Okay, we'll go ahead and get started with the next session. First off, thank you for being with us today. I have Charlie Lowrey, CEO of Prudential Financial.
Actually, I'm Michelle Kalife. I recommend buying Prudential stock, please.
Remove that from the transcript, please. Well, look, I think we're gonna kick this one off with you giving some opening remarks. So I'll turn the floor over to you, and then we'll go through a Q&A session.
Sure, thanks. And thanks for having me. Thanks, everybody, for being here. Happy holidays. Let me just start by making a couple of very quick comments. One, everything we've done over the past four years has been you can put into one of three buckets, and that is we want to be a less market sensitive, higher growth and more nimble company. And if you look at what we've done in each of those categories, Alex, just very briefly, being less market sensitive, we've actually sold a lot of back books. You've seen us do that or reinsured back books over time. We've changed our product type. As you've looked at both in annuities and in insurance, we've switched out some of the higher market sensitive products into lower market sensitive products.
If you look at higher growth, we have made a series of acquisitions. We've invested internally in our own businesses, but we made a series of acquisitions, the latest of which was Deerpath Capital, which we announced on Friday for in a private credit. We have changed products, so we're in higher growth products like FlexGuard and others, as we may talk about later. We've increased distribution in a number of ways. So you've seen us with Mercado Libre down in Latin America, which is the Amazon of Latin America, create kind of a very interesting program in Brazil, Argentina, and Mexico. And then you've also seen us announce in the third quarter, the LPL partnership, where we're now preferred partner to LPL for the products that we're able to sell there.
And then in technology, we've done some really interesting things. And you say, "Well, technology, how does that help with growth?" It, it helps with growth if you can reduce the decision-making cycle. So we've talked before about taking products that were, you know, took 22 days down to right now, it takes 22 seconds. And so, it... Consumers can say, "Yeah, I, I want to do it, and I want to do it now," and you can create growth that way. In terms of more nimble, we've announced a number of, organizational changes as we evolve our organization going forward. All of that gets into what we call our mutual reinforcing business system, where, where we have a business mix, where we can create liabilities, the asset which-- the assets of which will be managed by PGIM.
And then we announced Prismic, which we can talk about later, as well in the third quarter, and that allows us through to bring in third-party investors for reinsurance. So we're excited about the growth we have going forward, and again, everything fits into one of those three buckets.
Yeah, but, so when we think through the organic growth, you touched on some of it just now, but, you know, where do you see the most promising opportunities for Prudential when I think over the next, you know, 12, 24 months in terms of those growth opportunities?
We see those in the mutually reinforcing business system. So we announced Prismic. It was a small transaction. It was $10 billion. We reinsured structured settlements. We created that organization in Bermuda to reinsure business going forward. That enables us to bring in third-party capital to really turbocharge the growth of our other businesses. So if you think about annuities, you think about individual insurance, retirement, we'll be able to grow those faster through both products that we develop and have developed. So again, FlexGuard, some of the fixed annuities, some of the variable life products we have. But then to be able to reinsure either forward flow or back books to Prismic, using third-party capital, using some of our own, but mostly third-party capital. That will enable us to grow faster as we go forward.
So it's really this this self-reinforcing business system, and if we grow faster, those assets then go to PGIM. PGIM gets larger, we get more fees, and, and the circle continues. So we think we have a very interesting, dare say, unique business mix, given some of the strategies that other companies have taken, that where we have retained annuities, retirement, and individual life, which is gonna help in that system.
That makes sense. Maybe keying in on PGIM as part of that conversation, I mean, the multiyear performance of flows has been world-class. You also haven't been totally immune to, you know, what's going on in the asset management industry in general. You know, how does the outlook look from here? Are some of these things that you're describing enough to sort of, you know, turn the tide on that?
Yeah, the deal with two parts of that. There's the first part, the flows, yeah, we haven't been immune, and it's been the tale of two cities. So on the retail side, we had exceptional performance this year. 89% of our funds have beaten benchmark. And what happens when you're a sub-advisory on the equity side, when people rebalance, they go to the funds that have outperformed because they're sort of out of whack, and they take money out of that to rebalance into other areas. And so we have been hit because of our outperformance on the retail side.
