I guess we'll go ahead and get started. We may get a few last stragglers in here. I know some of the sessions are not in perfect sync, maybe we'll get a few more in here as we go along. I have the honor today to bring Prudential Financial to our stage. This room venue has been used for nothing but banks until this point in time. We have the unique opportunity to bring the only company that's escaped the clutches of the FSB to this stage during this conference. That's a unique opportunity. I'm glad to have it. I have with me today Rob Falzon. He's Vice Chairman of Prudential right now. Those of you who have been following the company for a while, he's been Chief Financial Officer, he's head of the real estate division, tenure that goes back, I guess, well into the '90s.
I guess the format today, I'm going to lead off with a few questions, some topics to kind of get things rolling. After a little bit, we'll open it up to the floor to take some questions from the audience. If you don't have any, then I'll just keep going because I could do this all day. That's what I do. Let's start out with kind of the big initiative has been financial wellness.
Right. Yeah.
Clearly something that's new. It's a great opportunity. Maybe talk about some of the key elements of it, what you see as the opportunity there.
Yeah. First we view this as an opportunity to significantly expand the addressable market that we have as a company, frankly, as an industry. As a result of that, I think there's the opportunity to accelerate our growth materially in the future. Hit a new point, an inflection point in our growth. Start with sort of what the market looks like. These numbers are not necessarily new, but the life insurance gap has been quantified by LIMRA at $12 trillion. Even if they're wrong, because they're an industry association, they would tend to sort of quantify that in a generous way, it's whatever you want to haircut by-
Right. Yeah
it's a huge market. The retirement savings gap is, different estimates on that, but they range from anywhere from $7 trillion to $14 trillion. Very large markets. The ability to crack into those markets is something that can materially change the growth trajectory of the industry, and particularly of our company. The issue is that those statistics are actually not particularly new, right? This is a phenomena that's been out there. The innovation is that there are tools designed that we think can actually crack the code to address that market. The tools come in sort of a package of, I think, three critical elements in order to get at it. The first is, we believe the way you're going to get at this is through the workplace.
Okay.
For Americans, the workplace is the place where we consume our benefits. It's where we're used to doing that, one. Two, there's the opportunity to create a value proposition, and this is the trick in it, a value proposition for the employer as well as the employee. The key is, if you want to get into the workplace, you have to get this thing called permissioning in order to actually get at the employee. If you can create a value proposition for the employer, and that's what we're calling financial wellness, which is that if your employees are financially well, they're more engaged, they're more productive, less absenteeism, they retire on time. It's a better outcome for you as an employer. If you can make them financially well, you'll benefit from those outcomes.
Allow us to work with your employees in order to sort of help them to achieve those outcomes. For the employees, it's about education. It's about identifying goals and then solutions to meet up with those goals. You have a process of engagement with the employees that's to the benefit of the employer. That's the first piece of it. Execute through the workplace. Second piece of it is around the way in which you can engage with individuals on a go-forward basis. That's been enabled by technology. Digital to hybrid to traditional in-person is now a critical element of being able to deliver that financial wellness, even at the workplace, to individuals. Technology has enabled an engagement with employees that is both effective and low cost, which is the key when you want to get to sort of a broader population.
The third piece of it that's important is to be able to provide simplified products. The industry has been built over recent decades and longer on a target toward the more affluent portions of our population, and the products that we've designed have been to meet the needs of that more affluent population. This is more about mass affluent and middle market, and the needs there are much more straightforward and the products need to be designed to do that. We think if you can take those three features, those three tools, package them together, that what you can do is you can take what are generally what I call points of reflection points in an individual's life, and turn that to inflection points. That's been the issue, which is there's this latent demand, but how do you turn latent demand into actual demand?
We think through the workplace, through the introduction of technology, which is both a cost-effective way and an engaging way to be dealing with the employee, and by having the right suite of products that you can then translate that latent demand into actual demand.
It's really kind of interesting because my grandfather's generation, he'd had a pension, but he might not have had healthcare and voluntary benefits. Over the decades, we've translated into this focus on healthcare and voluntary benefits, and we've lost track of the retirement aspect. That's the piece that for many companies or many individuals has gone away. There's a degree to which kind of what you're doing is you're really bringing that back to the fore and encouraging companies to help their workers see to that third need, the retirement need.
