Q4 2020 Prudential Financial Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Prudential quarterly earnings call.
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I would now like to turn the conference over to our host.
Head of Investor Relations Mr. Darren Arena. Please go ahead.
Good morning, and thank you for joining our call representing Prudential on today's call are of Charlie Lowrey, Chairman and CEO, Rob Falzon, Vice Chairman, Andy Sullivan head of U S businesses, Scott <unk> head of international businesses, Ken <unk>, Chief Financial Officer and Ryan.
<unk> Zone controller, and principal accounting officer, we will start with prepared comments by Charlie Rob and Ken and then we will take your questions.
Today's presentation May include forward looking statements. This possible the actual results may differ materially from the predictions we make today.
In addition, this presentation may include references to non-GAAP measures for a reconciliation of such measures to the comparable GAAP measures and the discussion of factors that could cause actual results to differ materially from those in the forward looking statements. Please see the slide titled forward looking statements and non-GAAP measures.
Of the appendix to today's presentation on the quarterly financial supplement both of which can be found on our website at investor Prudential Dot com with that I'll hand, it over to Charlie.
Thank you Darren and good morning, everyone and thank you for joining us today as.
As we approach the one year Mark of the global pandemic I hope that you your families and colleagues remain safe and healthy and the continuing difficult environment.
As before we remain deeply focused on the wellbeing of our employees customers communities and other stakeholders.
And on addressing their evolving needs and challenges amid.
Amid the extraordinary events of 2020, we continued to take steps to evolve our business for the future while living up to our purpose.
Turning to slide two.
We successfully executed on a number of our strategic initiatives in 2020 to reduce our market sensitivity and increase our growth potential Inc.
<unk> the expansion of our cost savings program.
While further solidifying our already robust financial position.
We're now focused on building upon our achievements over the past year to further accelerate our strategy.
Speak to this next phase of our transformation in more detail momentarily.
But we will start by recapping our accomplishments in 2020.
Turning to slide three.
We realized $215 million in cost savings during the year exceeding our $140 million target.
Recall that last quarter, we increased our cost savings targets of $750 million to be realized by the end of 2023.
We also began to rotate our international earnings mix towards higher growth markets. During the year, we completed the sale of our Korea business and announced the sale of our Taiwan business.
We also took significant steps to address the low interest rate environment with derisking actions, such as repricing products and pivoting to less interest rate sensitive solutions.
This pivot include the discontinuing sales of variable annuities with guaranteed living benefits and launching of buffered annuity product Flex guard, which is less sensitive to market fluctuations, while continuing to serve our customer needs.
Turning to slide four.
As we look ahead, we're building upon the actions we've already taken as well as our competitive strength to significantly transformed the company over the medium term.
To achieve this transformation, we expect to deliver on our cost savings program and to reallocate $5 billion to $10 billion in capital over the next three years as we pivot towards higher growth and less market sensitive businesses.
In parallel to this capital reallocation, we anticipate returning $10 billion of capital to shareholders over the next three years.
This includes dividends as well as share repurchases that of returning that of resuming in the first quarter under our new $1 5 billion authorization.
As a result of these efforts Prudential should emerge as a higher growth less market sensitive and more nimble business that is positioned not only to deliver growth for shareholders, but also to make it more meaningful difference in the financial lives of more people around the world.
Turning to slide five.
As we transform the become a higher growth less market sensitive business, we expect to double our growth businesses to more than 30% of earnings and have our individual annuities business to 10% or less of earnings.
We will change our business mix, primarily through organic growth and programmatic acquisitions for both of our global asset manager of PGM and in emerging markets within our international businesses.
PGM manages $1 five trillion dollars of assets, which we have grown both organically and through acquisitions of talent and capabilities in.
In emerging markets, we've expanded with joint ventures and acquisitions in regions with large markets and favorable demographic tailwind such as Asia, Latin America and Africa.
We benefit from strong relationships with companies that have a large footprint and its significant local market expertise.
In addition, we will remain focused on investing in our other businesses to expand our addressable market as well as continue to improve expense and capital efficiency.
Additional actions to change our business mix include de risking on the other transactions in conjunction with running off of certain blocks of business.
The $1 6 billion of capital generated from the sale of Korea Korea business is included in the $5 billion to $10 billion, we plan to reallocate into our growth businesses.
Our changing business mix will obviously not be of straight line.
But as we reallocate capital will provide you with information to help you both understand and measure our progress.
Turning to slide six.
We are well positioned to execute the strategic plan with a rock solid balance sheet at the end of the fourth quarter, we had $5 6 billion and highly liquid assets and our operating subsidiaries continued to hold capital to support double AA financial strength ratings.
Finally, let's turn to slide seven.
During this time of change and transformation, our commitment to our company purpose and the supporting all our stakeholders remains as fundamental as ever the.
The importance of this work is reflected in the multiple environmental social and governance initiatives that we advanced over the course of this quarter and throughout 2020.
Here are some of the noteworthy accomplishments.
We became the first U S insurer to ensure a green bond aligned with the United Nations Sustainable development goals.
We furthered our commitment to environmental transparency and accountability by disclosing our environmental impact through C V P. The world's leading environmental disclosure platform.