On the institutional side, it's a very different story because a lot of what we do is fixed income, and they're, you know, the story in rising interest rates, your AUM goes out, but, institutions aren't going to put in more money until they think we're at the peak of the market, so they're kind of holding back. So gross flows have been less than we would have, would have liked, even though our performance actually this year has been extremely good. On the alternative side, it's a little bit of a different story. We have been able to put some money to work, not, not as much in real estate, but in infrastructure and other areas and in private credit. And, and we have a $250 billion,...
alternative platform, and that's, we've done okay there.
Staying on PGIM for one more, could you discuss real estate specifically? You know, clearly, there's been, you know, a headwind in terms of some of the transaction volume and the fees that you all generate off of that.
Yeah.
But, you know, are you seeing signs of stability forming at all? Does the outlook start to improve as we get into 2024?
We hope so. I think office is still up in the air. Now, we're underweight in office, we're underweight in big box retail, we're overweight in industrial, residential, and self-storage, which we love, that's countercyclical. But so in some of those sectors, we'll be. I think we've seen growth. We've actually raised some funds in infrastructure and other areas. Office is still up in the air. And so transaction volume, as you said, is down across the real estate industry. That leads to lower... what we call other related revenue in other areas, and agency fees. But we hope it'll beginning to settle down, but office is still a question mark. Yeah.
Moving over to group retirement, and, you know, pension risk transfer-
Yeah
has been a fantastic growth opportunity for you over time. Can you talk a little bit about, you know, how things are shaping up for Q, big quarter for, for growth typically? You know, where—what is the outlook for that business?
Yeah. So this year, we think, it'll be a $40-$45 billion year, slightly less than last year. If you remember, last year, we and MetLife did the big IBM transaction in the fourth quarter, that was $16 billion. But this year, probably it tails off to $40-$45 billion, and that seems typical. I mean, it's a $3 trillion market. But there's still tailwinds in the industry, right? So sort of three major tailwinds, which is why companies would transact. One is that they're well-funded, so the average funding is over, it's like 102%-103%, so they can transact.
The second is that there's been volatility in the markets, and so what goes up can come down, and so people say, "Okay, I should hit the bid now because I'm overfunded." And the third is a little bit less known, but is the PBGC fees. So the PBGC charges high fees, that's a Pension Benefit Guaranty Corporation on a per person basis. So if you have low amounts per person in your pension fund, but you have a lot of people, you get crushed by those fees. So that's just sort of a tax on your business. And that's another sort of impetus to transact. So there's a lot of tailwinds in the business. As you said, we have a very good position in the business.
We're very well known, and we've had a good year, and hopefully, we'll continue.
You know, second piece to this also, you know, you mentioned Prismic.
Mm-hmm.
What are ways you can use that vehicle with the pension risk transfer growth?
It's interesting, we took our time in developing Prismic because we wanted to be a little bit of a different animal. It's just not a sidecar for a block of business, right? This is, we brought in world-class investors who want to see this grow to scale, and they want diversification. So longevity, mortality, they want geographic diversification, they want duration diversification, short duration, long duration. So we're really looking to build a business here, and there are three ways we can do it. One is through what we did with the first transaction in the structured settlements, which is sort of reinsure our own back books, and we'll continue to think about doing that. Second is to reinsure forward flow. And the third is to reinsure other books of business from third parties.
And we're pursuing all three of those with ourselves, with our partners, Warburg Pincus, who supplies the private equity, and then with our third-party investors.
You know, when I think outside of PRT, and you mentioned geographic diversification, et cetera, I mean, Prudential can offer those kind of liabilities. You have a lot of business in different places. I mean, is that something that is part of the roadmap in the early innings of this entity? I mean, is that something that's already heavily being explored?
It is being explored, along with reinsuring third-party blocks, so talking to different people. And what's interesting is, we've gotten a very good reception talking to third parties, just by virtue of the fact that we're an insurance— You know, we come from—we have very good insurance companies, and we have a world-class asset manager, and you can put those two together. With a history in both, that gives us the credibility to be able to do this.
