website at investor.prudential.com.

And now, I'll tuit over to Charlie.

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Charles F. Lowrey

Chairman & Chief Executive Officer, Prudential Financial, Inc.

Thank you, Bob, and thanks to everyone for joining us today. Our results for the quarter reflect accelerating momentum across all our businesses, including significant positive net flows in PGIM, our global asset manager and strong sales in our US and International insurance businesses.

During the quarter, we made substantial progress in shifting our business mix and growing our market-leading businesses to become a higher growth, more capital efficient and nimble company.

We also maintained our disciplined approach to capital management by making further investments in our businesses and returning additional capital to shareholders. Our rock-solid balance sheet, business mix, and distinct strategy position us to deliver long-term growth for our stakeholders.

Turning to slide 3. I'll now begin this morning with a few recent examples that demonstrate how we are growing our market-leading businesses. PGIM achieved robust third-party and affiliated net flows in the quarter, notably in our fixed income business, underpinned by continued strong investment performance. These flows reinforce the benefits of our large and strategic global client relationships and the power of our mutually reinforcing business system to grow our asset management fees.

Our Institutional Retirement Strategies business reported strong sales and record account values, including the benefits of two large pension risk transfer transactions in the quarter. As a result, we delivered a record first quarter of PRT sales.

Meanwhile, our Individual Retirement Strategies business recorded its best sales quarter in more than a decade. This reflects the continued diversification and expansion of our product offerings, as well as strong demand in the market. Strong growth in our Group Insurance [indiscernible] (00:03:24) our product and segment diversification strategy, leading to increased sales across life, disability and supplemental health.

Meanwhile, our Individual Life Insurance business continues to shift towards more capital efficient products and broaden solutions through newer offerings like FlexGuard Life, which had its highest sales quarter since launching in 2022.

Internationally, we continue to benefit from our broadening product portfolio in Japan and from our actions to expand our distribution to new customers in emerging markets. Prudential of Brazil saw strong momentum across all distribution channels, most notably in our Life Planner channel, which reported record sales for the quarter.

We achieved these milestones while continuing to pivot away from more capital-intensive and lower-growth businesses. We successfully closed a reinsurance transaction for a portion of our Guaranteed Universal Life block, further advancing our strategy to reduce market sensitivity and increase capital efficiency.

We also announced an agreement to sell Prudential of Argentina, a move aligned with our strategy of focusing on fewer high-growth emerging markets where we have an opportunity to achieve scale.

And finally, we initiated the process to exit our Assurance business, so that we can focus our efforts and resources on core businesses and capabilities. We also continue to strengthen our operating model through technology and strategic partnerships to generate efficiencies that can be reinvested to fuel growth and deliver exceptional sales, service, and claims experiences.

This ongoing focus on improving the ways we work and supporting our customers continues to be recognized outside the company. As just one example, Prudential of Japan recently ranked number one for life insurance service in a J.D. Power customer satisfaction survey for the 9th year in a row. We are proud to be recognized for the value we provide to our customers.

Turning now to slide 4. Our disciplined approach to capital deployment enables us to invest in our market-leading businesses to support long-term growth and retucapital to shareholders.

In the first quarter, we returned over $700 million to shareholders and increased the quarterly dividend by 4%, our 16th consecutive annual dividend increase. We will continue to focus on creating sustainable, profitable growth that will benefit all stakeholders.

Moving to slide 5. Our growth strategy is supported by Prudential's rock-solid balance sheet and robust risk and capital management framework. Our AA rated financial strength represents a strong capital position, including approximately $48 billion of unrealized insurance margins, over $4 billion in highly liquid assets at the end of the first quarter, a high-quality,well-diversified investment portfolio, and a disciplined approach to asset-liability management.

We've entered the second quarter with confidence in our strategy to be a global leader in expanding access to investing insurance and retirement security for people around the world.

And with that, I'll tuit over to Rob to provide more details on our first quarter business performance.

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Robert Michael Falzon

Vice Chairman, Prudential Financial, Inc.

Thanks, Charlie. I'll provide an overview of our financial results and business performance for our PGIM, US, and International businesses I'll begin on slide 6 with our financial results for the first quarter of 2024.

Our pre-tax adjusted operating income was $1.5 billion or $3.12 per share on an after-tax basis, up 16% from the year ago quarter. These results reflect the continued execution of our strategy to grow our market-leading businesses. Strong sales and robust net inflows and the benefit of higher interest rates and equity markets have resulted in higher spread income, fee income, and underwriting results. These diversified sources of earnings were partially offset by higher expenses to support business growth and one-time costs of closing the Guaranteed Universal Life reinsurance transaction.

Turning to the operating results from our businesses compared to the year ago quarter. PGIM, our global investment manager had higher asset management fees, driven by equity market appreciation, positive third-party net inflows, and contributions from the Deerpath Capital acquisition.

Additionally, higher incentive fees and seed and co-investment income resulted in an increase in other related revenues. This was partially offset by higher expenses to support business growth.

Earnings growth in our US businesses reflected higher spread income driven by business growth and the benefit of higher interest rates and variable investment income, as well as more favorable underwriting results. This was partially offset by higher expenses, including the one-time charges associated with the closing of the Guaranteed Universal Life reinsurance transaction and by lower legacy traditional variable annuity fee income, as we intentionally continue our pivot to less market-sensitive products.

Earnings growth in our International businesses was primarily driven by higher spread income, including the benefit of higher interest rates and more favorable variable investment income and higher joint venture earnings due to the favorable [indiscernible] (00:08:33) performance in Chile. This was partially offset by less favorable underwriting results, primarily reflecting policyholder behavior.