Prudential scored an a minus on Cdp's 'twenty 'twenty climate change survey.
We introduced nine commitments to advance further the work we've been doing on racial equity spanning our talent practices, our design and delivery of products our investments in public policy work and our support of community institutions working to remove persistent the obstacles to black economic.
Empowerment.
I'm also pleased that we will continue to tie inclusion and diversity with executive compensation.
Three years ago, we added an inclusion and diversity performance modifier that factored into our 2020 compensation plan.
Over this period diverse representation amongst senior management has increased.
We're including this type of modifier again to drive us to improve further our inclusion and diversity over the next three years.
Before closing I'd like to say, thank you to all our employees around the world.
It's through your hard work and dedication that we've been able to successfully help our customers and advance our transformation.
With that I'll turn it over to Rob for more specific details on our business performance. Thank you all for your time this morning.
Thank you Charlie.
I'll provide an overview of our financial results and update on our strategic progress and highlights of our outlook for our U S PGM and international businesses.
Turning to slide eight I'll begin with our financial results for the year on a pre tax adjusted operating income for 2020 was $5 $1 billion or the $10 21 per share on an after tax basis in.
In the fourth quarter, our pre tax adjusted operating income was $1 5 billion or $2 93 share.
Earnings exceeded the year ago quarter as increases in our PGM and international businesses as well as our corporate and other operations offset a decline in our U S businesses.
Results of our U S businesses reflected of heightened COVID-19 related mortality experience as well as lower fee income in our individual annuities business, primarily due to outflows. This was partially offset by higher net investment spread results driven by higher variable investment income and lower expenses in.
In addition, we made a change in our individual life procedures. The pulse that provides policyholders information to better manage their policies and premiums for certain flexible premium policies. Due to this change we have revised the estimate of premiums to be paid for these policies, resulting in an adjustment to reserves. We also established.
Establishing an incurred but not reported or IV in our reserve in our group insurance business for the expected increase in disability claims as a result of the lag effect from higher unemployment.
P. Jim our global asset manager reported record assets under management of $1 five trillion up 13% from a year ago as well as higher net asset management fees and record high other related revenues.
And earnings in our international businesses increased 6%, reflecting business growth lower expenses and more favorable underwriting results, partially offset by lower net investment spread.
Turning to slide nine.
Our U S businesses produce a diversified source of earnings from fees net investment spread and underwriting income, which includes the benefits from netting longevity and mortality experience.
We continued to make progress this quarter executing on our priorities, including implementing pricing and product actions to derisk, our business mix, while protecting profitability and expanding our addressable market.
Our productivity has worked well with sales of our buffered annuity Flex guard doubling to $1 2 billion in the fourth quarter from $600 million in the third quarter.
And the pandemic has increased awareness of the value of our broad set of life insurance and financial solutions as we continue to enhance our capabilities to reach people, when where and how they want.
These capabilities include traditional agents and financial advisors the workplace.
40 million people have access to our financial wellness.
Our precious time range for <unk>.
Further options with respect to assurance, we launched our Medicare business, a little more than a year ago. As a result of investments in our distribution capacity marketing capabilities and development of new technology, we nearly tripled our fourth quarter of Medicare revenues versus the year ago quarter.
We expect to continue to grow these revenues as we further expand distribution utilized newly developed tools for data driven consumer product recommendations and broadened our marketing.
In addition, this gives us further confidence as we develop and launch additional product lines.
Customer interest for our simply term life insurance products from insurance has been strong although sales have been lower than expected. We continue to modify our underwriting processes to allow for more instant decisions as we streamline the process and improve the customer experience, we expect our life revenues to grow.
Total revenues, our primary financial metric for assurance as we concentrate on scaling the business doubled versus the year ago quarter, we were adding more carriers and all of our existing markets and expanding into new product lines.
To execute this expansion we have increased our investments in marketing distribution and infrastructure, we expect operating losses in the near term in earnings to emerge as we reach scale.
Now turning to slide 10.
<unk> continues to demonstrate the strength and resilience of its diversified platform as a top 10 active global investment manager.
<unk> strong investment performance and diversified global investment capabilities in both public and private asset classes across fixed income alternatives real estate and equities position us favorably to capture flows.
<unk> investment performance demonstrate the resiliency with more than 90% of assets under management outperforming their benchmarks over the last three five and 10 year periods.
This investment performance contributed $6 $3 billion of <unk>.
Third party net flows during the fourth quarter, including $3 8 billion of retail and $2 5 billion of institutional flows, resulting in $20 billion of net flows for the year.
Of note PGM investments achieved the second highest Youtube U S. Mutual fund franchise ranking based on net flows in 2020.
<unk> strong overall flows were driven by continued investor appetite for fixed income strategies, particularly higher yielding strategies and for real estate.
The <unk> asset management fees increased 12% compared to the year ago quarter, reflecting growth in average assets under management and <unk>.
<unk> record high agency loan production and the effect of the strong investment performance on incentive fees as well as co investment and seed investment earnings drove significant growth in other related revenues.
