Prudential Financial, Inc. — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Ladies and gentlemen, thank you for standing by and welcome to Prudential's Quarterly Earnings Conference Call. [Operator Instructions] As a reminder, today's call is being recorded.
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 U.S. Businesses; Yanela Frias, Chief Financial Officer; and Rob Axel, Controller and Principal Accounting Officer.
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 U.S. and International Insurance businesses.
Thanks, Charlie. I will provide an overview of our financial results and business performance for our PGIM U.S. and international businesses I'll begin on Slide 6 with our financial results for the first quarter of 2024.
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, pretax 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.
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 included an adjustment of $50 million for expenses and other items. This includes adjustments for typical seasonality of expenses and premiums as well as the onetime expenses related to our guaranteed universal life reinsurance transaction.
[Operator Instructions] Our first question is coming from Ryan Krueger from KBW.
My first question was on Prismic. Can you talk about the outlook for reinsuring in-force blocks, additional in-force blocks to Prismic and do you expect more activity on this in 2024?
Ryan, it's Rob. I'll take your question. As we've shared before, we and our Prismic investors who are a group of very large global institutional investors that operate and scale have aspirations that go well beyond the initial $10 billion transaction that we completed last year. We're continuing work on an active pipeline. That pipeline includes ongoing balance sheet optimization. It includes flow or new sales that are solutions across our businesses and working on third-party blocks where we believe we can provide our reinsurance and asset management capabilities to other insurers.
Great. And then separately on -- I had a question on G&A expenses. I think they were up around 7% year-over-year on a consolidated basis. And previously, you had talked about taking expense actions that could keep G&A relatively flat in the near term. So I was hoping for an update on that.
Ryan, this is Yanela. And I will take your question. We are committed to keeping expenses flat while investing in our businesses. And as you noted, we did see an increase in G&A this quarter, but keep in mind that G&A includes expenses to support growth, including nondeferrable sales expenses in support of our very strong sales this quarter as well as onetime expenses like the cost-related to the GUL transaction.
Yes, sure. Of course, Yanela, thanks. And Ryan, clearly, Yanela just went through some of the earnings drivers. So now let me share with you how we're thinking about the fundamentals in our growth story. So overall, we're very pleased with the strong sales growth across our Retirement Strategies business. with over $14 billion in sales this past quarter.
Our next question today is coming from Tom Gallagher from Evercore ISI.
First question is just on the I think, what was a jumbo PGIM inflow that you got from a single client this quarter? I think that might have been $25 billion or $26 billion. And if that's not right, can you please sort of clarify what that amount was? And then what was the mandate in? Was that public fixed income? And any kind of sense for what kind of fee rate you would have had on that?
Tom, it's Andy. So this mandate was a significant portion of the $26 billion that we saw in institutional positive net flows. Obviously, we don't disclose fee rate on individual mandates. That said, this is a large mandate from a key pension client for a high-quality fixed-income portfolio.
And Andy, just as a follow-up, any -- how does the pipeline look? Any other sizable large mandates you think might get funded this year?
Yes. So maybe, Tom, let me just bring it up and I'll end with the outcome. So overall, on the institutional side, we're obviously very pleased given that large mandate, we feel that reinforces our position as a leading partner in the marketplace. And I'd also add that we've been consistently adding new clients to our roster on the institutional side every quarter, every year.
Great. Rob, just if I could slip one more in about a follow-up to what Ryan asked about Prismic. Have you guys done any additional fundraising beyond the first $1 billion for Prismic? And if you haven't, any thoughts on how much you would be looking to raise in a potential next fundraising?
Yes, Tom, the investors that we have in Prismic and our conversations with them have indicated their desire to put a significant amount of capital to work and the strategy that we've outlined to them. And so expectations are that these are firms that deal on the billions, not the millions or hundreds of millions.
Next question today is coming from Joel Hurwitz from Dowling & Partners.
So I want to go back to the individual retirement sales. So a very strong quarter, including sizable growth in fixed annuity sales. Can you just talk about the pivot to fixed annuities? And I guess, what's your plan to grow in this product line?