Next, on individual retirement, you know, this has been a shifting business for you all. There was the mix shift that was occurring with the guaranteed product and so forth.
Mm-hmm.
You know, it's been a real driver of your EPS recently, and so I wanted to see if you could unpack that a little bit. Help us think through, like, what's enabled that, and, you know, to the extent you believe it'll be sustainable, even, you know, if rates do begin to drift down.
Yeah. So basically, we eliminated anything with three letters: so PDI, HDI, GUL, so anything with three letters, we got rid of. But what we're doing is the back book, if you will, generates fees. The new product that we're putting on in FlexGuard, fixed annuities, et cetera, is really spread business.
Mm-hmm.
So as interest rates has gone up, obviously, that has helped us. But we have the ability to reprice products very quickly, and so even if interest rates come back down, and they've 10 years tick down a little bit, we'll have the ability to reprice that to retain our spread over the cost of capital. So we feel very good about the business we're writing and can write going forward, but it has helped, to your point, with the rise in interest rates.
Yeah, I mean, before we leave the topic of annuities, I do want to ask about the Department of Labor rule that's been proposed out there.
Seriously?
I mean, I asked, you know. It's too early on the earnings calls probably to really be able to opine on it. So, you know, do you have any updated thoughts? I mean, yeah, should I be asking about it?
And no comment is not good enough. So what I would say, look, we are all for regulation, and I think we are a regulated industry, and regulation makes us stronger. We just want good regulation. And what we want is to make sure that there aren't unintended consequences that come along with pieces of regulation that are put into effect. And so what we would hope is that there is a good dialogue between ourselves, meaning the industry, and the folks that are considering such regulation, and that we can craft it so that it really does, at the end of the day, help consumers.
Because if you look at some of the unintended consequences of things that have happened in Europe, there are many financial institutions that don't just don't sell long dated, long duration products anymore. They just sort of disappeared.
Yeah.
That's not good for the consumer. And therefore, we want, we wanna do the things that are good for the industry and good for the consumer, and we hope we can have that dialogue with, with the regulators going forward. The other thing I would say is this isn't any, and I know I can speak for all the firms in the industry, this isn't our first rodeo, right? We've been here before, and so we will, we will deal with whatever comes up. We just hope that the unintended consequences don't hurt the consumer as a result.
Understood. Maybe shifting gears a bit and moving over to the international business-
Mm-hmm
... and in particular, Japan. The rate environment's changed there as well-
Yeah
... pretty significantly. Does this offer new opportunities, for you to grow that business and open up the product set a bit?
First of all, obviously, higher interest rates are good, so that's great. We have a broad set of companies over there with strong diversification, and we have a diversification of product now. So, it does help. You're right. So with very low interest rates, we were selling mostly dollar-denominated product. We did have yen-denominated offerings, but there wasn't a lot of take-up. Now, to your point, there's more take-up on the yen-denominated products, so we're selling more of that. We're still selling dollar-denominated product, but the yen product has definitely picked up.
Got it. And on the capital front, can you discuss where you stand in terms of some of the capital ratios? We sort of have this SMR moving towards ESR. You know, will there be any impacts to cash flow as we think through that transition?
Yeah. So the good news is that the JFSA has engaged the industry for quite a while in looking at this, and they've been very, very thoughtful about this. And so there's a great, very good relationship between the regulators and the industry. That isn't to say that we agree on everything, but they selected four companies, of which we were one, to come and talk to them and work with them on crafting regulation. So this has been ongoing for years. The second comment, that we're still a couple of years out, so this is gonna—this isn't sort of impending immediately, and they are still listening to us as we go forward.
But as the regulation gets crafted, there will be ways to continue to bring cash flow over to the States, to sort of expatriate capital in terms of reinsurance and other ways of doing that. So, we are very well capitalized. The industry, in general, is well capitalized over there. We are very well capitalized. So, we don't think this will affect us in significant ways, and there are ways of getting capital out. But, kudos to the JFSA because they really are listening to the industry and taking at least our comments under consideration as they craft their own regulation.
