Prudential Financial Q2 2024 Earnings Call Transcript

Good morning, Ryan. It's Rob.

Yes, we and our Prismec investors share aspirations to grow well beyond the initial $10 billion transaction that we completed relatively recently. We continue to work on a very active pipeline of multiple insurance transactions. That pipeline includes ongoing balance sheet optimization, flow or new sales solutions across our businesses as well as third-party blocks where we have a particular focus on Japan. I would be -- we would be disappointed if we've not entered into an additional transaction before year-end.

Hi Ryan, it's Yanela. Yes, with regards to short-term rates, we do not expect much of an impact due to changes in short-term rates. We have cash at the holding company and collateral and individual retirement strategies that earn short-term yields. And this is generally offset by interest rate derivatives, where we pay short-term rates and receive fixed, and we use this to manage duration across our businesses. So generally, these are all setting.

Let me also address long-term rates since we've seen some recent movement. With respect to long-term rates, we have benefited from the rise in rates over the past few years, which have been at levels that are significantly higher than over the past decade. And this has increased our portfolio yields in both domestic and international.

So high reason it's a win for us and it has been a tailwind. If rates were to decline, it would reduce our new money rates, but we do have a healthy spread between our new money rates and portfolio yields. And lastly, I would point out that we have a very disciplined ALM approach, which significantly reduces future spread volatility of the in-force.

So Suneet, it's Caroline, and I'll take your question. So right now, the annuity market continues to be extremely strong as you referenced, with the market on pace to deliver a third straight record year, outpacing last year's run rate by over 20%. It's certainly possible that in a decreasing interest rate environment, we could see some pullback from the record sales levels, particularly in fixed annuities. From a Prudential perspective, while we've been very pleased with the growth in our fixed annuity sales, for us, it's really just a piece of the overall portfolio.

We have the broadest product portfolio we've ever had with no overconcentration in any single product. In fact, this past quarter, we had record sales in 3 distinct products, and 2 of those are in our RIA suite of solutions, which are actually less sensitive to interest rates. And Suneet, this really reflects our very deliberate strategy, which enables us to serve the broadest set of customers across all market conditions.

Frankly, we're also very excited about the broader retirement opportunity. We do see strengthening tailwinds from rapid growth in the population of Americans over age 65 as well as increased demand for solutions that protect retirement savings and provide lifetime income. So, we believe customer demand for protected income will continue to be the driving force behind growth over the long term, and we're well positioned to meet that demand with our diverse portfolio of solutions and the strength of our brand and distribution.

And finally, Suneet, you asked a question about pricing. We are also very well positioned to continue with our pricing discipline, which we have the ability to adapt pricing and enter the market with revised pricing in very short order, which enables us to be very nimble with changing markets.

So Suneet, so it would actually be the second deal. So the first transaction we closed was about $10 billion in reserves and so relatively significant in size. For the next transaction, what I would say is that the nature of underlying liabilities is what impacts the sizing of the transaction, and that's going to be dependent upon sort of market sensitivity, hedging and collateral needs.

So, we're not constraining it simply because of appetite or access to capital or other capabilities. It will really just be a function of making sure that as we're constructing the Prisma portfolio that all fits together well.

Well, I would say we the continued balance sheet optimization is probably our highest priority, Suneet. And incidentally, the most controllable of the things that we're working on. But both flow and third party are high priorities for us, and they are being actively worked as well.

Sure. Good morning, Elyse, it's Andy. I'll take that. So our flows in PGIM have become more variable. This is mostly driven on the institutional side of the business, so let me start there. We're the sixth largest manager of defined benefit assets globally and we have very large strategic pension clients.

If you look at many of these defined benefit portfolios, as we sit here today, are overfunded and those clients are either derisking or they're exploring PRT. So as a result, we're seeing more than normal institutional money in motion, leading to a variability in our institutional flows. Overall, we expect that in PGIM will be a beneficiary of that environment given our world-class fixed income solutions and our leading PRT business.

If you take a step back though and look across the year, last quarter, you saw us benefit with noteworthy PRT wins and a large pension mandate inflow. This quarter, we saw fixed income outflows as a few of our clients derisked and moved, but the important part is, when you look across the year, our institutional flows are positive year-to-date at $17 billion. On the retail side of the business, we have experienced large improvement versus last year. Year-to-date, our flows are flat, and that is a market improvement. We're starting to see flows back into our fixed income retail products with $1.1 billion in positive inflow this quarter.

We believe this is poised to accelerate once clients start to move to $6 trillion that's sitting in money market assets over into longer-term active products. And we expect that declining rates are going to be the trigger to that action. So the punchline overall from a flows perspective is we expect that we will remain a net winner over the long term, but you should expect near-term variability. It will continue in this environment.