Yes. Of course, Joel. It's Caroline, and I'll take your question. So first of all, the individual annuities market had a record year last year with about $380 billion of sales, and fixed annuities were a key piece of that given the rapid rises that we did see in interest rates. We're seeing continued momentum for fixed annuities this year as the value proposition remains strong, driving industry sales of over $100 billion in the first quarter, putting the industry on track for another record year.
first, our successful expansion of our product portfolio to include more fixed annuity solutions such as our Westgard, MIGA allowing us to meet more customer needs across a broader set of channels.
Okay. So it sounds like this will be a core product in your line of filing forward then?
Absolutely, Joe. Yes, we see it as a core product as we broaden our portfolio.
Okay. And then just moving over to pension risk transfer. Just any update on your outlook and Obviously, a very strong start to the year, I guess, how should we think about your desire to grow this business year-on-year out?
Yes. So as you said, Joel, and rightly so, we had a very strong start here. We finished actually the strongest first quarter ever in PRT, leading the market, including 2 transactions with Shell and Verizon totaling nearly $9 billion. In terms of our outlook on growth, last year's market volume was roughly $45 billion, and we expect to see that healthy pipeline continue this year supported by favorable funding positions of over 100%.
Okay. I guess, just how do you balance the capital strain from growing that business? Just how should we think about your appetite for overall growth this year after doing $9 billion in Q1.
Yes. So I'd say, in general, Joel, obviously, each large transaction naturally consumes its appropriate share of capital. We believe these deals are a very effective way of deploying capital. and we like the returns that we're generating.
Your next question today is coming from Wes Carmichael from Autonomous.
Rob, on your answer on Prismic, you mentioned the transactions require regulatory coordination is one of the considerations here. I'm just wondering if you can give us an update on the regulatory environment in Bermuda and how that's changed, if at all, over the past year if the CMA is more involved in improving potential deals or influencing the structure of transactions.
Yes, Wes, happy to do so. We've actually been highly engaged with the BMA throughout the consultation process that it recently went through and provided feedback on the proposed enhancements to their regime directly with the BMA as well as in coordination with the broader industry.
And maybe just a quick follow-up on that. But do you think PRT is a good liability for Prismic? Does that make sense there?
PRT can be done economically, both within the U.S. statutory regime and within the Bermuda statutory regime. We've advanced, adopted a set of principles that are under consideration for pension risk transfer type liabilities in coordination with our New Jersey supervisor.
That's really helpful. And then maybe just one more on the regulatory front. But can you give us just an update on the transition to ESR in Japan, we're getting closer to the implementation date here. So has there been any movement, particularly on how long-duration FX products are treated or anything else? Any other color might be helpful.
This is Yanela. Let me give you an update on where we are with ESR. On ESR, we believe our Japan businesses are well capitalized and financially strong, and that would be evident under any reasonable capital standard. We have been working with regulators and advocating for reasonable and responsible standards. And we have strategies to adapt to the potential new regime and to better match the economics of our business.
[Operator Instructions] Our next question today is coming from Elyse Greenspan from Wells Fargo.
My first question, I guess, is on the M&A side, right? Can you just give us an update on the pipeline and things that you're looking at? And given the action to exit Assurance IQ, how is that going to impact future M&A decisions?
Sure, Elyse. This is Charlie. Thanks for the question. We've executed on many transactions over time that have significantly grown the company. And we have pursued these transactions or acquisitions for a variety of reasons such as expanding our capabilities, broadening our distribution, increasing scale and/or adding key talent.
And then my second question, within group, good results in the quarter, you guys were towards the lower end of the target range for that business for the year. Just anything you want to point out, especially in the disability side, results seem good in the quarter? And how you expect the benefits ratio in that business to trend over the other 3 quarters of the year.
Sure. Of course, Elyse, it's Caroline, and I'll take your question. So first of all, we're very pleased with our first quarter sales for group overall, which are influenced by the momentum we've seen in executing on our strategy to maintain our core product leadership while growing in the under 5,000 lives and association markets and further diversifying in disability and supplemental health.
Our next question is coming from Suneet Kamath from Jefferies.
To start with Individual Retirement. Caroline, you had mentioned the strong sales, and I think you're expecting that will persist going forward for you in the industry. Just wanted to get a sense of where that money is coming from. Is this new money coming to the industry, maybe from the qualified market? Or are we seeing 1035 exchanges from existing annuities? Just wanted to get a sense of where that demand is coming from.
Yes, Suneet, it's a great question. Thanks so much. I don't think it's really one thing. I think it's the dynamic of individuals thinking more clearly as we have over 11,000 individuals turning 65 every single year over the next several years and 30 million Americans going to be turning 65 between now and 2030.
