Prudential Financial : Fourth Quarter 2024 Earnings Transcript

Published: 2025-02-05 20:26:05 ET PRU

Corrected Transcript

05-Feb-2025

Prudential Financial, Inc. (PRU)

Q4 2024 Earnings Call

Total Pages: 21

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Prudential Financial, Inc. (PRU)

Corrected Transcript

Q4 2024 Earnings Call

05-Feb-2025

CORPORATE PARTICIPANTS

Robert McLaughlin

Yanela del Carmen Frias

Head-Investor Relations, Prudential Financial, Inc.

Chief Financial Officer & Executive Vice President, Prudential Financial,

Charles F. Lowrey

Inc.

Caroline A. Feeney

Chairman & Chief Executive Officer, Prudential Financial, Inc.

Robert Michael Falzon

Executive Vice President & Head-US Businesses, Prudential Financial,

Inc.

Vice Chairman, Prudential Financial, Inc.

Andrew F. Sullivan

Executive Vice President & Head-International Businesses and Global

Investment Management, Prudential Financial, Inc.

.....................................................................................................................................................................................................................................................................

OTHER PARTICIPANTS

Suneet Kamath

John Barnidge

Analyst, Jefferies LLC

Analyst, Piper Sandler & Co.

Thomas Gallagher

Jack Matten

Analyst, Evercore ISI

Analyst, BMO Capital Markets Corp.

Ryan Krueger

Alex Scott

Analyst, Keefe, Bruyette & Woods, Inc.

Analyst, Barclays Capital, Inc.

Elyse Greenspan

Michael Augustus Ward

Analyst, Wells Fargo Securities LLC

Analyst, UBS Securities LLC

Wes Carmichael

Wilma Burdis

Analyst, Autonomous Research US LP

Analyst, Raymond James & Associates, Inc.

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Prudential Financial, Inc. (PRU)

Corrected Transcript

Q4 2024 Earnings Call

05-Feb-2025

MANAGEMENT DISCUSSION SECTION

Operator: Ladies and gentlemen, thank you for standing by. And welcome to Prudential's Quarterly Earnings Conference Call. At this time, all participants have been placed in a listen-only mode. Later, we'll conduct a question-and-answer session. Instructions will be given at that time. [Operator Instructions] As a reminder, today's call is being recorded.

I will now turn the call over to Mr. Bob McLaughlin. Please go ahead.

Robert McLaughlin

Head-Investor Relations, Prudential Financial, Inc.

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 US Businesses; Yanela Frias, Chief Financial Officer; and Rob Axel, Controller and Principal Accounting Officer. We will start with prepared comments by Charlie, Rob and Yanela, and then we will take your questions.

Today's discussion may include forward-looking statements. It is possible that actual results may differ materially from the predictions we make today. In addition, our presentation includes references to non-GAAP measures. For a reconciliation of such measures to the comparable GAAP measures and a discussion of factors that could cause actual results to differ materially from those in the forward-looking statements, please see the slides titled Forward Looking Statements and Non-GAAP Measures in the appendix to today's presentation and the quarterly financial supplement, both of which can be found on our website at investor.prudential.com.

And now, I'll turn it over to Charlie.

Charles F. Lowrey

Chairman & Chief Executive Officer, Prudential Financial, Inc.

Thank you, Bob, and thanks to all of you for joining us today. First, I'd like to comment on the leadership changes we announced in the fourth quarter. The board appointed Andy Sullivan as Prudential's next CEO, effective March

31. He is an exceptional leader, and the board and I have every confidence he is the right person to take Prudential into the future.

Also, at the end of March, Caroline Feeney will take on an expanded role overseeing our global retirement and insurance businesses. Both Andy and Caroline have been highly engaged in setting and executing our strategy, so we expect a smooth transition. And Jacques Chappuis will be joining as CEO of PGIM, our Global Asset Management business. Both Caroline and Jacques will report directly to Andy.