The results contributed to an increase in <unk> operating margin, which was in excess of 36% for the quarter, while <unk> operating margin will vary with market conditions, we expect to sustain a margin of approximately 30% across the cycle.
Turning to slide 11.
Our international businesses include our Japanese life insurance operation, where we have a differentiated multichannel distribution model as well as other operations focused on high growth markets.
As anticipated life planner sales in the quarter were reduced by the accelerated sales in Japan last quarter. Following the U S. Dollar denominated product repricing in August for the year. We were pleased the sales were about flat as are of high quality distribution overcame the effect of the pandemic related shutdown.
Similar to life planner Gibraltar sales were reduced in the current quarter and sales for the full year were about even with the prior year.
While we do not report separately on our emerging markets businesses. We would note that Brazil's life insurance in force grew by 10% from a year ago and our Chilean pension business held its number one ranking from market share benefiting from continued favorable investment performance.
On slide 17 in the appendix, we listed some of the emerging markets that we're in and our local relationships that have significant market leadership positions and with that I'll hand, it over to Ken.
Thanks, Rob I'll begin on slide 12, which provides insight into earnings for the first quarter of 2021 relative to our fourth quarter results pre tax adjusted operating income in the fourth quarter was $1 $5 billion and resulted in earnings per share of $2 93 on an after tax basis.
And then we adjust for the following items first variable investment income outperformed expectations in the fourth quarter, which is worth $360 million.
Second we adjust underwriting experienced by a net 65 million. This includes a placeholder for COVID-19 claims experience across our businesses of $170 million based on 250000, COVID-19 related fatalities in the U S. During the first quarter.
Third we expect expenses to be of $165 million lower in the first quarter, primarily due to seasonal items in the fourth quarter.
Fourth there are other items that would be that may be 40 million more favorable in the first quarter as Rob discussed in the fourth quarter, we recorded a charge for the change in our individual life business practice, which was partially offset by strong other related revenues in PJM.
We anticipate net investment income will be reduced by $15 million, reflecting the difference between the new money rates and disposition yields of our investment portfolio and last we expect the first quarter effective tax rate to normalize these.
These items combined gets us to a baseline of $2 54 per share for the first quarter of.
I'll note that if you exclude items specific to the first quarter earnings per share would be $2 90 per share.
The key takeaway is that this is roughly in line with the prior quarter.
While we have provided these items to consider please note that there may be other factors that affect earnings per share in the first quarter.
As we look forward I'd like to bring your attention to a few other items in the appendix. In addition to the seasonal considerations on slide 25, we have included other considerations for 2021 on slide 26.
Notably, we expect to realize an increase in cost savings from $250 million in 2000 $20 million to $400 million in 2021.
We also provided the expected net cost for corporate and other the.
Yen foreign exchange rate and the effective tax rate for 2021.
On slide 13, we provided an update on the potential impact of the pandemic.
The estimated sensitivity of operating income for 100000 incremental U S deaths due to the pandemic is $85 million based on our updated outlook. This.
This is up slightly from our prior sensitivity as the virus more broadly spreads across demographics and geographies, including the insured population.
As I noted earlier, our first quarter baseline includes a net mortality impact of $170 million due to COVID-19 the.
The actual impact will depend on a variety of factors such as infection and fatality rates geographic considerations and the speed and effectiveness of the vaccine rollout.
Turning to slide 14, we maintained a robust capital position and adequate sources of funding our capital position continues to support of double AA financial strength rating and we have substantial sources of funding our cash and liquid assets at the parent company were $5 $6 billion at the end of the quarter, which is greater than three times.
The annual fixed charges and other sources of funds include free cash flow from our businesses and other contingent capital facilities.
Turning to slide 15, and in summary, we successfully executed our 2020 initiatives and we are building on those initiatives to transform prudential into a higher growth less market sensitive and more nimble business and we continue to benefit from the strength of our rock solid balance sheet.
Now I'll turn it to the operator for your questions.
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Our first question comes from the line of the neat.
Come on with Citi. Please go ahead.
Thanks, I wanted to start high level, if I could Charlie at the 2019 Investor Day, I think you guys laid out a strategy around the financial wellness and that initiative was supposed to get you to double digit EPS growth in the 12% to 14% ROE kind of over the long term.
Based on what you're talking about today.
Do you need to take these additional capital reallocation.
The steps to get there or should we think about these initiatives.
As you know potentially pushing you above what you guided to.
The need it's Rob I'll jump in on that if you don't mind. So a couple of thoughts one since our Investor day, obviously rates have declined.
The decline quite materially.
And given our current business mix of low interest rate environment with the 10 year hovering around 11115.
The present headwinds to an improving Roe.
I would note nonetheless debt in a challenging year for the industry 2020, we achieved an ROE of just under 11% on I think that speaks to the the strength and earnings potential of the mix of businesses that we have I'd also add debt or our focus.
Anita is on not just the ROE, but also on cost of equity.
And importantly, the spread between the two and the strategies and initiatives that Charlie outlined I think.
Around derisking, simplifying and reducing market sensitivity and changing the business mix I would look at is very much geared toward expanding net spread between our return on equity and our cost of equity.
Okay, and then as we think about that $5 billion to $10 billion of capital that's that Youre going to reallocate is it fair to think about most of that coming from life and annuities.