Yeah. There was the whole shift in the market from DB to DC. It's been a wave, and we're all well aware of that. The issue is that the consumer is not well aware of it.
Right.
Someone's got something saved and they think, "I'm heading to retirement, and I got $75,000 in my 401, terrific." When they don't understand what that translates to in the way of sustainable income on a go-forward basis. Incidentally, that's why we've been a big proponent of this recent SECURE Act. A component of that is actually to get at this, to inform employees when they get their 401 statements, not just what that balance is, but actually what that balance would translate into in the way of an annuity and income for life for them in order to create a connection and visibility as to where they need to get to in order to be adequately saved.
Right. No, it's a good thought. There's a lot of companies that kind of poke at the idea of, they don't call it financial wellness, they have their own name for it. What differentiates Prudential? Where do you have an edge? Why?
Yeah. What we believe is we may be the only company actually that has the full suite of tools that are necessary in scale. Let me explain what I mean by that. If you go through those three drivers, those three components, you start with workplace. We're in the workplace already through our group business and through our retirement business. We actually have $20 million customers at that workplace. We have a mechanism to apply financial wellness. Secondly, we've developed the digital interface for customers. We have developed an educational series and a series of engagement tools. It plugs into a continuum that we have. We can engage with individuals online in a hybrid fashion.
think of it sort of as it could be telephone assisted online or chats online, all the way to if you need to speak to an advisor directly in person, we can do that as well. We think actually having that full continuum engagement and distribution is important for execution. It's the product piece, the third piece that I mentioned.
Right.
We have, in scale, all the businesses that are necessary to deliver financial wellness into the marketplace. It's about savings, it's about investments, it's about retirement, it's about guaranteed income, and it's about protection. We have large-scale businesses in all of those areas providing those services.
It's certainly an area where Prudential, not exclusively unique, but certainly has an edge on a lot of people because you can really bring together the whole gamut of life insurance annuity, regular traditional investment 401(k). There's not a lot of financial companies, particularly with your branding, that can kind of pull off the grand slam, so to speak.
Yeah. We have the power of brand. The other thing we have is we have this whole history of our culture, what's made us successful in the past is we've got this culture of teamwork and collaboration. It's important to have the components, but it's equally important to make sure that the components are actually working together to deliver the solution at the work site and to the individual. We've got a history of being able to do that in a variety of our lines of businesses and showing how they can work together. That culture of organization allows us to not only have the capabilities but to actually execute against those capabilities.
How big is it going to be?
That's a good question. We actually have our investor day coming up in June. I think we'll be a little bit more prepared to talk about sort of the quantums in this in more specificity. What I would say is that I spoke to the size of the market. We think the opportunity is actually quite large, and we're actually very encouraged by the early feedback that we're getting and the early success that we're having. I kind of think about the impact of growth as coming in 3 stages. The first is that what's happening for us is we're actually winning business because we have a financial wellness platform. We're winning business in our group platform, and we're winning business in our retirement platform.
We can attribute $11 billion of AUM to the successes that we've had, successes that were because of financial wellness in our retirement business and about $100 million of revenues associated with our group business that were wins because the decision was made on the basis of having our financial wellness capability as a differentiation. In the first instance, what we're going to see is that 20 million customer base, as we like to describe it, a top of a funnel that we're trying to engage with and wind up at the bottom of the funnel with execution. That 20 million is going to be growing as a result of the competitiveness of our institutional platforms, our company platforms. What you'll see is that that business, once financial wellness is in place, becomes sticky because.
Right
It's hard to replace it. That gives us retention, and it gives us pricing power on renewal. You're going to see a second leg of earnings growth that's associated with that. While that's occurring, you're going to see a growing level of sales associated with what I'll call retail sales. That's the consumption of the services that once we've done the education and we've identified goals and we're now helping individuals to execute against those goals. We're actually seeing good results from this. We have this program called Pathways, and we deliver it on-site to employers. We actually have it in place with large employers. Right now it's on the platform for 450 employers. They represent about four and a half million individuals, employees. To date, as we've been rolling it out, we've had 45,000.