This is an exciting and significant time for Prudential and the right time to elevate the next generation of leadership as we mark our 150th anniversary. Finally, I'd also note that just last week, we were recognized as the number one company among our life and health insurance peers for 2024 on Fortune's list of the World's Most Admired Companies.

Now, let's turn to our results. In 2024, we made significant progress on our path to becoming a higher growth, more capital-efficient company. We maintained our disciplined approach to capital deployment, while also

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Prudential Financial, Inc. (PRU)

Corrected Transcript

Q4 2024 Earnings Call

05-Feb-2025

continuing to invest in our businesses, and returned excess capital to shareholders. Our strategic progress and performance are backed by our financial strength.

Turning to slide 3. Our results for the full year reflect continued momentum as we further diversified our product suite and expanded our distribution capabilities to address the investment, insurance and retirement needs of our customers and clients around the world. Earnings for the fourth quarter were lower than we anticipated, but do not reflect the earnings power of our businesses. This was largely due to adverse underwriting experience, primarily driven by an elevated level of large individual life claims. Large claim activity will vary on a quarterly basis, but our fundamentals remain strong and the actions we are taking across our businesses create a solid foundation for future growth.

We reported strong full year sales across our retirement and insurance businesses, as well as strong investment performance and significant positive net flows in PGIM. PGIM reported robust affiliated and third-party flows for the full year 2024, benefiting from our broad capabilities across fixed income, equities and our diversified private alternatives platform, and fueled by the growing global retirement opportunity and the growth of our retirement and insurance businesses.

Our Retirement Strategies business continues to address the growing needs of the market as a leader in pension risk transfer and individual annuities. On the Institutional side, our pension risk transfer business had the highest annual level of sales for any single carrier since 2012. On the Individual side, we had our ninth consecutive quarter of sales growth.

We also continued to diversify our products and expand our distribution networks in Group Insurance and Individual Life, which resulted in continued sales momentum. And in our International Businesses, we continue to diversify our product portfolio in Japan, including retirement solutions, and we expanded our distribution channels in Brazil.

In addition to the momentum we are seeing across our businesses, during 2024, we successfully executed on a number of transactions that enhanced our capital flexibility, improved the quality of our earnings, and shifted our business mix. We completed two Guaranteed Universal Life reinsurance transactions, which reduced our cumulative exposure to this product by 60%. And just last month, we announced our second Prismic transaction to reinsure a $7 billion block of Japanese Whole Life policies, adding further scale to the Prismic platform.

Turning to slide 4. Our continued investments in our businesses are supported by our disciplined approach to capital deployment, which included returning nearly $3 billion to shareholders in 2024. In addition, the board has authorized share repurchases of up to $1 billion in 2025 and increased the common stock dividend for the 17th consecutive year.

Turning to slide 5. Our strategic progress is supported by our robust risk and capital framework. We maintained a

Before I turn the call over to Rob, I want to acknowledge the extraordinary partnership we have shared over these past six years. Rob is retiring from Prudential in July, culminating a remarkable 42-year career with the firm, in which he has made innumerable and material contributions to our continued success and future growth.

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Prudential Financial, Inc. (PRU)

Corrected Transcript

Q4 2024 Earnings Call

05-Feb-2025

And with that, I'll turn it over to Rob.

Robert Michael Falzon

Vice Chairman, Prudential Financial, Inc.

Thank you, Charlie. It's been a privilege. I'll provide an overview of our financial results and business performance for our PGIM, US and International Businesses. I'll begin on slide 6 with our financial results. Our pre-tax adjusted operating income was $1.4 billion, or $2.96 per share for the fourth quarter of 2024, and $5.9 billion, or $12.62 per share for the full year, up 6% from 2023. This reflects the execution of our strategy to grow our market-leading businesses and was driven by higher fee and spread income due to continued strong sales and flows, as well as the benefit of higher interest rates in equity markets, net of increased expenses to support the growth of our businesses.