And can you give us the amount of capital that's currently being consumed by those two businesses.
Yeah, Let me, let me jump in on that for me.
You know as we as we've said in the past I think everything's on the table right.
But what we've also said in this call is that we're really focused on annuities and one of our priorities is annuities and shrinking annuities, the 10% or less of earnings.
But in addition to that what we're doing is we're looking at all market sensitive of low growth businesses or blocks of businesses in terms of run off reinsurance or sales. So we're going to continue to look at those life will be one of the the.
The the business as we look at in addition to annuities, but not necessarily the only one.
And.
Go ahead, Ken I'll, just you asked about the amount of capital.
Our annuities business is predominantly within one company and one stature.
The statutory company called Prudential Life insurance company and its statutory capital is a little bit more than $6 billion.
<unk> business is a well capitalized, but it's across a number of companies and I don't have that aggregate number handy.
Andrew here.
Okay. Thanks, Ken.
Thank you. Our next question comes from the line of Huron Qunar with Goldman Sachs. Please go ahead.
Thank you and good morning, everybody.
That's my my first question is around the reduction of earnings coming from from individual annuities can you achieve that without a block transfer of our reinsurance seal.
And the reason I ask that is I would think that there may be a bit more of a challenge.
Two of them to dispose of that given that it is more of the Ah <unk>.
The WB.
The variable annuity block.
We haven't seen a lot of appetite for that and in the market to date.
So maybe you could address the those questions.
Your own it's Rob I'll jump in first and then maybe Kevin or Andrew you might want to jump in after me, but just with respect to the first part of your question as we think about our objective of of getting our annuities business into the do represent a 10% or less of our overall earnings as I think of as we indicated our slides are not inconsequential.
<unk> of that comes from the run off of.
Of the existing a legacy block to the tune of about legacy block runs off at about $3 billion of quarter, and so that gets us to a range of 40% to 45% of our objective.
Just with respect to run off of.
Why don't I lost.
The deferred of Canada, and you talk a little bit about the.
The multiples and deployment of capital on the market share you're you're on you know on.
Our variable annuity business as a as we've said in the past the very well capitalized and has a good profitability cash flow and risk profile.
File and we don't see the fact that it's the G. M. W. B book to present any unique or difficult challenges.
Okay. That's helpful. And then I guess on the flip side of that in terms of the growth into the double the growth markets.
Im assuming theres the large inorganic component there.
Concerning the $5 billion to $10 billion debt that you're looking to deploy.
And those markets I would think the valuation of that there may be a little bit higher.
So how do you go about determining.
The use of kind of a prioritization of capital between buybacks inorganic growth and organic growth in those.
Emerging market, it's asset management the like.
You're one of it's Rob I'll start out with that and then I'll turn it over the others to answer the second part of your question just in terms of the amount of the inorganic versus organic.
As you think about the businesses that are grouped together and that sort of the Eric that we're trying to grow to in excess of 230 per cent of more of our our earnings those are higher growth businesses, they're dominated by teach them.
And PGM as we've said before is a is a business that is growing in the mid to high single digits on an organic basis and so as we think about that combined with the emerging markets and assurance, which we think of the potential for quite high growth rates.
We think that in excess of a third of our objective can be accomplished simply by organic growth. So let me stop there and turn it over to others to answer the second part of your question.
So you are in it's Andrew maybe I'll jump in and it's a good spot to talk about a PGM and our our plans around PJM and <unk> and.
How to accelerate into programmatic M&A, but first I'd reemphasize, what Rob said, we've had great growth in that business and we expect that great growth to continue yeah. When we look at our at our M&A opportunities in PJM, we're looking to do the yeah as we've termed the programmatic, which we would frame as methodical on plant full.
Specifically leaning into new product and an investment strategy capabilities, we feel very confident that when we do that we can gain leverage from our distribution of might end and strength. Obviously anything we do has to fit with our multi manager model because we don't want to be disruptive to that multi multi manager model.
And the particular areas of interest on.
The areas that are higher growth as other parts of the asset management business. So I would I would name alternatives is a key area as well as international.
Got it thank you and good luck with the execution.
Thank you. Our next question comes from the line of Eric Bass with Autonomous Research. Please go ahead.
Hi, Thank you.
Or are you evaluating potential acquisitions and the growth markets that you highlighted are you focused on near term earnings accretion or is the bigger priority finding scalable properties with large addressable markets that you can grow over time.
This is Scott why don't I, why don't I start with that on the emerging markets. The front first of all we expect to remain focused on Latin America emerging Asia, and Africa, and primarily on those markets, where we already have established operations and partners and in some cases I think that would incur.
The expansion into adjacent markets.
The most mark for the most part we've been looking at yeah. If you're if you will expanding into the markets that we're already in and so we might be adding a you know a capability or a little bit of scale.
I think in those situations of the valuations have been relative.
Relatively attractive, but going back to <unk>.
Charlie his opening remarks, we're going to be a we're going to be a disciplined buyer and.
Make sure that we're earning an attractive return over our cost of capital before we deploy any funds.
Over a reasonable over a reasonable amount of time.