Got it. Okay. That makes sense. And then I guess, one for Rob, if I could. I think in your, Rob, you keep referencing this $48 billion of insurance margins, I don't know what that means. Like how was that calculated? And if that's such a big number, is there a way that you can start to monetize that rather than just wait for it to flow through the income statement?
I'll take a first stab at that, Suneet, and then I'll answer and then I'll ask Yanela to jump in if she wants to clarify anything I'm about to say. So with the change in accounting for long duration under LDTI, we now have the ability to actually calculate and share those margins. And that's what we've been doing since the adoption of those updated GAAP standards.
No, Rob, that was a great explanation, nothing to add.
Got it. If I could just sneak one more in for Yanela. On HoldCo cash, are there any big movements that you're expecting as we move through the year in terms of capital structure, either issuances or repayments? Or are we kind of at a steady state at this point?
No. We had the hybrid issuance in the first quarter. That was a prefunding of a 2025 maturity. So we issued $1 billion, and we also did redeem $500 million of previously issued hybrids. So from an issuance perspective, nothing more is expected. Our HLA balance did increase modestly during the quarter. As you saw, we did have net positive cash flows from our businesses after funding very strong growth, as you noted and as we've talked about, and the net proceeds of this hybrid issuance.
Next question today is coming from Jimmy Bhullar from JPMorgan.
First question, just on the Assurance IQ business. Should we just assume that you're shutting down the business? Or is it reasonable to assume that you'll be able to sell it for like a decent consideration?
Jimmy, it's Yanela. I'll take your question. And as we say that we've begun a wind-down process for Assurance and have moved the results to divested businesses. First of all, let me acknowledge that these decisions are always difficult and our utmost focus is caring for the people involved. That said, this winddown will not have a material impact on earnings.
And I would have thought that it would be -- the exit would be slightly accretive to earnings given that Assurance IQ wasn't really making much money. And in most of the years when you were reporting it stand-alone, it was actually losing money. But is that not correct?
Well, that's the point. We had moved it to corporate other because it was not material. Now it's in divested, and it's just not material to the bottom line.
And then on the [ CRE ] portfolio, it seems like on commercial mortgage loans, most of the credit metrics are fairly stable with what they had been recently. But if you just talk about what's going on there and give us some insight into the percentage of loans or the number of loans that are maturing this year and what's happened with loans that have matured -- like are you having to extend more of them? Or are they just paying down? Or just anything to give us more color on how the portfolio has been performing.
Okay. Jimmy, let me start at a high level and then end with your specific question on maturity. So actually, there has not been a material change from year-end. We've got a $51 billion portfolio. It's about 14% of our investments.
Your next question is coming from Wilma Burdis from Raymond James.
Given the high level of retail sales, could you talk about the competition levels in annuity and life products? We would expect pricing to rationalize somewhat this year given regulatory changes in Bermuda. So have you seen any evidence of this? And maybe give us some broader color.
Yes. So Wilma, it's Caroline. So I'll take your question. if I think about life for a moment and our sales results and our outlook going forward, I'll take that first. We are very pleased, Wilma, with our first quarter results with over $165 million in sales an increase of more than 10% from the prior year quarter. That's driven by our term and variable products, and we continue to write that new business at healthy returns continuing the trend we saw throughout the year in spite of competition.
And given the exit in Argentina, could you discuss which regions you're thinking about scaling? And more broadly, could you give us an update on the market for bolt-on opportunities?
So Wilma, it's Andy. So our emerging market strategy is to focus on a few select high-growth geographies that offer us the opportunity for significant scale. So at this point, what I would tell you is we're in the countries that we want to be in. So there really are no direct implications from the sale of Argentina for the rest of our portfolio. And we remain highly committed to Latin America as part of our emerging market growth strategy.
We reached the end of our question-and-answer session. I'd like to turn the floor back over to Mr. Lowrey for any further closing comments.
Okay. Thank you again for joining us today. We are pleased by the progress we've made in growing our market-leading businesses, including leveraging our mutually reinforcing business system and optimizing capital to deliver sustainable long-term growth. We will continue to lead the way in expanding access to investing insurance and retirement security across the globe as we help current and future generations live better lives longer. Thank you again for joining us, and have a good day.
Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.