Our GAAP net loss for the quarter was $57 million. This was primarily due to interest rate driven realized losses on the investment portfolio that will be transferred to Prismic in connection with our recently announced reinsurance transaction, as well as some modest repositioning of our investment portfolio in the quarter. 2024 adjusted operating return on equity of 13.1% improved 70 basis points from 2023. This reflects the strength of our businesses and the benefits from the deliberate actions we have taken to pivot to more capital-efficient and higher growth products.

Turning to the quarterly operating results from our businesses compared to the year ago quarter. PGIM, our global investment manager, had higher asset management fees, driven by strong net flows, market appreciation, favorable investment performance, and increasing contributions from the Deerpath Capital acquisition, and higher other related revenues driven by higher incentive fees. This was partially offset by higher expenses to support business growth.

Results of our US Businesses reflected higher expenses related to the one-time transaction impacts associated with the closing of both the Guaranteed Universal Life reinsurance transaction and the consolidation of our captive financing arrangements, less favorable underwriting results, driven by mortality experience and true-ups and lower net fee income. This was partially offset by higher net investment spread income, primarily driven by business growth.

Our International Businesses had less favorable underwriting results, primarily reflecting elevated US dollar product surrenders, with the continued weakness in the yen, and higher expenses to support business growth. These were partially offset by increased spread income due to higher yields from favorable market performance and reinvestment to the portfolio.

Turning to slide 7. PGIM, our global investment manager, has diversified capabilities in both public and private asset classes across fixed income, equities and alternatives. PGIM's investment performance remains strong, with 78% and 85% of assets under management outperforming their benchmarks over the last 5- and 10-year periods, respectively. PGIM's assets under management increased by 6% to $1.4 trillion from year-end 2023, driven by market appreciation, net flows and strong investment performance.

Total net flows in the quarter of $8.6 billion included affiliated net flows of $8.9 billion, driven by a large annuities mandate, partially offset by $300 million of third-party net outflows. Total net flows for full year 2024 were $38 billion, including $24 billion in affiliated flows and $14 billion from third-party clients. These inflows reflect the competitive positioning of both PGIM and our retirement business in the wake of large, albeit episodic, institutional pension plan activity.

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Prudential Financial, Inc. (PRU)

Corrected Transcript

Q4 2024 Earnings Call

05-Feb-2025

As the investment engine of Prudential, PGIM's capabilities support the success and growth of our US and International Businesses in retirement, asset management and insurance. PGIM's asset origination capabilities, investment management expertise and access to institutional and other sources of private capital, including through our sponsored reinsurer, Prismic, are a competitive advantage, helping our businesses bring enhanced solutions and create more value for our customers.

Our retirement and insurance businesses, in turn, provide a source of growth for PGIM through affiliated net flows, as well as unique access to insurance liabilities. In addition, our diversified PGIM private alternatives platform, which has assets under management of nearly $250 billion, experienced 37% growth in private credit origination activity in 2024 compared to the prior year. This was driven by our direct lending businesses, including our acquisition of Deerpath Capital and the organic build-out of our private asset-backed financing business.

Turning to slide 8. Our US Businesses produce diversified sources of earnings from fees, net investment spread, and underwriting income, and benefit from complementary mix of longevity and mortality businesses. We continue to focus on growing our market-leading businesses by expanding our addressable market with new financial solutions delivered through a broader distribution footprint, leveraging capabilities across Prudential, and enhancing those capabilities to improve the experience of our customers and distribution partners, while driving operating efficiencies.

Retirement Strategies generated strong sales of $50 billion in 2024 across its institutional and individual lines of business. Institutional Retirement sales of $10 billion in the fourth quarter contributed to $36 billion of sales for the year, up 27% from the prior year. US-funded Pension Risk Transfer transactions for the year were over $16 billion, the highest annual level for any single carrier since we set the record in 2012.