Thanks.
Thanks, and then.
Maybe another one on a similar topic, but as you consider annuity reinsurance transactions. How do you think about the challenge of replacing the lost earnings and the potential for EPS dilution of your selling with the relatively low multiple business the potentially by higher multiple businesses.
Hey, Eric it's Ken.
We are reallocating capital.
As you suggest to to achieve better growth.
To lower our market sensitivity and improve our quality of earnings and the combination again, well will deliver higher growth and less market sensitivity and that we will believe will get recognized in terms of of lower cost of capital and expanded evaluation that would offset the dilution.
Got it. Thank you that's helpful.
Yeah.
Okay.
Thank you. Our next question comes from the line of <unk>.
Jimmy <unk> with Jpmorgan. Please go ahead.
Hi, good morning of the <unk>.
First I just had a question on the assurance IQ.
Uh huh.
It was a good quarter on revenues, but you generated a loss and it seemed like at least from the outside of the business is done significantly worse than would have been expected when you announced the deal. So what are your impressions of all debt transaction has gone now that you've had it for about a year little bit over a year.
Yeah, Jamie it's Andy So I'll hand handle your question are we a year and you're correct. We now have four full quarters of of operating the business under our belt and we are very encouraged and I'm glad that we have assurance as part of our of our business mix and.
And see it as an expansion of an extension of our business model you know pretty early on in 2020, we made an explicit decision because we saw market opportunity to both expand and broaden.
The assurance platform and we did that from both the product and the distribution perspective. So if you think of from a product perspective, we began to add on additional product lines product categories like Medicare.
And like our property and casualty on the distribution side, we determined that we would be more successful over the long term if we add it on to the on demand agent model. So we've we've now have an external b P. O agent component and we're building out a prudential W. Two agent component.
That leaning in to organically growing the business and expanding the business has led to a pretty significant increase in in Opex. As you would expect and that's why we're so focused on revenue because now it's about scaling up the platform.
And we're very confident over the long term about the growth potential both from a revenue perspective, but also expanding margins over time, yeah. As we said the previous quarters, we don't intend to provide or update any assurance specific guidance other than what Rob sort of said at the at the top of of the section about in the.
The term given our organic investment that I spoke to we expect the operating losses.
Okay, and then just on your annuity business sequentially, you saw an improvement in variable annuity sales and I wanted to get an idea and a lot of that I think is being driven by the lack of God brought up but just wanted to get of idea on is that fully rolled out to your distribution or is there sort of still.
Ramp up potential for sales in that product and Relatedly should we assume that sales in <unk> and through the first half of this year would be the cause Ah you're the drawing the living better, but the traditional living benefit products.
So so Jamie it's Andy I'll take the question and let me start with Flex Guard Yeah. We've been very very pleased with the success that we've had of the flex guard buffered annuity product.
So in essence, we rolled it out in may and and through the May through December we almost crossed $2 billion in sales. We think it's one of the most successful launches probably in the industry and you know the strength there is really coming from the strength of our business. The fact that our brand is so strong our distribution on our relationships are so strong and we.
Came out with a very good product to your question of around momentum, we still are rolling it out to additional third party intermediary. So so we have some additional work to go there and we also have a couple of states left that haven't rolled out so where we're seeing great momentum and expect that momentum to continue.
T to the second part of your question given the pivot that we're doing in that business. You know it was a pretty assertive in and material change to see selling of our highest daily income and Prudential defined income products. They were a big part of our sales in the past so that will have an impact on our overall sales and flows and I think you could expect.
With that we will see outflows from the business due to that change.
Thank you.
Thank you. Our next question comes from the line of at least the Greenspan with Wells Fargo. Please go ahead.
Hi, Thanks.
My first question I guess on pulling back on some of the transactions you've been talking about on the annuity side. So depending up on all of this new structure of do you take potentially and how the sales of kind of watching.
What type of sequential they'd be kind of whole I imagine you pick the constantly take book equity on well how do we think about the libraries within your capital plan on.
The update on sort of where you would see the beverage Bali on I'm, assuming as you think through on.
Kind of playing a part of it all of that you've taken the killer.
And that you could probably absorb some helpful. They'll keep the leverage of the long target well the top of.
On feed off of that.
The use for M&A.
M&A was on the golf market.
Yeah at least it's Ken.
As we look at these transactions will we'll be looking at are of a number of of key metrics and making sure we keep them all in balance.
That's whether it's a potential of charges or gains to our equity.
Depending upon the transaction terms.
On what it would do to our cash flow going forward, our earnings and our risk profile.
And very importantly, we will be focused and disciplined on on looking at fair value as.
As we conduct these things so we've we've managed our leverage ratio.
Over time within our objectives to.
<unk> maintained our double a credit rating and we'll continue to keep that of priority.
So how high can it go how kind of put the debt to cap though.
We have some room and some flexibility of the I don't want to pinpoint a number of them and.
But we are we manage to make sure we keep our objectives with our credit rating.
Okay and then my second question on on.
On the slide deck, when you guys talk about the growth Mark it on.
No doubling that to the greater than 30 per cent that does include did you mention that the growth market doing food assurance IQ I guess following up on earlier questions on.