Can you go a bit deeper into some of the growth avenues for international that are outside Japan? I feel like, you know, we all-
Yeah
... focus on, you know, Prudential of Japan and Gibraltar within Japan, but, you know, there's a lot going on. There's a lot of different geographies you all have been building up. You know, at what point is some of that kind of hitting critical mass, and-
Mm-hmm
... what are you excited about?
Yeah. So let me take us just a quick step back, and then I'll go right into that, which is, where are we? So we're not gonna be planting a huge number of flags going forward. We are in the countries we want to be in. So we're in 7 of the 10 most populous countries in the world. We are not the only three we're not in are Bangladesh, Pakistan, and Russia, of the top 10. We're in all the others. So we're in the most populous countries with rising middle classes, so we'll take that to begin with. Second point is what we want to do is to go deeper into those countries, and I'll give you an example of Brazil in a minute.
But we look at things in different time frames. So immediately, we focused on Latin America. We started to talk more about Brazil and the very good business we have in Brazil. We also have businesses in China, India, and Indonesia, so Asia is out there. But primarily, it's Brazil, Chile would be the two with our joint venture with Habitat. And then far out would be Africa, where we have interest in three very good companies in Ghana, Kenya, and now most recently, we just bought a 33% interest in Alex Forbes, which is a pension retirement company in South Africa. So using Brazil as an example, because that's the most relevant-...
What we've done there is we have a very good and one of the leading life insurance companies there, but that only represents, you know, 15%-20% of the market. The rest of it, this is sort of rough justice, would be, forty percent is group insurance and forty percent is bank insurance. So what we did is, years ago, we bought group, the Itaú group business, so we're now in that business and growing that. And then later on, we created a joint venture with Itaú, to sell through their bank channel. So we're in the bank insurance business. So we're now in all the segments of Brazil, and that's what's enabling us to grow, to grow really well.
You throw on top of that the MercadoLibre transaction, which we just did, and the number of simplified policies that we're able to sell to a different demographic in Brazil, because they're simplified solutions, small premiums, et cetera. But in volume, that's gonna open up a whole other avenue of growth. So I would say Latin America first, sort of Southern Asia second, and then Africa, under the long term for my successor's successor. They're gonna be enjoying the fruits of that.
Shifting gears a little bit over to individual life.
Mm-hmm.
We've seen sort of mixed results from the industry as we've, you know, I guess, you know, heading towards an endemic state here. What are you seeing in your block? Are there, you know, is there anything to some of these concerns around older age mortality and some of those pressures? Or, you know, is that mostly been worked out? You all have obviously-
Yeah
...taken action and, you know, done some things to reserves as well as transactions.
Mm-hmm.
So where do you stand on your block and the latest view?
Yeah, I think we have absolutely seen the pandemic change to an endemic, so it's much more flu-like now.
Sure.
We're back to pre-pandemic levels of where we were. We don't see any blip in mortality or other things at this point. I don't know about you, but when I got my flu shot recently, I also got the latest vaccine both in the same arm, and it was just... I think that's gonna be what it's gonna be like going forward, right? It's just more of an endemic.
Yep. Understood. Maybe sticking to individual for one more. Yeah, I think you've seen a pickup in sales and individual life as well, in some of the VUL. You know, what, what's the opportunity you see there? Have you done anything in distribution in particular to aid that?
Yeah, so we have seen a pickup in VUL. That represents a large part of our part of the shift that we've done to become sort of less market sensitive-
Mm-hmm
... eliminating the GUL and going into the VUL. That has helped immensely. We have used both our PruA dvisors to do that, as well as, which is our tied agents, as well as all the third parties that we use to do that. It's been well-received in the marketplace. We've had a big pickup in sales, and we're looking forward to being able to continue that with LPL and others as we go forward and create these sort of unique relationships. So we're always looking to expand distribution in various ways, and think that between our brand, our reputation, our distribution, and our pricing, that we'll be able to continue to do well there.
Got it. Next topic, capital management. There have been some pretty positive developments when I think through the Prismic transaction-
Yep
... you know, maybe some relief from the Interest Maintenance Reserve-
Mm-hmm
... update as well. So as we think through that added flexibility, what are you thinking in terms of capital management priorities and how you may look to deploy-
Yeah
... the capital?