Additionally, longevity risk transfer sales totaled over $10 billion this year. Individual Retirement posted $3.6 billion in sales in the fourth quarter, its best quarter of sales in over a decade. 2024 sales were over $14 billion, up 84% from the prior year. Our product pivots and innovation have resulted in continued strong sales of our registered index-linked annuities and fixed annuity product sales have doubled from the prior year. Additionally, we continue to reduce market sensitivity by running off our legacy variable annuities.

Group insurance sales totaled $550 million in 2024, up 4% from the prior year, driven by growth in supplemental health. We are executing our strategy of both product and client segmentation diversification, while leveraging technology to increase operating efficiency and enhance the customer experience. These actions to improve profitability and performance resulted in a benefits ratio of 83.1% for the year, which is at the low end of our target range.

In Individual Life, sales reached a quarterly record high of $326 million in the fourth quarter, and for the full year increased 23% from 2023. These increases include the benefit from the strength and breadth of our distribution capabilities, the expansion of our product offerings, including our pivot towards more capital-efficient products, and from an increased level of estate planning sales concentrated in the fourth quarter.

Turning to slide 9, our International Businesses include our Japanese life insurance companies, where we have a differentiated multi-channel distribution model, as well as other businesses aimed at expanding our presence in targeted high-growth emerging markets. In Japan, we are focused on providing high-quality service and expanding our distribution of product offerings.

Our needs-based selling approach and protection and retirement product focus continue to provide important value to our customers as we expand our product offerings to meet their evolving needs. In emerging markets, we

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Prudential Financial, Inc. (PRU)

Corrected Transcript

Q4 2024 Earnings Call

05-Feb-2025

are focused on creating a selective portfolio of businesses in regions where customer needs are growing, where there are compelling opportunities to build market-leading businesses and where the Prudential enterprise can add value.

Sales in our International Businesses for 2024 were up 6% compared to the prior year. Sales in Japan are benefiting from recent retirement and savings product launches, which are gaining traction with customers, resulting in a 14% increase in sales of these products compared to the full year of 2023. In addition, emerging markets sales increased 12% versus the prior year, driven by growth in Brazil as we continue to expand third- party distribution and benefit from the strong performance of our Life Planners.

As we look ahead, we are well positioned across our businesses to be a global leader in expanding access to investing, insurance, and retirement security. We continue to focus on investing in growth businesses and markets, delivering industry-leading customer and client experiences, and creating the next generation of financial solutions to serve the diverse needs of a broad range of customers.

And with that, I'll now hand it over to Yanela.

Yanela del Carmen Frias

Chief Financial Officer & Executive Vice President, Prudential Financial, Inc.

Thank you, Rob. I will begin on slide 10. Our significant capital position and strong regulatory capital ratios continue to support our AA financial strengths and our ability to expand our market-leading businesses. Our cash and liquid assets were $4.6 billion, which is above our minimum liquidity target of $3 billion, and we have substantial off-balance sheet resources.

Now, turning to slide 11, as I mentioned on last quarter's call, in order to provide greater insights into our financial outlook and align with our longer-term nature of our business, we are introducing new financial targets through 2027. Our significant growth in sales and flows, supported by the strength of our balance sheet and our commitment to become a higher growth, more capital-efficient company, position us well to achieve these targets. We expect this will lead to annual core earnings per share growth of 5% to 8%, which is based off of core adjusted operating income per share for 2024, and an adjusted return on equity of 13% to 15%.

We're also introducing an operating expense ratio for our global retirement and insurance businesses, an anticipated range of 8.5% to 10.5%, which we expect will trend down over the three-year period. The momentum in our sales and flows, combined with operating efficiencies and incremental buybacks, are expected to contribute to our earnings growth and returns over the three-year period, but this performance may not be linear due to the near-term strain from new business and the impact of runoff blocks.

In addition, we will remain thoughtful in our capital deployment, preserving our financial strength and flexibility by targeting to maintain highly liquid assets of over $3 billion at the holding company, while investing in our businesses for long-term sustainable, profitable growth.