So, they're obviously embedded within the three year outlook I mean, some assumption for the assurance contribution to earnings is it sounds like your margins improve as the business scales because he can give us a sense as you put this plan together all of them.
Your time period, what you're kind of assuming on assurance does ultimately at the earnings overtime.
Okay.
At least it's Ken.
As Andy mentioned, you know are we.
We are very focused on growing this business and that includes expanding distribution and expanding product lines and that's that's required that we make some investments to realize the the growth potential that's in the business that will lead to a modest loss in the near term, but we would of that business scales and gains of efficiency.
We would see that.
The gaining profitability.
That's what I would add.
Okay. Thank you.
Thank you. Our next question comes from the line of Ryan Krueger. Please go ahead with K B W.
Hi, good morning in terms of the $5 billion to $10 billion of capital reallocation given that you're the.
The higher growth.
Businesses are generally not it wouldn't be very capital consumptive of the the fair to the wound that.
Five to 10 billion would also of equate to the day wrap amount of programmatic M&A that you're anticipating to do.
Yeah, Ryan of it Charlie I think I think that's of a fair assumption that in other words as we think about reallocating capital, we're reallocating capital from the lower growth less market sensitive businesses into the opposite right higher growth higher market sensitive businesses. So it really is it's it's of a REIT.
Location of that capital if you will between the businesses.
Got it and then.
On the individual annuity business can you give us a rough sense of what percentage of those earnings are generated from the the the block that you've now discontinued that have living benefit guarantees.
Right now on our current earnings are driven largely by our legacy business.
New in the Flex guard.
The space, we were gaining great traction in and it's going well, but the the majority of our current earnings are from our legacy business.
Got it thank you.
Yeah.
Thank you. Our next question comes from the line of.
Andrew.
Click on men with credit Suisse. Please go ahead.
Thank you very much.
No.
Another question on on.
Your M&A approach.
You've mentioned the asset management of emerging markets.
On.
Haven't heard anything about retirement and group.
I'm wondering if there's you know I I think these are growth businesses on I'm wondering whether you know full service and recordkeeping and you know various group and voluntary businesses might be attractive eliminated as well.
Hey, Andrew It's Charlie let me start and then I'll turn it over to the Andean Scott to elaborate some book, but I think it's important to start with what we're not interested in right. So we're not interested in doing a mega transaction that expands the that expands over multiple businesses. What we've said on what we're going to stick to it.
Really looking at.
R R.
Less market sensitive of higher growth businesses in this case of emphasizing.
Asset management and.
Emerging markets and so that's where we're going to do and we're going to do it in terms of programmatic M&A that that really emphasizes the multi manager model in P. Jim in certain specific markets in emerging markets, but I'll I'll turn it over to Andy into Scott to elaborate on that.
Yeah, Andrew It's Andy I would just add you you specifically mentioned, our institutional businesses I'll frame it that way in full service and in group insurance, we've seen very good success in our in particular with our financial wellness strategy and strengthening our institutional value prop in general and that has led to.
The good growth in both of those businesses. So I would say our focus in those businesses is to lean into the into that organic growth and to continue to see net revenue growth that flows from the investment and financial wellness.
Got it very helpful and then in the individual life segment I saw on line item.
$130 million from reserve refinement on I think of it.
There's a ton of very.
Generally understand the it was providing customers with information around the options that they could have maybe in the UL policies. I'm wondering you know what what are those options what exactly was offered to the customers.
How did that $130 million reserve impact the evolved.
So Andrew at the Andy again, I'll I'll take your question. So this was the business practice change where in essence, we're giving more detailed communications to certain of our flexible premium product holders are the.
The intention of of that information is is to help them proactively manage their policies and premiums.
And we believe that will lead to less premiums coming in over time with us the the financial charge. It does not have a material impact from a go forward perspective on earnings.
So when it.
Just trying to understand what would it mean that you know they don't have to pay premiums they could use the cash value and that might prompt them to think while I shouldn't have.
Putting cash into the product I, just would like to understand what behaviors will change as a function of that two.
130 million is the significant charge.
Yeah, So Andrew it's Andy again, so in that sense of on their annual statements and and they're paying the payment notice says, we're giving them more details around their premium flexibility there requested premium amounts and their guarantees of again against the lab station and we think that the customers working with our advisors.
That'll lead to less premiums coming in over time.
Thanks, Andy.
Thank you next we go to the line of Tracy Thank geeky.
With Barclays. Please go ahead.
Good morning, Andrew on the market speaking with potential buyers of closed block sales I'm wondering at PJM Third party Investor Maybe consortium has expressed any interest or appetite I mean that does not preclude other buyers just wanted to get a sense of patient's familiarity crew can bring teams.
The bid ask spread at all.
So Tracy it's Andy. Thank you very much of your question are we absolutely think PJM clearly is a net positive to this overall, our overall process, we see more and more capital.
That sees value in the types of things that we do and we think that does enhance our opportunity in many different ways. We feel are advantaged in that we own a world class origination capabilities are very strong asset liability matching capabilities and PJM as a world class investment manager in particular.