Sure. Elyse, it's Caroline, and I'll take your question.

There's really none nothing that's one-off, Elyse, but it's really very much core strength in the business, which was driven by a few different factors. First of all, we continue to see strong life and group disability results driven by favorable mortality and by our focus on effective claims management, which is an area we continue to invest in. We also continue to see strong double-digit growth in our supplemental health business which is a core component of our diversification strategy. And we've also seen growth in our under 5,000 lives in our association market segments, helping us further broaden our portfolio.

So overall, Elyse, the business is growing and it's doing so at attractive margins. In terms of your question on the benefit ratio, we delivered a very strong result coming in at 81%, in line with the year ago quarter and below our target range of 83% to 87%. Given that we have been below our target range for the first half of the year, you can expect for the year, we would be towards the lower end of that target range.

Hi, Wes. This is Janella. So let me take your question.

I mean, to take it a step up the annual assumption update this quarter had a modest benefit to adjusted operating income, as you saw. And this is a result of our multiline business mix that generally creates risk diversification and tends to moderate the annual assumption update impact. So the net modest benefit was due to favorable mortality updates for the institutional retirement strategies, partially offset by unfavorable policyholder behavior updates for both individual life and Japan.

And to your question about what drove the large impact to individual life, the negative impact to individual life was primarily due to lower guaranteed universal life surrender experience post-COVID as individuals retain their life insurance policies at higher levels than previously assumed. And this was based on our examination of updated emerging experience data of our business and information available from a number of industry studies. So that is what drove the assumption update, and we do have a small ongoing impact from the assumption update as well.

So there's an ongoing operating income perspective. From a statutory perspective, the assumption update there, we have a process -- from a process standpoint, that is done at the end of the year. So that will be reflected in our statutory results at the end of the year. Having said that, any impacts are not expected to be meaningful to our assessment of capital availability, cash flows or our capital deployment plans.

It's Rob. I'll take that question. I would say that if we look at the industry from an overall basis, our real estate investment group has a forecast that there will be actually continued valuation declines through the remainder of the year across the industry, those valuation declines, though, will be in the low single digits. So while we think we're close to an inflection point where that could begin to turn around, we're not quite sure we're at the trough of that yet.

Yes, Tom, it's Yanela. So yes, the non-AOI impact was mainly due to Rila and it was really driven by a methodology update to the annuity valuation and this is really to be consistent with industry standards and also more consistent with how we actually manage the product. So it's valuation methodology change, it is GAAP only. we will not see a comparable statutory impact, and that is just following the normal variable annuity reserving and capital standards.

Yeah. So Tom, it's Caroline. So we actually don't see much weakness in the earnings, especially given both reported and core earnings are up this quarter compared to the prior year quarter. If I just take the institutional side of the business for a moment, it does take time to see the impact from our risk transfer transactions materialize in our earnings. So in essence, Tom, sales leads and then obviously, earnings will follow.

We had $4 billion in sales this past quarter. and we believe that rapidly growing demand for pension derisking in the U.S. and our international markets will continue to fuel profitable growth. We did see some less favorable underwriting this quarter as well as lower on the institutional side.

And then on the individual side, Tom, there are 2 key drivers of our core earnings. First, I would point to the strong sales we're driving through our expanded portfolio, which includes our RIA our fixed products and this past quarter, as you heard, was especially strong, our best quarter in over a decade. The higher sales volumes across these products will also drive future profitability. But over the near term, those profits are tempered by the higher upfront distribution costs associated with the higher sales levels.

And then second, there's the impact from our decision to no longer sell traditional variable annuities with living benefit guarantees. While this business continues to generate strong fee income, it will run off at roughly $3 billion to $4 billion per quarter, offsetting some of the earnings growth from our new business. But we see this largely as a transition. Ultimately, we like the business we're putting on and those strong sales are contributing higher quality earnings, but you're still going to see an impact from the intentional runoff of our traditional variable annuity block.

Thanks, Tom.

Sure, John. It's Caroline. I'll take your question. So the growth in our book continues to be primarily driven by the execution of our diversification strategy which is focused on growing in the under 5,000 lives market as well as our focus on further diversifying and disability and supplemental health products.

We're certainly benefiting from strong employment, John, which is driving overall employee and wage growth and will continue to grow organically and in the block. However, when you look at what is primarily driving our growth, it is more driven by the strong underlying fundamentals and executing on our strategy. So hopefully, that helps you.

