Fourth Quarter 2023 Earnings Transcript

Corrected Transcript

07-Feb-2024

Prudential Financial, Inc. (PRU)

Q4 2023 Earnings Call

	Total Pages: 20
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CORPORATE PARTICIPANTS

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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 will 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; Ken Tanji, Chief Financial Officer; and Rob Axel, Controller and Principal Accounting Officer. We will start with prepared comments by Charlie, Rob and Ken, and then we will take your questions.

Today's presentation may include forward-looking statements. It is possible that actual results may differ materially from those predictions we make today. In addition, this presentation may include references to non- GAAP measures. For a reconciliation of such measures to the comparable GAAP measure and a discussion of 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.

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. Before we begin, I'd like to comment on our CFO transition. As you saw from yesterday's news release, Yanela Frias, President of Prudential's Group Insurance Business has been named Executive Vice President and CFO of Prudential, succeeding Ken Tanji. As a 27-year veteran of Prudential, Yanela is a seasoned executive who brings a deep understanding of our business and industry, as well as significant finance, operations and leadership experience. I'm sure you'll enjoy getting to know her as she starts her new role.

Yanela will become CFO effective March 15, and Ken will stay on for a six-month period to ensure a smooth transition. Ken has been a great partner and friend and has had a distinguished 35-year career at Prudential. I don't need to go back far to articulate his impact. Most recently, as CFO, Ken guided Prudential through the financial challenges of the COVID pandemic and the market volatility that followed. During the same time, his leadership on strategic initiatives meaningfully contributed to our goals of becoming less market-sensitive and more nimble. We are grateful to Ken for his many contributions over more than three decades and wish him well.

Now, let's tuto my remarks for the quarter. Our financial results for 2023 reflect continued strong sales momentum across our insurance and retirement businesses and solid underlying earnings growth. The fourth quarter capped a productive year of continued transformation to make Prudential a higher growth, more capital-

efficient and more nimble company. Our strategic progress and financial strength position us well to navigate the current macroeconomic environment, maintain a disciplined approach to capital deployment and deliver long-term sustainable growth.

Turning to slide 3. I will begin today by sharing a few examples of how we are transforming our business to drive future growth and unlock value for all our stakeholders. Over the course of 2023, we executed several attractive transactions adding to our capital efficiency. We reinsure the $10 billion block of traditional variable annuities, reducing our market sensitivity.

We closed a $10 billion transaction of structured settlement annuities with Prismic, a life and annuity reinsurance company we launched. Prismic will enhance our mutually reinforcing business system and drive future growth by leveraging our differentiated brands, global asset and liability origination capabilities and multichannel distribution.

In addition, we entered into a reinsurance agreement with Somerset Re for a $12.5 billion block of guaranteed universal life reserves, which will release capital and increase earnings.

We continue to strengthen the capabilities of our market-leading businesses through strategic M&A, expanded distribution channels and created new products and solutions to meet the evolving needs of our customers across the globe and to support future growth.

In PGIM, we enhanced our capabilities in the attractive area of private credit and direct lending by acquiring a majority stake in Deerpath Capital, which closed in December. To further provide investors with a cohesive offering, we brought together PGIM's private alternatives capabilities into one global team with the formation of PGIM Private Alternatives.

Internationally, we continue to expand third-party distribution in Latin America through Mercado Libre, reaching a milestone of close to 300,000 policies in force last quarter. In Japan, we launched expanded inheritance and new investment products to diversify our portfolio and meet a broader range of customer needs.

Our Institutional Retirement Strategies business secured its second largest longevity risk transfer transaction ever with one of the biggest life insurance companies in the Netherlands. This marks our first international reinsurance deal in the Dutch market.

Retirement strategies also worked with Fidelity Investments to address growing consumer demand for a workplace retirement income solution. Our Prudential SimplyIncome product, a new single premium immediate annuity is now available to employer-based retirement plans administered by Fidelity.

In addition, to solidify our leadership and expand our addressable market and structured settlements, we launched a new index structured settlement annuity product. We also continue to create a more nimble and efficient company to meet the changing needs of our customers and maintain a competitive position in the marketplace. This included evolving our operating model and organizational structure to better support customers at the business level and leveraging technology to bring products to market faster.

Our business and technology teams together launched an average of one new or enhanced product every two weeks in 2023. Additionally, we are strategically leaning into partnerships with cutting-edge technology firms within our group business to increase the speed of innovation, add capabilities and enhance customer experience.

We entered 2024 with momentum and optimism as we have expanded and diversified our product offerings, enhanced customer and client experiences and continued to reinvest in our businesses for sustainable long-term growth.

Moving to slide 4. Our transformation strategy and growth initiatives are supported by Prudential's rock solid balance sheet and robust risk and capital management framework, which have allowed us to confidently navigate the macroeconomic environment.

Our AA rated financial strength, includes a strong capital position, including approximately $50 billion of unrealized insurance margins, $4.1 billion in highly liquid assets at the end of the fourth quarter, and a high- quality, well-diversified investment portfolio and disciplined approach to asset liability management.

Turning to slide 5. Our disciplined approach to capital deployment enables us to effectively balance investing in the long-term growth of our businesses with returning capital to shareholders.

In the fourth quarter, we returned over $700 million of capital to shareholders. For 2024, our board has authorized up to $1 billion in share repurchases as well as a 4% dividend increase beginning in the first quarter. This represents our 16th consecutive annual dividend increase.