We're just at the tip of the iceberg. 45,000 individuals go through our Pathways program. The Pathways program is about education. We bring a Prudential Advisors in in order to deliver a whole series of modules on education around financial wellness. They are not permitted to sell during this.
Okay.
The only thing they can do is they can leave a business card, but they're strictly prohibited from selling, and that's the agreement we have with the individual companies. Despite that, what we found is of that 45,000, about 20% of the individuals who attended those seminars, then contacted the presenter in order to arrange a meeting as a follow-up to that series of seminars.
It's better than leaving your business card in a fish bowl.
Yeah, absolutely. What's really powerful is 20% of them actually then went on and executed and bought products from us. You sort of think about now if you're able to scale that goes well beyond our expectations in what we would hope to get in terms of population translating into execution. Those are very, very powerful numbers. We think we've got the right equation and what we're in the process of doing is sort of accelerating the rollout of that.
Excellent. I think it brings together a lot of elements and certainly the runway is vast and you described at the beginning kind of the global need and its numbers with trillions involved. I mean, $11 billion is a great start, but it makes apparent the size of the runway that you have to work with as you continue to scale and roll.
Yeah. We're at the very front end of what we think will eventually be a steep curve of acceleration.
Okay. I mean, it seems like part of the key to this, to me, one of the more intriguing bits of it is really that technology interface. Same thing to talk about my grandfather, he ripped open the statement that showed up in his mail. My daughter doesn't understand why this truck stops in front of our house every day. Her whole world happens on the internet. Maybe describe some of the technology that Prudential is using, both within the wellness program and then more broadly, kind of interface with customers and build that relationship.
Yeah. I think technology hits a whole spectrum of things. From our standpoint, the most powerful potential for technology is around expanding our addressable universe, right? We think about that in terms of access to customers and engagement with customers. There also is an application of technology which will produce efficiency and productivity for us as well. Let me kind of go through that spectrum. From a customer standpoint, we think about engagement with the customer, and there we've rolled out a series of tools that are around needs identification, it's highly personalized experience that an individual can go through in order to identify their needs, quantify goals that are associated with that, customize a set of goals, and then actually point to a series of solutions against those goals that we can help them to execute against.
We have something called Link by Prudential that we've very recently rolled out that's available actually to individuals, as well as to the workplace. It takes people through that journey of sort of plotting out what their life is going to look like, and then how they need to plan against that. Those are very helpful and important tools. They're dynamic, they're customized, and they begin to create a level of engagement so people can begin to understand what their needs are. That's part of the issue, is that people don't wake up in the morning and say, "Today's the day I'm going to buy some life insurance." That's not how our industry works. That's why we've had to rely on Prudential Advisors to sort of coach people as to what they need.
Right.
You have a digital capability of doing that. The other part of our customer experience though is also when we have customers, it's the servicing and the engagement that we have with existing customers as well. We're standing up a platform that we call Aurora. Think of it as it's sort of a unified customer contact center, so that individuals, regardless of where they are in our organization, are calling in, can have an experience where we know everything we need to know about them as we're talking with them. Then we have an opportunity to sort of more holistically address their needs. That's on the sort of the customer interface side. The second component of it is how it can help with product and delivering service actually to the customer. We've now introduced artificial intelligence to our underwriting.
For any individual life policy up to $1 million that we sell, individuals can apply for that through something we call Fast Track.
Okay.
They answer seven questions. After answering seven questions, we can get back to them within 48 hours, a process that takes from a manual underwriting standpoint, months, right? To underwrite someone for life insurance. You get that down to 48 hours where they're now underwritten. We've tracked the success of this, using the artificial intelligence and then back testing it against our own data and our manual underwriting, and it's 97% effective. The 3%, what that means is it comes up with the same result as the underwriter would've come up 97% of the time.
Do you still have to have the lady come with the scale and the cup?
No. Eliminates cups. Eliminates fluids from the equation. It's a much more comfortable experience for individuals. Obviously we use the seven questions and our own data and external databases in order to be able to do that. That creates a very different customer experience, and essentially the way in which we deliver product. The last piece of it is around productivity and efficiency.
Right.