So we have. Thanks for that question, by the way. We have a very consistent view about capital and capital usage. So first, we're in the business of making long-term promises, and customers come to us because of our reputation, our execution, the product offering, et cetera. But they have to believe, and we're unique in this way, unique meaning the industry. They have to believe that we're gonna be here 50, 60, 70 years from now, because some of these promises won't be fulfilled until then. So job one for us always
and I'm unapologetic about it, is financial strength. They need to know that we are rock solid financially. So if we hold a little more capital in order to do that, again, I'm unapologetic about doing that. It helps our sales, and it allows us to fulfill our promises of that we make that are decades and decades long. So that's number one. Number two is investing in our businesses, both organically and inorganically, and you've seen us do both. And we can talk more about M&A if you want in a minute, but it's, that's definitely a part of what we do and how we do it. And then we return capital to shareholders as a third, both in terms of dividends, and you've seen us increase dividends for a long period of time.
We have a consistent way of doing that. As well as then returning, after that, excess capital to shareholders through buybacks. We've been consistent in doing that over time. We don't use buybacks as a way of our opinion about stock prices, but a way of consistently giving excess capital back to shareholders on a regular basis. And so that's how we think about the tiering of it, and that's how we'll continue to look at it.
And maybe touch on the M&A front. I think you mentioned some of the things you've done-
Mm-hmm
... recently, but you know, maybe touch on what were those things, and what was the driving force behind the decision? And then also, you know, what are the ways you think about M&A moving forward, that could supplement the growth and improve?
So we think about M&A in a programmatic way. So we're thinking about a series of transactions that either help our capabilities or potentially our scale... and focusing on both PGIM, in the alternatives capability, and then in emerging markets. So taking PGIM for a minute, if you look at the two latest transactions we've done, it's Deerpath Capital, which is in the private credit business, which we closed on Friday. About $5 billion in AUM, but augments the really good private credit business we have now by going slightly lower into the market, in the sort of middle market. And then we did Montana Capital Partners, which was a private equity secondaries.
And so what we're doing is augmenting our alternatives business with additional capabilities that investors will like, and buying sort of smaller pieces of smaller business or buying the entire business, and then using our distribution and our investor network to kind of turbocharge that. The other area in PGIM we'd look at is distribution, either in Europe or in Asia, and if we can expand distribution there, we will. So that would be PGIM. And then in emerging markets, as I said, we really concentrated the past two deals on Africa, so augmenting our Africa strategy, one, buying an interest in ICEA Lion in Kenya, and then the 33% interest in Alex Forbes more recently.
What you'll see us do now in emerging markets is really go deeper into the countries in which we already are, and you won't see us expand into a lot more countries.
Understood. Okay. You mentioned some of the investments in the business. I wanted to come back on that. Feels like, you know, in the news recently, there's certainly lots of talk about an acceleration in some of the AI capabilities and so forth. But, you know, could you talk about some of the opportunities you do see for, for Prudential, you know, to, to leverage some of those capabilities and, and maybe take advantage of the scale that you have?
Yeah. So, obviously, a lot of talk about this now with AI and Gen AI and all, all of that. We spent a lot of time talking about where is good, good enough, and where do you really want to spend your incremental dollars in technology to be a leader in the industry? So I'll give you an example. If you call our call center, and it takes 10 seconds, we can spend another $300 million-$400 million and turn that, you know, make it 5 seconds. Is that worth it? Probably not. Would I rather spend the money on Gen AI and creating a program where Gen AI can, in fact, take the call notes of someone in the call center so that they don't have to do it? They would review it, but they don't have to do it.
That could save them up to 4 minutes of time, by which they could then call another customer, right? So that's the kind of, that's the kind of thing we're thinking about. We used an example—we've been using AI since, I don't know, 2017, 2018. We used it on a previous call, where we took a simplified product and turned the underwriting from 22 days to 20 seconds. Actually, our IT group gets annoyed at me because that's a really nice soundbite. It's actually 7 seconds, but that doesn't sound as sexy as 22 days to 22 seconds. But that kind of investment helps us because it helps the customer, and it drives sales, because they don't have 22 days to think about it. They can...