And now, I will tuit over to Rob.

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Robert Michael Falzon

Vice Chairman, Prudential Financial, Inc.

Thank you, 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 fourth quarter and full year of 2023.

Our pre-tax adjusted operating income was $5.5 billion, or $11.62 per share for 2023 and $1.3 billion, or $2.58 per share in the fourth quarter. These results reflect an increase in the underlying earnings power of our businesses, including the benefits of strong sales growth and higher interest rates. This was partially offset by pressure on variable investment income and higher expenses, primarily due to a $200 million restructuring charge in the fourth quarter.

Our GAAP net income for the quarter was $374 million higher than our after-tax AOI primarily driven by net investment gains due to declining rates.

Turning to the quarterly operating results of our businesses compared to the year ago quarter. PGIM, our global investment manager, had lower other related revenues driven by lower incentive fees and agency income and higher expenses. This was partially offset by higher asset management fees, including the benefits from our acquisition of Deerpath Capital and of launching Prismic

Results of our US businesses primarily reflected higher spread income driven by business growth and the benefit of higher interest rates and lower expenses. This was partially offset by lower legacy traditional variable annuity fee income as we pivot to less market-sensitive products. The earnings in our international businesses primarily reflected less favorable underwriting results, including unfavorable policyholder behavior partially offset by lower expenses.

Turning to slide 7. PGIM, our global active investment manager, has diversified capabilities in both public and private asset classes across fixed income, equities and alternatives. PGIM's strong investment performance over the past year has also driven attractive long-term performance with over 80% of assets under management outperforming their benchmarks over the last 5- and 10-year periods.

PGIM's assets under management increased 6% to $1.3 trillion from the year ago quarter, primarily resulting from market appreciation. Third-party net outflows in the fourth quarter totaled $13.5 billion. Institutional outflows of $6.3 billion were driven primarily by a large redemption of a low fee equity index mandate and redemptions in public fixed income resulting from client rebalancing and liquidity needs.

Retail outflows of $7.2 billion were primarily driven by equity, sub-advised mandates and fixed income outflows. 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, or a competitive advantage, helping our businesses to 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, we continue to grow both organically and through acquisitions, our PGIM Private Alternatives business, which has assets of approximately $240 billion across private, corporate and infrastructure credit, real estate equity and debt and secondary private equity. Capital deployment across PGIM's private assets platform of $9 billion during the quarter benefited from robust private placement and direct lending originations.

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 drive growth 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 $16.4 billion in the fourth quarter across its institutional and individual lines of business. Institutional Retirement sales of $14.3 billion in the fourth quarter were driven by strong international reinsurance sales and our best quarter for structured settlements since 2016. International reinsurance sales included a $9.2 billion transaction in the Netherlands and with the recently passed Dutch Pension Reform Legislation, we anticipate this market will continue to grow over time.

Individual Retirement posted $2.1 billion in sales, reaching the highest level since the third quarter of 2019. Our product pivots have resulted in continued strong sales of FlexGuard and FlexGuard Income, which increased about 20% from the year ago quarter, while fixed annuity sales have doubled.

Our Individual Life sales increased 33% from the year ago quarter, reflecting our product pivot strategy towards more capital-efficient products.

Variable life protection and accumulation products represented approximately 70% of sales for the year, including a benefit from our recently launched FlexGuard Life product. In Group Insurance, we continue to execute on our strategy of product and client segment diversification while leveraging technology to increase operating efficiency and enhance the customer experience.

Our full year sales were up 11% compared to the prior year, driven by growth in disability and supplemental health. Group's full year adjusted operating income was the highest in the past 15 years and included favorable underwriting experience. As a result, we are lowering our benefits ratio target range by 2 percentage points to 83% to 87%.

Turning to slide 9. Our international businesses include our Japanese life insurance companies, where we have a differentiated multichannel distribution model, as well as other businesses aimed at expanding our presence in targeted high-growth emerging markets.

In Japan, we are 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 are 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 24% compared to the year ago quarter. Life Planner sales were up 21%, including the benefits of recent product launches in Japan to diversify our product offering. In addition, Brazil sales were up 24%, reflecting growth across all channels and leading to a full year record.

Gibraltar sales were up 27%, primarily driven by higher independent agency sales and growth in the bank channel. 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 Ken.

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Kenneth Yutaka Tanji

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

Thanks, Rob. I'll begin on slide 10, which provides insight into earnings for the first quarter of 2024 relative to our fourth quarter results. As noted, pre-tax adjusted operating income in the fourth quarter was $1.3 billion and resulted in earnings per share of $2.58 on an after-tax basis.

To get a sense for how our first quarter results might develop, we suggest adjustments for the following items: first, variable investment income was below expectations in the fourth quarter by $95 million. Second, underwriting experience was below expectations by $15 million in the fourth quarter, and we expect $30 million of unfavorable seasonality in the first quarter.

And last, we included an adjustment of $240 million for expenses and other items. This includes the $200 million restructuring charge related to changes in our organizational structure as well as adjustments for typical seasonality related to the timing of expenses and premium. These adjustments combined get us to a baseline of $3.36 per share for the first quarter. I'll note that if we exclude items specific to the first quarter, earnings per share would be $3.50.

The key takeaway is that our underlying earnings power has increased significantly over the past year, while we have also made strategic progress improving our risk profile. While we have provided these items to consider,