We think about taking talent and enabling talent with technology, with artificial intelligence, with automation, with improved organizational design and sourcing and process. What you can do is get individuals out of what we think to be important roles. They're critical roles, but they're critical roles that can be done by things other than human beings. Take those individuals, take that capacity, that talent, and redirect it toward what we call pivotal activities in the organization, things that are going to impact the customer experience, that are going to help us to accelerate revenues, that are going to enhance our profitability. I think about technology as everything from the customer experience to the products that we're delivering to the customer, and the way in which we're operating as an organization.
Okay. Maybe before I go to the crowd, we'll hit on one more topic. We've got a room full of people here who are involved with asset management organizations.
Yeah.
PGIM, of course, is among the biggest. There's a lot of challenges in the asset management sector right now, but PGIM seems to have found their way through. You're continuing to drive good asset management growth. Maybe talk about what some of the things you're doing there, some of the product initiatives, some of the things that have been giving you an edge and what's good and exciting in PGIM.
Yeah. Let me just describe PGIM first for those that may not be familiar with it. It's our investment management business. It's 10th largest global asset management business in the world. We've got 1,400 institutional clients in that platform. Within that 1,400, what you would find is that we do business with 23, I think the number is, of the 25 largest corporate pension plans in the U.S. We do business with more than half the 300 largest global pension funds. It's got a big institutional business. This is not just an extension of our general account. This is actually a legitimate large third-party institutional management business. I was talking about the business model maybe next, that's what sort of the customer base looks like. Oh, incidentally, we have about a quarter of a trillion of AUM in retail.
That's just sort of.
Okay
in the back of my mind. The business model for PGIM is it's an active manager, okay?
Okay.
They're actually quite proud of the fact that they're active. The good news for us is they're actually quite good at it as well.
Any active managers in the room?
Yeah. Hope a few. If you look at their five-year track record across their fund complex, 90% of the funds are beating their benchmarks. They're actually good at executing against that. The other dimension of it, aside from being active, is that it's a multi-manager model.
Okay.
All right. Within that multi-manager model, every business we have is individually of scale. It could be a standalone sizable investment management business, and included in that are alternatives.
Okay
like our real estate business. In fact, if you look at our real estate business between equities and debt, we're the second-largest global real estate investment manager in the world, obviously global. If you look at alternatives holistically, we'd be the third-largest manager of alternatives globally.
I think probably a lot of people don't realize that.
Yeah.
That's a good stat.
Yeah. It's very large and successful, and particularly within alternatives. The combination of that strategy, the organization that we have, the strategy, and the performance has led to 16 consecutive years of positive institutional cash flows into the business, which we're very proud of that track record. That's over periods of time, and not many asset managers and people in this room could probably attest to have that sort of a track record of sort of consistently be able to attract investors into the platform. In terms of sort of what's in the future for that, as we're thinking about it, we want to continue to grow the business. Probably the three areas that we're focused on would be continuing to grow in retail, continuing to grow global and really international, and then growing our alternatives business.
Okay. Let me take the opportunity here to see if there's anybody in the audience that has a question, somebody who wants to jump in, because I can go for hours. So what's on your mind? Anybody? All right. I'll keep going then. You just mentioned international. The international units continue to deliver pretty good sales results. Certainly the various business units in Japan and so forth. Can you talk about what you're seeing there, what you're doing there, where you might see opportunity over time on the international front?
Yeah. Internationally, if you think about our international business, it's anchored in what we believe is the premier Japanese insurance company. In addition to that, we have what I'll characterize as seed investments in a number of other areas, and particularly in some high-growth markets. We're in China, we're in Indonesia, we're in Brazil, Chile, we're in India. We've got growing businesses in high-growth markets, but we have this very large and very successful business in Japan. When I think about the things that are sort of going well within that international complex, obviously our Japan business anchors it and is doing quite well.
Right.
If you look at the business, it generates pretty steadily a mid-single-digit growth rate. It has a high teens ROE, highly stable earnings performance, and the earnings translate into a high level of free cash flow for us. We're every year, every quarter, taking capital out of that Japan business and bringing it back into the U.S. It readily translates into free cash flow for us. The unique thing about our Japan business, what makes it that premier business, is that we have a proprietary distribution capability that no one else in the market has been able to emulate. We have less than 6% of the agents in the Japan market, but we represent over one-third of the members of the Million Dollar Round Table. You sort of think about we punch well above our weight in terms of the productivity of our agents.
