Prudential Financial, Inc. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Retirement Strategies: On Institutional side, continued leadership in pension risk transfer reinforced with second transaction with IBM to reinsure $6 billion of pension liabilities. On Individual side, five annuity products exceeded $1 billion in sales. Japan business saw year-to-date sales of retirement and savings products up 30% compared to prior year. Expanding individual annuity solutions and adding new workplace partnerships like with JPMorgan Asset Management.
• Group Insurance: Expanding disability and supplemental health products and growing position in under 5,000 lives and association market segments.
• Individual Life: Launching innovative, more capital-efficient products with positive momentum across distribution channels.
• International Businesses: Benefiting from recent product launches and strong multi-channel distribution in Japan and Brazil.
• PGIM: Benefiting from deeply connected and reinforcing business mix, strong affiliated flows, private alternatives capital deployment increase, and well-positioned to capture growing retail demand for fixed-income products. Also, investments in technology across businesses to support growth strategy.
• Capital Deployment: Disciplined approach with returning over $700 million to shareholders during Q3. Maintaining AA rating with healthy capital position including over $4 billion in highly liquid assets at end of Q3.

Segment Performance

• PGIM (Global Investment Manager): Asset management fees were higher due to favorable investment performance, Deerpath Capital acquisition, and market appreciation, but offset by higher expenses. Assets under management increased by 15% to $1.4 trillion from the year-ago quarter, with total net flows in the quarter of $3.2 billion including affiliated net flows of $6.4 billion and third-party net outflows of $3.2 billion. Year-to-date total net flows were $29 billion, including $15 billion in affiliated flows and $14 billion from third-party clients. Private alternatives capital deployment increased 24% year-to-date.
• U.S. Businesses: Retirement Strategies generated strong sales. Institutional retirement sales totaled $11 billion in Q3, with U.S. funded pension risk transfer transactions of $6.3 billion including the second PRT transaction with IBM and longevity risk transfer sales of $2.8 billion. Year-to-date institutional retirement sales were over $26 billion. Individual Retirement posted $3.6 billion in sales, its best quarter in over a decade. Group Insurance sales increased 3% year-to-date driven by growth in supplemental health. Individual Life sales increased 13% from the year-ago quarter and 9% year-to-date.
• International Businesses: Sales in international businesses were up 25% compared to the year-ago quarter. Higher sales in Japan were benefiting from recent product launches, with retirement and savings products representing 75% of current quarter sales. Emerging market sales were also higher driven by growth in Brazil.

Guidance

• Fourth Quarter Outlook: Adjustments for variable investment income below expectations by $50 million in Q3 (plan to pre-announce next quarter), underwriting experience above expectations by $15 million in Q3, $100 million adjustment for expenses and other items. Baseline of $3.34 per share for Q4, with earnings per share excluding Q4 specific items at $3.67. Expect higher initiative investments to continue in Q4 and maintain full year 2024 expected loss in Corporate & Other of $1.8 billion. Seasonally lower annual premiums of $50 million in international in Q4.
• New Financial Targets: Plan to introduce new intermediate-term financial targets starting with 2025 to replace quarterly baseline disclosure.

Risks

• Foreign Currency Surrenders: Weaker yen leading to enhanced level of U.S. dollar policy surrenders in international businesses, influencing sales and earnings. Had it not been for this surrender experience, would have seen low-single-digit earnings growth across PII business segment.
• ESR Regime in Japan: New economic solvency regime in Japan is punitive and uneconomic for long-duration liabilities, potentially affecting capitalization of business, but we have tools like reinsurance and believe Japan businesses are well-capitalized and financially strong.

Question and Answer

Q: Hi, thanks. Good morning. I guess one question and kind of a related follow-up would be, one, can you give an update on Prismic and potential activity there? And then the second one was just how you plan to use capital that you free up from both, external and internal reinsurance transactions going forward? Because I think you freed up some capital from various transactions, but what are your key priorities for returning that over time?

A: RobFalzon: We'd be disappointed if we've not entered into an additional transaction that we could announce before year-end. We're continuing our work on a very active pipeline with multiple reinsurance transactions across a spectrum of types. Charlie Lowrey: We want to be good stewards of capital with a consistent disciplined and balanced approach. Three aspects: maintaining rock-solid balance sheet, investing in businesses, and returning excess capital to shareholders. We deployed capital to support strong sales and returned over $700 million to shareholders during Q3.