Being very strong in alternatives and as I said earlier is that being one of the areas that we look to strength in EBIT than even further so I do think that that's a very is a positive for us and we're excited for the possibilities that could create overtime.
Okay, Great and then besides of the motivation of reducing market sensitivity is part of the motivation the complete.
Block sales from the upcoming accounting changes from all of the Ti on another insurance divesting their own life and annuity business inside of that the reduction to equity Andrew L. D. T. I would have been worse than the book value loss from the sale now I'm not asking you to comment on that specific transaction, but just to get a sense of if you're willing.
Net to sell out of law and how L. D. T I it may be a motivating factor.
Hey, Tracy it's Ken.
The first you know she is a few years away, but in them and I don't want to comment on someone else's deal or or or or nor do I have a specific transaction for us to comment on but with respect of deals like I said, we're going to evaluate.
The things through a number of metrics one will be its impact on on book value earnings cash flow capital risk, we'll take that all into consideration.
And so I can't comment beyond there because it would be a you know being too general.
Hello are you can't maybe I would just add basically recall of our accounting that we use for our annuities is different than most others that are in the industry are using for the accounting and other ti other actually is not the significant change the accounting of the living benefit in our book you should be the way in which we currently accounts for it so that may be part of the explanation to your question is.
Well.
Okay. Thank you for the color.
Thank you. Our next question comes from the line of.
Humphrey Lee with Dowling and partners. Please go ahead.
Good morning, and think of it taking my questions just to follow back on assurance IQ.
I understand that you don't want to provide any kind of updated guidance in terms of revenue or margin since the original announcement on it but basically you suggest suggesting it will be in operating losses in the near term given.
Given the I guess to where its been trending do you feel like you could turn to.
Two of it so it tended to be profitable by 2022, and then also how should we think about the the the impact on the the additional earn out on looking at it right now it doesn't look like that maybe achievable. So could there be any impact to the key person retention issues given the the either the changes the challenges on the on.
The earn out.
So Humphrey it's Andy Yeah, you know as we as we talked about we are seeing progress as we launched product lines of the process. We basically go through is is we need to become more efficient at marketing those products and then obviously as we build out the distribution end of things.
We need to get to a place where we're getting better and better at conversion, we have seen a quarter over quarter throughout 2020, our conversion rates get better. We we we have seen and we won't get into specifics, but but product lines that we've we've started to see a start to get towards the levels of.
The profitability that we would expect we're still not going to comment on specific timing.
But we do we do like the trajectory that we aren't we're on and we intend to continue investing the operating losses near term have everything to do with the the decision we made to really accelerate our investment and now we have a we we have the of the job in front of us that we're confident in of scaling up the revenue.
Yeah.
And Humphrey, it's Ken on the on the earn out it's based upon variable profits and its over three year periods of it it's still in place until the end of 2022.
And it's it was designed to incent them to outperform our expectations.
And right now the it.
It's still.
Two years ago, and it's still in place.
Okay.
Shifting gear S. You shrink the annuity business, how should we think about the the the overhead all kind of potential stranded costs related to the shrinking that book of business.
Specially given a two years ago. When you talk about the financial wellness part of the cost synergy was having all of the different business of sharing are the the call.
The call Center and the back office support and now you have a major part of that on.
Potentially shrinking and in reducing your over on earnings contribution. So how should we think about the the potential kind of overheads related to the deaths out of the business and how how are you going to address that.
Yeah in the first is as we indicated with our progress in 2020, we're making really good progress when the accelerated our progress in and increased our objectives with our transformation program.
And it's also given us capabilities that we'll be able to apply should as we reallocate capital we need to deal with stranded costs also keep in mind, we're reallocating that capital so as of as we.
Shifted from the annuities will be redeploying it into new earnings opportunities as well.
Got it thank you.
Yeah.
Yeah.
Thank you. Our next question comes from the line of John Barnidge with Piper Sandler. Please go ahead.
Thank you very much does it seem reasonable to think that there will be elevated administrative expenses in group disability to process Covid claims as long as the pandemic remains I asked that in light of the two point increase through the year.
Yeah John.
John It's Andy I'll take your question, Yes. Your assumption is absolutely reasonable I mean, one of the most important things during a period of time like this as of disability carrier is properly investing in the disability claims staff. So some of what you saw on our admin ratio in the fourth quarter was us adding to staff.
That's claims managers, that's nurses, that's folk specialists to make sure that our our our claims personnel have the adequate time and space to properly help our customers and help them return to work. So you know it is reasonable to assume as incidents goes up which typically happens during the recession we have.
Not yet seen that on the L. P D side, but where we are expecting to see it that we would continue to invest and maintain the right level of claims teams and that would be a higher level of investment.
Great and then unrelated to that Israel has been the country that had enacted the most aggressive vaccination program globally.
Are there any markers that you've seen out of the country and the week since he began his.
Provides maybe some insight around timing of maybe COVID-19 tampering tapering off of a little bit.
So so John this is Charlie I think we are we're encouraged by what we see in terms of the of both the introduction of the Pfizer and Madonna of vaccines, but also the potential of Johnson and Johnson coming with it with a completely different kind of vaccine right at the one shot vaccine.