If they want to own the product, they can immediately own it. So we're doing a lot of work on AI and Gen AI, and finding lots of use cases for both. But we're being very thoughtful about how we actually spend the money and what we spend it on, because otherwise, you can spend an inordinate amount of money and not get a real return on your investment. So lots of work going on, lots of really exciting work, but we're being really thoughtful about how we spend the money.
Got it. This one's a totally different topic, but I wanted to ask you about long-term care insurance. It's, it's been more, you know, of a benign story for you all, and I think you were sort of early in taking, you know, a bit more action, going back a handful of years. But, you know, any, any view on some of the studies that have come out, any implications for your block? I know there's, you know, reopening of long-term care in ways and, and frequency having picked up. I mean, what would you tell us about what you've seen and the confidence in your book of business?
Three comments. One, we have a very small book, so ours— You know, I would talk to a lot of people who have larger books because they may... Secondly, we have seen a slight uptick in incidents after the pandemic, but that, to me, is intuitive because you would expect to see a slight uptick. Not huge-
Sure
... but you know, people are getting out, people are doing things, things happen. You'd expect that. But the third comment is that we find our claims are consistent with our assumptions, so we haven't seen any, you know, any aberration to that. So have incidents ticked up a bit? Yeah, but after the pandemic, you know, lots of things have ticked up, and that's kind of intuitive. So, n othing, nothing alarming there, from our point of view.
Got it. Pivoting over to the investment portfolio.
Mm-hmm.
Can you talk a bit about, you know, the experience you've had in terms of credit performance?
Yeah.
You know, also just touching on the commercial mortgage portfolio, you know, what that experience has been like working through the first slug of
Sure
... maturing loans this year.
Sure. No, I love talking about this 'cause I ran PGIM during the Great Financial Crisis, so-
Okay
... I've seen these groups in action and what they do... and starting with private credit, they have something that they put in there. What is it called? Covenants. They use covenants. And they use a lot of covenants, and those come into effect now-
Mm-hmm
... if there are issues. So our recovery rates are extremely good. The private credit is our private credit group knows what they're doing. They're great. In terms of real estate, I would say the same thing. You know, it's not a big part of our portfolio. It's, you know, it's 14% of the general account, which is about $50 billion. Debt service coverage is 2.48, so very high debt service coverage. Loan-to-value, you know, as of the third quarter, was 59%. Again, we are underweighted office and big-box retail. We are overrated residential ... we are overweighted residential and industrial. So the portfolio itself structurally is in good shape. The loans we make are very conservative.
Sometimes we're criticized for it, but it's times like this that the experience that we've had over... You know, we've been lending in mortgages for, like, 100 years, so the experience we have is profound, and the professionals we have, you know, they are battle-tested, and they know what they're doing, so our portfolio is in good shape.
Got it. You know, group benefits is an area that you probably don't get asked about quite as much, but, you know, I think there's been some momentum there in terms of, you know, some of the growth opportunities and so forth.
Yeah.
I mean, how does that fit in, in terms of those ambitions that you talked about at the beginning in the growth?
Yeah, we've been very pleased with the rebound and the growth in our group business. Obviously, it was hit hard during the pandemic, so you can't take credit for a lot of... I'd like to take credit for a lot of the rebound... but you can't. But we have moved into different segments of the business. We are increasing our, you know, our voluntary offerings. We're moving sort of down. We're very big on the national account basis, but now on the premier basis, we're going sort of 1,000-5,000 people. We're moving into that nicely, and so there's a lot of good things going on in the group business that we're very pleased with.
One thing that we also do is we are not afraid to lapse business that isn't profitable, and so sometimes the elimination of a negative is a positive. And so they are extremely disciplined about what we renew, what we don't renew, the pricing on which we renew it, and that discipline has helped us significantly over the past two or three years.
Got it. Well, look, you know, I think we can leave it there, and I just wanna thank you again for being here, and thank you to everybody in the audience. It was very helpful.
Great. Well, thanks all for your interest. Thanks for having us up here. I very much appreciate it, and again, wish everybody happy holidays.