Q: Hi, thanks. Good morning. I wanted to start with Japan. Can you talk about how the margins or the returns on this -- these retirement products that you're selling compare to the protection products, death protection products that you used to sell? I mean, my recollection is those death protection products had very attractive margins and I just want to get a sense of the new business that you're writing and how that compares.

A: Andy Sullivan: We're pleased with the profitability of the sales in Japan and do not expect an impact on the margins given the mix-shift between product types. We see a long-term opportunity in Japan to help citizens prepare for retirement. Retirement investment product sales increased about 30% year-to-date versus prior year and accounted for the majority of Japan sales in Q3.

Q: Good morning. First question back on Japan. Can you talk about your sales mix between yen products' foreign currency products? I know foreign currency has been a big part of what's gone on, but just given the move higher in rates in Japan as -- or are you starting to see a pivot back into yen-oriented products? And how do you see that going forward?

A: Andy Sullivan: In Q3, about 30% of Japan sales were yen-based sales. Level of yen-based sales has nearly doubled over last three years. We've been intentionally strengthening yen-based product choices with new product introductions contributing to 29% year-over-year sales increase.

Q: Hi, good morning. Thanks. I just wanted to hit on PGIM first. Maybe could you talk about what went on institutional in the quarter, what drove the outflows and maybe how you're expecting them to come into '25? I mean, I know it's episodic, but any color there would be helpful.

A: Andy Sullivan: Expect to continue experiencing more near-term variability in institutional fixed income flows. Many DB plans remain overfunded and are derisking leading to near-term variation. But as rate curve normalizes, money will flow back consistently. Looking at longer timeframe, affiliated flows from pension risk transfer transactions and asset-intensive annuities/life insurance are linked. Year-to-date third-party institutional flows positive $14 billion and affiliated institutional flows positive $15 billion.

Q: Good morning. Thank you for the opportunity. On the variable investment income pre-announcement that you're going to do for disclosure going forward. Will that be a wholly separate pre-announcement from the AUM one that comes out as an 8-K?

A: Yanela Frias: That will be included in the current disclosure that we provide on AUM. So it will be all-inclusive.

Q: Hi, thanks, good morning. My first question, I guess, was on the comments regarding away from the quarterly EPS baseline and moving towards new financial targets. Is there any more color you can provide us on what you're considering for those and realize it's still maybe in flux?

A: Yanela Frias: We plan to introduce new intermediate-term financial targets beginning for 2025. To provide greater insight into financial outlook and align with longer-term nature of business. Will replace quarterly baseline disclosure and implement starting with release of fourth quarter earnings results.

Q: Hi, good morning. Could you talk a little bit more about the Prismic team -- the Prismic Japan team that you're building out? And maybe give us some examples of the types of deals that could make sense and the size of the market?

A: RobFalzon: Need an agency license business on the ground in Japan for Prismic to do reinsurance transactions. Upcoming ESR in Japan is a catalyst with punitive solvency regime for long duration and foreign currency denominated liabilities. Japanese customers still interested in dollar-denominated products. We think our business in Japan gives us credibility with other insurers in the marketplace for reinsurance transactions.

Q: Hi, good morning. First one I had for you is on the comments that were made on, I guess, surrenders in foreign currency products being a bit elevated. And it was noted that there was some earnings pressure from that. I wanted to also get a feel for what kind of revenue pressure is that exhibiting on the international franchise, particularly Life Planner?

A: Andy Sullivan: Weaker yen leading to enhanced level of U.S. dollar policy surrenders. On U.S. dollar recurring premium products, affordability is an issue for customers. Some customers in U.S. dollar investment products are looking to monetize gains. Had it not been for this surrender experience, would have seen low-single-digit earnings growth across PII business segment.

Q: Thanks, Yanela, just -- would you mind reiterating what you said you're going to change the quarterly disclosure? Did you say you were going to eliminate the quarterly bridge that you typically provide on the next quarter-out? And I think I heard you say you were going to start pre-announcing alternatives and any other changes you're planning on making?

A: Yanela Frias: We are eliminating the quarterly baseline disclosure and replacing that with intermediate-term financial targets, starting with '25 and pre-announcing variable investment income. Still going to speak to unique items in the quarter to help understand what's happening.