We expect to deploy 30% to 40% of capital generated towards organic growth as we see significant opportunities in our chosen markets. After consideration of organic growth, this yields a free cash flow ratio of approximately 65% of net income, with 35% to 45% expected to be deployed to attractive and increasing dividends. This is a healthy return to shareholders that represents an annual payout of approximately 6% of adjusted book value as of year-end 2024.

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Prudential Financial, Inc. (PRU)

Corrected Transcript

Q4 2024 Earnings Call

05-Feb-2025

Further, we expect to return 20% to 30% towards share repurchases, and the board authorized $1 billion of repurchases in 2025. Finally, we continue to proactively explore opportunities to invest in inorganic growth, while maintaining a disciplined approach to capital deployment in the current environment.

Turning to slide 12, our enterprise metrics will be supported by our business segment growth targets. We expect low-double-digit earnings growth in PGIM, backed by strong asset management fee growth of 6% to 9%, driven by net flows and market appreciation, and an adjusted operating margin of 25% to 30%. In the US Businesses, we expect mid-single-digit earnings growth, supported by account value and sales growth across businesses.

In Retirement Strategies, our account value growth assumes annual gross sales of $35 billion to $45 billion, which will be partially offset by annual net runoff of our pension and longevity risk transfer products of $8 billion to $10 billion and legacy variable annuities of $12 billion to $16 billion. In group insurance, we expect premium growth of 2% to 4%, and in Individual Life, we expect sales to be flat to 5% growth. And lastly, in our International Businesses, we expect low- to mid-single-digit earnings growth, driven by sales growth of 4% to 6% as we continue to diversify our product mix.

We also have included our key economic assumptions and other earnings considerations specific to 2025 in the appendix. We are confident in our ability to deliver on these financial objectives as we drive incremental organic growth in our businesses, while continuing to maintain our disciplined capital deployment approach.

So, turning to slide 13, and in summary, we continue to become a higher growth, more capital-efficient company. We will maintain our disciplined approach to capital deployment, and our growth is supported by the strength of our balance sheet.

And with that, we will be happy to take your questions.

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Prudential Financial, Inc. (PRU)

Corrected Transcript

Q4 2024 Earnings Call

05-Feb-2025

QUESTION AND ANSWER SECTION

Operator: Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Suneet Kamath from Jefferies. Your line is now live.

Suneet Kamath

Analyst, Jefferies LLC

Great. Thanks. I want to start out on the annuity outlook. I see the 20% to 25% account value growth. So, Caroline, I was just wondering if you could help us maybe translate that into sales growth expectations for the year. And the reason I ask is I think LIMRA is out saying sales will probably be down for the industry, and I just want to get a sense of how you're thinking about a PRU's outlook.

Caroline A. Feeney

Executive Vice President & Head-US Businesses, Prudential Financial, Inc.

Yeah. Terrific, Suneet. I will certainly take your question. So, clearly, it was another extremely strong year for annuities with over $425 billion in total industry sales last year. And I think what LIMRA might be referencing in terms of some of their outlook is this past quarter, the industry did see some softening of traditional fixed annuity sales, which is to be expected with rate decreases. So, what we're seeing is a shift from MYGAs, which are more sensitive to rates, to index products such as RILAs. But Suneet, what I would point out is that RILA sales were up over 35% across the industry last year. So, in our own business, we continue to see positive results. In the fourth quarter, we delivered roughly $3.5 billion in sales, which was our ninth consecutive quarter of sales growth.

So, from an outlook perspective, Suneet, as we've discussed previously, we continue to see those compelling tailwinds in the marketplace driven by aging demographics, plus a high volume of money in motion. And that includes an estimated $70 billion in fixed annuities that's coming due as well as over $7 trillion in money market fund balances. So, all of this just underscores the importance of our diversified product portfolio. As you know, Suneet, this has been a key focus for us over the past few years. And as a result, we now have the broadest individual product portfolio in our history. We actually have five different products with over $1 billion in annual sales. So, overall, we believe that tailwinds will continue to support strong sales. And certainly, we are well positioned to capture this demand, and thanks to the strength of our distribution and our well-established brand.