It doesn't need cold chain storage, and we think that could that could have a large effect on the ability of this country to to get vaccinations. If you will so over the course of the next three to six months, we're not going to say, it's going to happen overnight, but we think theres.
Gonna be a material change in in the ability to vaccinate people are as we go forward and that kind of only in the year or two to the company to the country's benefit and end to the reduction in the transmission of the of the virus.
Thank you for your answers.
Thank you. The next we go to the line of Tom Gallagher with Evercore. Please go ahead.
Hi, it's true.
First question is what.
What kind of you mentioned that one third.
Of the $5 billion to $10 billion of capital deployment won't come through organic growth.
I guess that seems like a high number considering PJM miniature inside of Q shouldnt have much capital intensity. So is that largely coming from the <unk> side.
Yeah, Let me clarify what I said, Tom apologies, if I wasn't clear what I was saying is that in excess of a third of the earnings of <unk>.
Both of that gets us from 18% of our total earnings to 30% of our total our total earnings comes from organic growth not that not debt in excess of a third of the capital is organic so I hope that clarifies that point.
Debt debt that does the.
The other question I had is just a follow up on the broader M&A strategy.
The I.
I get like group benefits and retirement.
Alright high growth businesses, but there are capital efficient.
So just curious why these wouldn't be M&A areas.
So let me, let me start with that and Andrew you may want to join and afterwards, but.
The way, we look at those businesses and I think consistent with what Andy said before is it is not that we're not investing in those businesses. We will continue to invest in them for purposes of organic growth, but when you think about the the areas in which we want to reallocate the capital if you will to too higher growth.
On the businesses with less market sensitivity of those those are our priorities are certainly P. Jim and emerging markets and Andy I don't know if you want to expand on that but.
No nothing to add Charlie Okay.
Okay. Thanks.
Thank you and our next question comes from Josh Shanker with Banc of America Securities. Please go ahead.
Yes. Thank you for taking my question later on the call. If we go back to the Investor day that we keep bringing up I guess the big difference is the the parting ways of the annuities are the sort of certainly the all of the high capital from some type of annuities.
If I want to like.
Are there other strategic changes that really come out of just putting numbers of things that were already in motion.
Are there other strategic changes embedded in those numbers that we really should focus on.
So I'll take the first our first stab at that and then Rob maybe you want a of join in but I think when you. When you look at our strategy. We still have the wellness strategy. That's still exists it's still a very much part of what was our Investor day presentation back then and is continues to be there what what we've.
Done that with a much lower interest rate environment and with the strategic review is again to say, where we want to reallocate capital and that's that's new and that's what we've come out with this quarter in terms of thinking where we want to be in three years with the higher growth businesses. So if I were to articulated different.
It would be there and Rob I don't know if you have other things you can elaborate on yeah. Just so thank you for the question you just elaborate a little bit on what Charlie said I think just if you think about what we said in Investor day on all of that is largely intact. As we described it all around our organic growth opportunities. We have said that it's.
That our near term aspirations around some of that are we're facing headwinds with regard to a much lower interest rate environment than we were in at the point in time of which we articulated that well, but I think it's not just the the the pivotal.
Pivot away from annuities, but as Charlie said, it's also.
As contrasted to what we described on Investor day, the the reallocation of the active reallocation of capital are more broadly into all of those growth businesses. So I would call not just call out not just the the emphasis of annuities because of its not because we don't think incidentally, it's a very good business.
We think it produces tremendous cash flows it's well capitalized it's well hedged we just happen to believe that it's the business that will get better value in private markets and where we are how we're getting rewarded in the public market for that today.
And that gives us an opportunity to arbitrage capitals on and to reinvest it into areas in which we can be rewarded in the public market and.
And those would be the growth areas that we've articulated.
So in presenting the plan to the board, where we're gonna, it's gonna be probably earnings dilutive, but we're gonna get higher multiple earnings out of it and less market sensitivity is there any frame for the magnitude of the dilution that was.
As presented.
In order to make this change.
So let me let me take a stab at that and you know what we really what we present to the board and what we present. The externally is it's really of balance right. It's the balance between the reallocation of capital into these higher growth businesses, but also of redeployment of capital and in this case, we've articulated 10 billion.
Dollars to shareholders in terms of.
Our share repurchases and dividends and so what we've what we've attempted to do is balance of the two right and say, we're going into higher growth markets.
So therefore, hopefully we will have a higher multiple as we go forward and yet return a significant amount of capital to shareholders. As we have done in the past and we'll continue to do in the future.
Okay, well I'm trying to some math of maybe of Darin will help me out down the line I appreciate it. Thank you.
Okay.
Thank you now we will send it back the Charlie Lowrey for any closing comments.
Thank you very much in closing today I'd, just like to reinforce our commitment to creating a new and more nimble Prudential one that remains deeply focused on its customers that will have a higher growth potential and will be less market sensitive in the future.
We're excited and we're optimistic about this next phase of our transformation and we look forward to keeping you updated on our progress. So thanks again for joining us today.
Thank you, ladies and gentlemen that does conclude our conference for today, we thank you for your participation and for using AT&T conferencing service.
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