We have a good formula for success, and that continues to generate growth for us and good returns. The areas where we're looking to grow is we'd like those investments that we have in the growth and emerging markets to be a larger component of that overall international business mix. You've seen us be investing in joint ventures and acquisitions. There's a good organic growth there, but we really need to grow it more than organically if we want to balance out the very large business that we have in Japan.
Certainly, places like Brazil, India, these are emerging middle class and upper middle class markets, more financial sophistication beginning to get into those markets. It certainly seem, again, kind of a good runway.
Yeah. Our Brazilian business is going gangbusters. Actually, I was just looking at some numbers the other day, new business premiums in Brazil just exceeded on an annual basis our Korean business. We've been in Korea for 30 years, we've been in Brazil for 15 years. Now it's already surpassing it on a new business basis. A year or so ago, we actually added to our Brazilian business. We had an individual life business where we bought a group business. We're now both in the group and life business in Brazil. We're very optimistic about the potential for that business. Along with we started a joint venture in Indonesia, and we feel really good about the opportunities in that market. Across markets, we think the potential is clearly there. We just want to accelerate the impact.
Okay. Let's turn our attention back to the United States with the annuities business. Spreads there have been pretty strong. Sales growth has begun to kind of pick back up. Can you talk about sort of what's working here, where the opportunity lies? How do you see that business continuing to progress after the downturn we had a couple of years ago?
Yeah. We have a really high quality annuities business that I think is generally underappreciated by the market. It's a business that's also churning out mid to high teens ROEs. It has a very stable ROA. About 80% of the earnings translated to free cash flow for us. We've gone through now volatility in the marketplace, and what we've shown is that both earnings and capital are actually quite stable in the way that we manage the block. You have stability combined with high returns and high free cash flow. It's a very attractive business for us. One of the challenges is that the industry and our business included, the sales growth there slowed down pretty considerably. Now last year, industry growth was somewhere around, I think, 13%, 14%. Sales have begun to pick back up. Our sales growth was up 40% 2018 over 2017.
We've very clearly begun to re-accelerate sales. There's been a shift. It's gone from variable to fixed.
Right.
I think about two-thirds or so of the sales in 2018 were fixed. We pivoted our sales as well. We're a big variable annuity seller. We've introduced a fixed indexed annuity, and our sales of that have been climbing pretty dramatically as well. I think some of the issues around the DOL
Right
fiduciary rule, sort of the cloud lifted and I think allowed the industry to begin sort of re-engaging and selling.
Okay. Anything from the crowd? We got time for maybe one more, otherwise, I've got one. All right. To me, one of the bigger stories in the last year or two, you guys have always done capital management. You're always a good dividend payer, buy back some stock. I would say you kind of kicked it up a notch over the last year or two. Just talk in general about how you're thinking about capital management. Obviously, the strong earnings and the cash flows help support all of that. Just talk about how you think about the capital management process and what kind of goes into the equation.
Yeah, sure. Actually, this year is our 11th consecutive year of increasing dividends. Every year, as our earnings have been growing, we've been translating those earnings into higher dividends. This year we increased the dividend by 11%. We also increased the authorized buybacks by 33%, a pretty significant increase there. We're at $2 billion of authorized buybacks for 2019. That is to the point that you made, Mark, it starts with the fact that the earnings that we have within our businesses are strong. Our free cash flow ratio, the translation of earnings into free cash flow is around 65%. As we think about that, we generally think about, okay, we're going to take half of our free cash flow roughly. There's no formulas around these things.
As a guideline, we think about half of our free cash flow, we want to sort of systematically return to investors, and the best way to do that is through dividends. We think about the dividend as representing about that half of free cash flow, which is 65% of our overall earnings. The remaining other half of our free cash flow we look at is that's cash that we can look to reinvest in the business in order to accelerate growth, either organically or inorganically. If we don't find the opportunities to do that, we would return that to investors as well, and that's generally in the form of stock buybacks. Hence why you've seen us go from a billion and a half of stock buybacks last year to $2 billion of stock buybacks this year.
Well, we've covered a lot of ground here in a fairly short period of time. Hopefully, a bunch of you have meetings with Prudential over the course of the balance of the day. Red light's on. Can you all join me in giving a round of applause here?
Thank you