Suneet Kamath

Analyst, Jefferies LLC

Got it. And then, I just wanted to pivot to Prismic. Obviously, we saw the internal reinsurance deal. Presumably, that's going to consume some of their time and capital. I guess the question is, how quickly do you think Prismic could sort of pivot to maybe some third-party deals, particularly in Japan? Is it going to take some time for them to integrate this transaction? Or just any thoughts around that would be helpful.

Robert Michael Falzon

Vice Chairman, Prudential Financial, Inc.

Suneet, it's Rob. I'll address that. So, yeah, we closed the second transaction, as we, I think, had indicated with Japan-based. A number of important reasons for doing that, but more broadly is, as we think about the Japan opportunity, including the third-party opportunity in Japan, we think it's a significant growth opportunity for Prismic, both from our own book and third-party reinsurance. Japan's the third-largest life market in the world, and it's been relatively underserved by third-party reinsurers. So, there's an opportunity there, and that opportunity is sort

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Prudential Financial, Inc. (PRU)

Corrected Transcript

Q4 2024 Earnings Call

05-Feb-2025

of accelerating by virtue of the introduction of the ESR regime and its impact on legacy books that have been sold not just by us, but across the industry.

ESR has a non-economic treatment of long-duration, foreign currency denominated products that's in the Japan marketplace, but the industry has sold a lot of that and continues to sell it because of the demand that our customers have for the product. And so, addressing those books and those flows, those sales, are going to be something that the industry has to grapple with, and we think we're well-positioned to do so.

Our brand - our local presence and the market intelligence that we've got create a competitive advantage. Prismic, as we've indicated in the last quarter, we've stood up a dedicated licensed team in Japan. And then by virtue of, as I indicated upfront, by closing on our own Whole Life book, it's given us the experience and confidence to execute third-party blocks and further establishes our credibility in the marketplace.

But I would emphasize more generally, we're optimistic that we can grow Prismic through the multiple levers that we've got, Suneet. So, that includes ongoing balance sheet optimization, both in the US and Japan. It includes, importantly, flow, so new sales solutions across our businesses, and third-party blocks, particularly in Japan.

Suneet Kamath

Analyst, Jefferies LLC

Got it. Okay. Thanks.

Operator: Thank you. Next question today is coming from Tom Gallagher from Evercore ISI. Your line is now live.

Thomas Gallagher

Analyst, Evercore ISI

Good morning. A few questions on free cash flow. So, the 65% free cash flow conversion, why is 30% to 40% of that needed for growth capital when most of the businesses that I would think of requiring capital are growing sub- 5%?

Yanela del Carmen Frias

Chief Financial Officer & Executive Vice President, Prudential Financial, Inc.

Hi, Tom. It's Yanela. So, let me take that. So, we continue to see strong opportunities in our chosen markets, and we're leaning into those opportunities as evidenced by our strong sales and flows really across our businesses. So, as an example, on a full year basis, we had a 39% increase in sales for Retirement Strategies, 23% increase in sales for Individual Life. And these strong sales are contributing to earnings, but we do face near-term headwinds due to strain from new business, specifically distribution costs that are not deferred and the impact of runoff.

So, I would emphasize that we're investing in strong growth that is materializing in earnings, but we have near- term headwinds related to new business strain and runoff. And as these headwinds moderate, we would expect an upward trajectory in our core earnings growth. But even with these headwinds, we have a 5% to 8% growth rate in core earnings, we're paying a healthy dividend, and we have a healthy level of buybacks.

Thomas Gallagher

Analyst, Evercore ISI

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Prudential Financial Inc. published this content on February 06, 2025, and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on February 06, 2025 at 01:25:10.051.