I would also say one more thing in terms of our strategy. We've also made a lot of progress on diversification in our under-5,000 market which spreads our premiums out more across the year. So we're continuing to like what we see in our diversification.

So, John, it's Andy. I'll take the question. Yes. And as you said, our strategy on emerging markets or in international in general, is to accelerate our growth through a select set of emerging markets by extending our leadership position in Latin America, by strengthening our footprint in emerging Asia and in particular in India and Indonesia and by investing in market leaders in Africa.

I mean I think the important thing here is you're already seeing very, very strong good growth in Brazil, that is leading to healthy earnings growth in that block of business. Many of these other markets offer us very good opportunity but they will take time to develop. So, this is about the medium and long term as well. As far as M&A, we are absolutely open to opportunistic programmatic M&A to help us accelerate our growth in those markets. But as always, organic growth is going to be job one for us. We're confident that over time, emerging markets will become a bigger part of the Prudential pie.

Thank you. Next question is coming from Jimmy Bhullar from JPMorgan. Your line is now live.

Hey, Jimmy, it's Yanela. So look, we remain well capitalized. You saw pipeline of RBC ratio in excess of our AA objective of 3.75. We are positioned to continue to invest in the growth of our businesses, and you've seen that year-to-date where we've closed 3 large PRT transactions exceeding $10 billion in liabilities, and we funded strong growth across all of our businesses. And even with that, we continue to pay dividends out of our insurance subsidiaries and our highly liquid assets increased a bit, as you mentioned.

But we will remain thoughtful in our capital deployment. We will remain focused on preserving financial strength and flexibility. Investing in our businesses for long-term growth where we see a lot of opportunities and then returning capital to shareholders.

Yeah, Jimmy, it's Andy. I'll take the question. Maybe let me just start by saying we're very, very pleased with the sales results that we saw. We experienced strong year-over-year growth in our Life Planner independent agent and bank channels, and sales in Japan were up 10% year-over-year. That is really flowing from our work to continue to broaden and innovate our product portfolio and enhance the customer experience in our business. The fact is, in that 10% year-over-year up, 20% of our sales this quarter flowed from more recent product introductions, including both life and annuity products, and we've been expanding our yen offerings in addition to our U.S. dollar offerings.

Obviously, we are -- we see effects from the yen strengthening and weakening. Lately here with the strength we've seen, we think that will be a benefit to our U.S. dollar products as it will make them more affordable for the consumer. Japanese consumers are still absolutely interested in taking advantage of the U.S. interest rates. So we're pleased with the yen movement this week. We are pleased with the work that we've done and the results we've shown, and we expect to continue the good sales trend.

Yeah, Jimmy, I'll start by saying all the businesses we compete in are competitive, but I would say, yes, the marketplace is rational. At times, you may see a competitor get aggressive. But overall, we see it as a rational market with a good ability for us to drive and drive profitability. And we're competitively advantaged with broad product portfolio, differentiated distribution and a good brand.

So the last thing I always reinforce is, we'll be disciplined no matter what the competition does and make sure that we deliver for the customer and the shareholder.

So Mike, it's Yanela. Let me take your question. So obviously, we executed on the transaction earlier this year. We don't have a sense of what the impact would have been. So that said, in terms of further derisking transactions, we always are looking at options and opportunities to the extent they are available.

So it's Andy. I'll take the question. I'll take that in 2 parts. First, the quant manager you're referring to is not a material part of our business. It had less than $1 billion in assets under management. And it's a subcomponent on the quantitative equity side that we're exploring strategically what we want to do with the capability. But as far as you referenced the investment performance, we are actually quite pleased with our investment performance in the business.

Obviously, that is job one. It's the most critical ingredient. And if you look at our short-term and long-term results, they have been very, very strong, and we remain confident in our ability to continue that track. But as far as that block of business, it's small, not material to the overall business.

Sure. This is Charlie. Let me make an observation, if I may, before the closing comments, and that we are experiencing very turbulent times right now, obviously. And this is exactly when clients need us the most. And we've seen that, in the past when clients turn to us during these kinds of volatile times such as the great financial crisis and others that we've all been through. And what we've observed is that we've been a net beneficiary in these turbulent times as there is a real flight to quality, which we define as having the financial strength, the strength of brand, and the strength of distribution so that clients can meet us when, where and how they want.

Now obviously, pass isn't prologue, but I'll make the following observation. And that is that we have exactly the capabilities that clients need in terms of investing, insurance and retirement security, and that we will be laser-focused during these times in helping them as they map through this volatility.

So, we'll continue to focus on our clients, and we'll continue to deliver sustainable value to all our stakeholders as we go forward.

So, thanks, and have an enjoyable weekend.