Turning to slide 7. PGIM, our global investment manager, has diversified capabilities in both public and private asset classes across fixed income, equities and alternatives. PGIM's strong investment performance continues to improve with 80% of assets under management exceeding their benchmarks over the past year. This has contributed favorably to attractive long-term performance with over 80% of assets under management outperforming their benchmarks over the last five and 10-year periods.

PGIM's assets under management increased by 6% to $1.3 trillion from the year ago quarter, driven by market appreciation and positive third-party net flows. Robust third-party net inflows in the quarter totaled $26.6 billion, institutional inflows of $26 billion included a large fixed income client mandate, and retail flows also turned positive, reflecting building momentum in public fixed income.

Additionally, strong affiliated flows were driven by retirement strategy sales during the quarter. As the investment engine of Prudential, the success and growth of PGIM and of our US and International insurance and retirement

businesses are mutually reinforcing. PGIM's asset origination capabilities, investment management expertise, and access to institutional and other sources of private capital, including through the recently launched reinsurer Prismic, are a competitive advantage, helping our businesses bring enhanced solutions and create more value for our customers.

Our insurance and retirement businesses, in turn, provide a source of growth for PGIM through affiliated net flows, as well as unique access to insurance liabilities. In addition, our diversified PGIM Private Alternatives platform, which has assets under management of approximately $240 billion experienced strong private credit activity driven by our organic growth and the first full quarter benefit from acquiring Deerpath Capital.

Turning to slide 8. Our US businesses produced diversified earnings from fees, net investment spread and underwriting income and benefit from our complementary mix of longevity and mortality businesses. We continue to focus on growing our market-leading businesses by transforming our capabilities to improve customer experiences and expanding our addressable market with new financial solutions leveraging the capabilities across Prudential.

Retirement Strategies generated strong sales of $14.3 billion in the first quarter across its institutional and individual lines of business. Institutional Retirement sales of $11 billion in the first quarter included two large US funded pension risk transfer transactions of nearly $9 billion, driving the strongest first quarter in market history. We have now completed 6 of the 10 largest transactions on record.

Individual Retirement posted $3.3 billion in sales, our best quarter in sales in over a decade. Our product pivots have resulted in continued strong sales of FlexGuard and FlexGuard Income, which increased nearly 60% from the year ago quarter and fixed annuity sales have nearly tripled, while we continue to reduce market sensitivity by running off our legacy variable annuities.

Group Insurance sales increased 18% compared to the prior year, driven by growth in life, disability and supplemental health. We are executing our strategy of both product and client segment diversification, while leveraging technology to increase operating efficiency and enhance the customer experience.

In Individual Life, we continue to execute our strategic pivot to more capital-efficient products with the closing of the Guaranteed Universal Life reinsurance transaction. Total sales in Individual Life increased 12% from the year ago quarter, including the benefit from the recently launched FlexGuard Life product. Variable life products represented approximately 70% of sales for the quarter.

Turning to slide 9. Our International businesses include our Japanese life insurance companies, where we have a differentiated multi-channel distribution model, as well as other businesses aimed at expanding our presence in targeted, high-growth emerging markets. In Japan, we're focused on providing high-quality service and expanding our distribution and product offerings. Our needs-based approach and protection product focus continue to provide important value to our customers as we expand our product offerings to meet their evolving needs.

In emerging markets, we're focused on creating a selective portfolio of businesses in regions where customer needs are growing, where there are compelling opportunities to build market-leading businesses and where the Prudential enterprise can add value.

Sales in our International businesses were up 5% compared to the year ago quarter. Higher sales in Japan are benefiting from the recent product launches, including a new yen-denominated variable life product offered through our life consultant and independent agency channels beginning in the first quarter.

In addition, emerging market sales were higher, driven by growth in Brazil as we continue to expand third-party distribution and benefit from the strong performance of our world-class life planners.

As we look ahead, we are well positioned across our businesses to be a global leader in expanding access to investing, insurance and retirement security. We continue to focus on investing in growth businesses and markets, delivering industry-leading customer experiences and creating the next generation of financial solutions to serve the diverse needs of a broad range of customers.

And with that, I'll now hand it over to Yanela.

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Yanela del Carmen Frias

Chief Financial Officer & Executive Vice President, Prudential Financial, Inc.

Thank you, Rob. I will begin on slide 10, which provides insight into earnings for the second quarter of 2024 relative to our first quarter results. As noted, pre-tax adjusted operating income for the first quarter was $1.5 billion and resulted in earnings per share of $3.12 on an after-tax basis.

To get a sense of how our second quarter results might develop, we suggest adjustments for the following items. Underwriting experience was below expectations by $85 million in the first quarter, and we expect $10 million of favorable seasonality in the second quarter.

We also include an adjustment of $50 million for expenses and other items. This includes adjustments for typical seasonality of expenses and premiums as well as the one-time expenses related to our Guaranteed Universal Life reinsurance transaction. These adjustments combined get us to a baseline of $3.43 per share for the second quarter.

I will note that if you exclude items specific to the second quarter, earnings per share would be $3.50. The key takeaway is that we continue to drive underlying earnings power momentum as we invest in the growth of our market-leading businesses and pivot away from capital-intensive and lower growth businesses. While we have provided these items to consider, please note that there may be other factors that affect earnings per share in the second quarter.

Turning to slide 11. Our capital position continues to support our AA financial strength rating. Our regulatory capital ratios are in excess of our AA objectives. Our cash and liquid assets were $4.2 billion within our liquidity target range of $3 billion to $5 billion, and we have substantial off-balance sheet resources. We remain thoughtful in our capital deployment, investing in our businesses for long-term growth, and returning capital to shareholders.

Turning to Slide 12. And in summary, we are becoming a higher growth, more capital-efficient and nimble company. We are maintaining a disciplined approach to capital deployment and our growth is supported by our rock-solid balance sheet.

And with that, we will be happy to take your questions.